Archive for the ‘Household Finances’ category

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Purchasing Power of Households Should Boost Consumer Spending

November 30, 2012

Households are arguably better positioned to increase their spending than at any time over the past decade. I define household purchasing power, in the aggregate,  as a combination of income and household financial obligations.  Household financial obligations include all debt obligations as well as things like housing rental costs, auto leases, insurance and property tax payments.   A combination of low interest rates that reduce the cost of debt for households as well as reductions in the use of credit and households paying down debt since the recession, have all combined to lower the financial obligations of households (in the aggregate) as a percentage of household disposable income.  Real wage and salary income is also increasing (even if not for all individual households).  In combination, the reduction in financial obligations and rising aggregate income should result in increasing consumer expenditures.  A  lack of conviction in the economic recovery, a decline in home values that affect consumer’s sense of financial well-being, and higher energy prices over the past year have all helped restrain consumer confidence and spending.  But energy prices are falling and home prices (in most areas) are rising.  As hiring (and thus wage and salary growth) accelerates, the stage is set for a long-awaited burst of consumer spending.

Consumer Health

Categories: consumers, Debt, Financial, Household Finances
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The Rise and Fall of Homeownership Rates

November 16, 2012

The rate of home ownership increased significantly in the U.S. and in New Hampshire from the middle of the 1990’s until the housing market crash in the late 2000s.   The increased availability of financing (sometimes exotic) played a significant role,  as it did in the ultimate unwinding of the housing boom (nearly taking the nation’s financial system down along the way).  Home ownership rates are returning to levels closer to historical standards in the U.S., but not before a lot of household wealth in the form of homeowners equity was lost.  That has had a large impact on our recovery from recession.  One rule of thumb is that for every one dollar of household net worth lost, consumption expenditures by households will decline by 3-5 cents (the so called “wealth-effect”.   Using the lower figure (3 cents), implies that across the country, consumer expenditures were about $180 billion lower between 2007 and 2011 as a result of the housing market crash,  than they would have otherwise have been.

In NH, home ownership rates are higher than for the U.S. and they have yet to significantly move back toward their historical levels in the state.  They may never, but I have to think that until they do, putting a true value on houses in the state is going to be difficult.  In the meantime,  home price depreciation has had the same negative effect on household net worth in the Granite State and thus a substantial negative impact on consumer expenditures via the “wealth-effect”.

Categories: Homeownership, Household Finances, Housing, Real Estate
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Measuring Consumer Financial Distress, are We Really Better Off Today?

November 15, 2012

The Consumer Distress Index is a quarterly comprehensive picture of the average American household’s financial condition.  The index is calculated for the nation and each of the 50 states.  The index measures 5 categories of personal finance that reflect or lead to a secure, stable financial life—Employment, Housing, Credit, Household Budget and Net Worth.   It is calculated by CredAbility,  a  nonprofit credit counseling service, uses 65 data points using public and private data to measure consumer financial distress.  According to their Consumer Distress Index, only 12 states have lower levels of financial distress among households than does New Hampshire.    Lower scores indicate higher levels of financial distress.  The chart below compares NH with the U.S. average.    It shows that, by this measure, NH households are about as financially well-off as they were just prior to the recession, but that the financial health of households has generally deteriorated since the second-half of the last decade.  Not surprising given the increases in employment insecurity and decreases in the value of most households largest asset, their home.

 CredAbility categorizes distress scores using the following:

Less than 60 Emergency / Crisis
60 – 69 Distressed / Unstable
70 – 79 Weakening / At-Risk
80 – 89 Good / Stable
90 and Above Excellent / Secure

By that scale NH, with a score of 75.68 is “At-Risk”, while the U.S. average household is bordering on “unstable/distressed” with a score of 70.48.   According to this measure, NH households are about or just slightly below where they were prior to the recession in terms of financial distress, while the average U.S. household is in more financial distress than they were prior to the recession.  I don’t know how much concurrent validity this measure has but I do know that if I had used it, instead of a state-level “misery index” (the sum of unemployment and inflation) to predict the outcome of the election it would have been a less  accurate predictor of election results.

Categories: consumers, Financial, Household Finances
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The Changing Banking Market

October 23, 2012

Public antipathy toward large financial institutions  may have been building throughout much of the past decade but it surely peaked during and immediately following the recent recession and the financial crisis that helped precipitate it.  One result appears to be a changing market structure for deposits and loans at financial institutions in NH and across the country.  The recession in our state was less severe than was the recession of the early 1990’s, and less severe than was the recent recession  in  many states because of the the overall health and strength of our state’s banking institutions.  Nevertheless, one fallout from the financial crisis appears to be a growing market share for credit unions in the state.  As the chart below shows, since the recent recession, deposits at credit unions have grown much faster than deposits at NH banks overall.  Deposits at NH community banks have grown faster than deposits at all NH banks, suggesting that deposit gains by credit unions have come largely at the expense of large banks in the state, as deposit growth for all NH banks is much lower than the growth among just community banks.  Prior to the recession and financial crisis, deposits at NH community banks were growing faster than were deposits at credit unions.

It would be unfortunate if community banking institutions that have had strong commitments and links to their local communities  and regional economies are tarred by the actions of institutions from afar. Beyond that, a fundamental change in the market shares for financial services could  have significant impacts on the regulation of financial services, on government revenues , and on market shares as the tax exempt status of credit unions contributes to their ability to compete and capture market share.  The increased concentration of deposits in the banking industry that occurred during much of the 1980’s and 1990’s may now  be occurring among credit unions.  As the services credit unions offer and their branching look more and more like those of banks, their ownership and regulatory structure may be the only thing that distinguishes them from banks.

Categories: Banks, Credit Unions, Financial, Household Finances, NH Economy, Recession
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