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Overview
Going into the new year, many consumers felt optimistic that the worst of the pandemic had passed and that 2022 would be focused on promising plans to return to normalcy as much as possible. Many hoped the crazy housing market would normalize so they could purchase a new home. But it’s been anything but normal, with gloomy economic news – rising inflation, continuing supply chain problems, and other factors influencing higher costs for everything. Sadly, many households are under significant financial strain, while others are nervous as news headlines hint at a recession on the horizon. The following analysis and consumer survey, conducted by ScoreSense in March and April 2022, sought better to understand consumers’ credit score activity and their plans – on track or changed – for buying a home this year.
Credit Spending Analysis:
Q1 2022 Compared to Q1 2021
For perspective on the market, we analyzed credit activity for Q1 2022 compared to the same quarter last year. The results, illustrated in the graphic below, revealed the following:
- Credit card usage has skyrocketed, up 49% this year. Consumers are also overspending their credit limits; the number of consumers who have exceeded their limits is up 30% from last year. This can largely be attributed to inflation: many households with budget stress are resorting to paying for food, doctor visits, gas, and other things with credit. The overuse of credit cards shows that consumers are still buying at the higher prices rather than saving. This is also evident in recent consumer spending data.
- Major derogatory alerts – late payments of 180 days or more – including collections, repossessions, and foreclosures have trended down over the past five years as consumers have been doing better at paying down debt. From January 2021 to 2022, derogatory alerts dropped 17%. What remains to be seen is whether we will see an increase due to delinquent accounts going past 180 days.
- Inquiries and new trade accounts (Open New Account) have been decreasing since September 2021. In January 2022, inquiries were down 14% from the previous year. Consumers opening new lines of credit over the same period were down 7%. Since last fall, people have continued to shift spending and make fewer big purchases amid rising economic uncertainty. Still, it’s also due to shortages of big-ticket items such as vehicles and homes.
Consumer Survey:
Home Buying Plans For 2022
Key Findings
- Nearly one in four people were undecided about whether they planned to buy a house this year.
- 30% of the respondents said the economy or personal budget changed their plans.
- Inflation was the top reason consumers said they might not buy a house this year, but 7% of respondents cited their credit score.
- Finding a home I can afford is the most concerning thing when buying a home this year.
Outlook
As we entered 2020 during an inflation-plagued economy, credit spending, overspending and late payments all increased. Earlier this year, ScoreSense had already seen an uptick in delinquent payments being reported on the heels of increased holiday spending. In February, Federal Reserve data showed that Americans incurred more debt, as rampant inflation – which shows no signs of abatement anytime soon – kept up the pressure. The Fed reported that debt levels jumped by nearly $42 billion to almost $4.5 trillion. That’s an annual increase of 11.3%, seasonally adjusted, setting a new high. Revolving credit, which includes credit cards, jumped by 20.7% to about $1.1 trillion. We believe this will only get worse and expect that our Q2 analysis will reflect the impacts on household budgets from smaller IRS refunds, increased mortgage payments due to property tax increases, and rising costs for goods and services that show no signs of falling.
Concerns are rising about inflation, and the Fed aims to raise interest rates. Consumers now see inflation hitting 6.6% over the next year, according to the New York Fed’s survey of consumer expectations in March. By the end of April, it happened: the Commerce Department reported prices had surged 6.6% during the 12 months ending in March. That’s the highest increase in prices since 1982. All signs point to the Federal Reserve moving forward on a series of interest rate hikes to help slow the economy and fight inflation this year; the latest rate increase of half a percentage point occurred on May 4. Consumer fears could translate more strongly to what we’re seeing now – a decrease in big-ticket purchases like homes and vehicles, but deeper to include reduced purchases of durable goods such as home appliances. Fed interest rate hikes mean it will cost consumers more to borrow.
Many consumers typically use their tax refunds to reduce or pay off debt in April – but this year was different. Notably, parents and people with student loan deferments were shocked to find smaller refunds, or worse, they wrote checks to the IRS. Most parents did not receive the “big” child tax credit write-off this year, as those credits were paid out in advance during 2021, and there’s no write-off of student loan interest for people who took deferments. These dynamics only added to the strain of inflationary budgets.
Financing requirements to buy a home and costs to own it have gone up, knocking many prospective buyers out of the market and adding budget stress for some owners. Several dynamics include:
- Dramatically higher property tax assessments in many areas of the country, reflecting soaring home prices in a low inventory market, will result in higher taxes. For prospective buyers, the added cost may be too much to overcome. For current owners, the increase will be reflected on the higher escrow amounts on mortgage payments, yet another strain on the household budget.
- Some of the nation’s biggest mortgage lenders are raising financing requirements for borrowers. Some banks have raised credit score requirements above 700 and are requiring down payments as high as 20%.
- According to a Mortgage Bankers Association report, mortgage credit availability declined sharply in March. A benchmark index of mortgage credit availability fell by 16%, with availability across all loan types declining.
- Data from LendingTree revealed that new mortgage offers to prospective borrowers with credit scores below 720 dropped by five percentage points between January and March. In the same period, mortgage refinance offers dropped by 10 percentage points for prospective borrowers with credit scores below 720. For both customer groups, the drop accelerated between February and March.
- New Gallup poll results released in early May found that 30% of Americans believe now is a good time to buy a house. This is the lowest level on record since Gallup began surveying consumers on this question in 1978. This is also the first time that less than half of consumers thought it was a good time to buy. The poll also found that seven in 10 Americans expect home prices to rise in their area.
For those who cannot buy a home, high rental costs are squeezing budgets. In the 12 months through March 2022, average rent rose 17% according to research by ApartmentList.com. The average rent for a two-bedroom home in the U.S. is about $2,000, according to a recent research report from Rent.com, up by 22% on a year-over-year basis.
For those with federal student loan payments, payments have been postponed through August 2022. But when payments resume, some households will feel budget stress. For many, this is a substantial expense, especially after more than a year of forbearance.
Final Thoughts
Looking at our analysis of credit behavior in Q1 and over the past year, we’re concerned that many consumers under financial duress will continue to increasingly use credit to pay for “ordinary” things, such as groceries and fuel, and hold that debt instead of paying it off at the end of the month. Worse, we’re concerned that late payments and overdue payments that go to collections may increase as well. Lastly, credit scores always matter, but especially now with lenders tightening restrictions for whom they will loan money.
At ScoreSense, we provide credit monitoring to thousands of Americans. Our website and credit specialists offer personalized recommendations to help you better understand your credit and monitor for identity fraud.
Methodology
This study was conducted for ScoreSense© using the Google Surveys online portal. Surveys were collected in March 2022 among a sample of 519 consumers in the United States aged 24+ who might consider buying a home in 2022. The margin of error for total respondents is +/-4.3% at the 95% confidence level.
