Why Are Consumer Default Rates Rising?

Consumer default rates are rising and even though they're least apparent in first mortgage default compared to credit cards and auto loans, the latest S&P/Experian Consumer Credit Default Indices said that this trend was a signal for caution across credit markets.

The indices, which represent a comprehensive measure of changes in consumer credit defaults, indicated a rise of six basis points in the composite rate to 0.89 percent in December 2018. While the bank card default rate rose 25 basis points to 3.34 percent, auto loan default rate increased 10 basis points to 1.03 percent.

The default rate on first mortgages showed the least uptick rising three basis points to 0.67 percent. Despite this rise, mortgage default levels remained slightly below the 0.68 percent recorded during the same period last year.

The report noted that December 2018 was first time since January 2017 that all loan types and all major metropolitan statistical areas (MSAs) showed a higher default rate month-over-month.

"The economic pictures behind the three lending sectors–autos, mortgages, and bank cards–reveal different patterns," said David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Down Jones Indices. "Housing is pressured by rising prices and higher mortgage rates. Sales of both new and existing homes are weakening. Auto sales were steady in 2017 and 2018 at slightly more than 17 million vehicles sold each year. Retail sales and consumer spending saw continued growth in 2018 with few signs that credit tightening was having any impact."

Additionally, Blitzer said that it was almost two years since default rates across the three sectors and all the five cities tracked by the indices rose together. "These trends, combined with gradual increases in market interest rates during 2018, point to increasing pressure on the availability of consumer credit as the economy shifts from the fast path of growth last year to what analysts expect to be a slower, more sustainable pace in 2019," he said.

Looking at the five MSAs covered by the indices, default rates in Miami increased 41 basis points to 1.93 percent due to a sharp increase in the first mortgage component in this area. New York rose 13 basis points to 0.96 percent, Chicago by four basis points to 0.88 percent, Dallas by three basis points to 0.85 percent, and Los Angeles by two basis points to 0.52 percent.