Breaking News That Might Be Bigger Than The Housing Crisis

You could say a broken clock is right twice a day. 

Or you could say we’re badasses here at The Juice. We’ll go with this option. 

Here’s the deal — we’ve been tracking the story on consumer debt for a long time. 

Like since April 2022 when we wrote:

In their respective Q1s, Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC) reported 23%, 29%, 33%, and 25% increases in consumer credit card spending.

At all four banks, debtors have started to make slower payments. In other words, they’re carrying balances, however, for the most part, charge offs have yet to appear worrisome. 

Just wait. 

And we have been waiting and watching the story unfold. Because, as we have also been saying all along, the traditional media doesn’t like this type of story. It takes too long to develop. They’ll only jump all over it when there’s a spectacle. A crash. We’ve been covering it every step of the way. 

Now, things are starting to go from bad to worse. So much so that we’re preempting our October Housing is Haunted series to update the situation on consumer debt. We’ll be back with more on housing tomorrow and links to what we’ve done so far this month on real estate from economic, personal financial and investing perspectives. 

But first … where to begin? 

Let’s start with auto loans. 

• The percent of subprime auto loan holders who are at least 60 days behind on their payments hit 6.11% in September. The worst level since 1994 and up from 5.93% in January. 
• Repossessions will hit 1.5 million this year, up from 1.2 million in 2022. 

No big surprise. With super high interest rates, the average monthly payment on a new car loan taken out in Q3 was $729. 

However, the bad news isn’t just on auto loans. 

Consider the news from Discover Financial Services (DFS) last week. 

Credit card balances and delinquencies are up at Discover. On the company’s conference call, it noted: 

Now, while the unemployment numbers remain relatively in line and strong by historical standards, we are seeing some indications of stress …

So, as we took a look at household net worth and savings rate, both have deteriorated. And we’re seeing deterioration more specifically in lower FICO bands.

Just how bad was it at Discover on consumer debt balances and delinquencies? Let’s get it straight from the horse’s mouth and the company’s earnings press release:

Total loans ended the quarter at $122.7 billion, up 17% year-over-year, and up 4% sequentially. Credit card loans ended the quarter at $97.4 billion, up 16% year-over-year. Personal loans increased $1.9 billion, or 25% …

The total net charge-off rate of 3.52% was 181 basis points higher versus the prior year period reflecting seasoning of recent vintages with higher delinquency trends. The credit card net charge-off rate was 4.03%, up 211 basis points from the prior year period and up 35 basis points from the prior quarter. The 30+ day delinquency rate for credit card loans was 3.41%, up 130 basis points year-over year and up 55 basis points from the prior quarter …

Provision for credit losses of $1.7 billion increased $929 million from the prior year driven by a $297 million higher reserve build in the current quarter and a $631 million increase in net-charge offs.

Wow, wow, wow … and wow. 

Similar story at other big banks. 

Like Bank of America (BAC). 

• Net charge-offs came in at $931 million, a 7.1% quarterly increase and a whopping 79% annual increase. 

And Wells Fargo (WFC), directly from the bank’s Q3 earnings presentation:

• Consumer net loan charge-offs up $98 million to 67 bps of average loans (annualized) primarily on $49 million higher auto net loan charge-offs from 2Q seasonal lows and a $24 million increase in credit card net loan charge-offs.

And at JPMorgan Chase (JPM):

• Net charge-offs hit $1.5 billion in Q3, up 7.1% quarterly and 94.4% annually. 

You read the last part right. 94.4%!

We’re not surprised. We saw this coming. We predicted it. 

The data from the banks is starting to meet the data that’s been coming from the Fed. Particularly data on ever increasing credit card debt. As of Q2, it hit $1.02 trillion, an all-time record. Of course, the delinquencies and charge-offs could only lag the debt number for so long. 

So here we are. And it doesn’t look good. 

The Bottom Line: You could say, yeah well, who cares? This is a subprime, lower-income class problem. But it’s not only a subprime problem. 

The average FICO score of BofA credit card consumers is consistently in the 770s. That ain’t subprime. Bank of America doesn’t just hand out credit cards to anyone. We think this problem of dwindling savings and escalating debt is trickling up. (The nation’s personal savings rate hit 3.9% in August, way down from 5.3% in May). 

But, even if it isn’t, you can’t maintain a just society in a country as rich as the United States with one massive cohort struggling to get by amid high inflation and a housing crisis, while the relatively well-off enjoy $18 dirty martinis and $28 plates of pasta al fresco in America’s affluent urban and suburban enclaves. 

Maybe you can maintain it like a house of cards, but bottom line to the bottom line — we’re not okay with it.

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