Understanding Affordability in Terms of 2024 Market Trends

Our January Market Pulse webinar discussed all aspects of affordability in our current financial market. Our experts shared their deep knowledge of topics such as:

•  inflation, 

• customer relationships, 

• and potential portfolio implications. 

We were joined by:

• Amy Crews Cutts, President and Chief Economist at AC Cutts & Associates, who dissected the macroeconomic landscape; 

• David Sojka, representing Risk Advisory Practice at Equifax, who gave an overview of consumer credit trends;

•  and Tom Aliff, Risk Advisory Leader at Equifax, who hosted an in-depth conversation with Jeff Richardson, Senior Vice President of Marketing & Communications at VantageScore, on the topic of affordability. 

Macroeconomic update

In the current economic landscape, inflation is undergoing a deceleration. However, the significance of this metric varies for different stakeholders. Consumers are exhibiting heightened sensitivity to non-core inflation, a trend likely exacerbated by the prevailing economic conditions. The Federal Reserve is concerned with core or supercore measures, indicating a nuanced perspective that focuses on underlying inflationary trends rather than temporary fluctuations. 

Consumer sentiment is responsive to inflation outside of recessionary periods. Despite earlier expectations among economists for a recession to begin in 2023, the anticipated timeline has shifted to mid-2024, if it materializes at all. This adjustment is informed by the yield curve. The curve currently signals a 46% probability of inflation persisting. 

While the banking crisis may have abated, banks continue to increasingly utilize the Federal Reserve's Bank Term Funding Program, indicating an ongoing need for support and liquidity within the financial sector. 

The housing market is experiencing a slowdown due to higher interest rates. This marks the lowest volume of sales since 2011. Although housing prices are influenced by interest rates, the predominant factor impacting the market is the supply of available housing. 

In the automotive sector, sales of new vehicles in 2023 have dipped by nearly two million units below the pre-pandemic average level. This decline is attributed to elevated prices and interest rates. Despite the increasing affordability of electric vehicles, the overall trend indicates that new vehicles are becoming more expensive. The conjunction of high interest rates and soaring car prices has resulted in monthly car payments that rival mortgage payments, contributing to the challenges faced by consumers in the automotive market. 

Consumer credit trends

The sharp uptick in personal loan balances could be indicative of economic trends, consumer confidence, or shifts in lending practices. Financial institutions and lenders may be responding to evolving consumer needs, offering more accessible and flexible personal loan options. Alternatively, consumers might be seeking financial assistance due to changing economic conditions, indicating a reliance on personal loans as a means of managing their everyday financial obligations. 

It is essential to examine the underlying factors contributing to this substantial year-over-year change in personal loan balances. Analyzing the nature of the loans, the demographic profile of borrowers, and the economic context can provide valuable insights into the dynamics at play. Monitoring these shifts in personal loan balances is crucial for financial institutions, policymakers, and analysts to gain a comprehensive understanding of the evolving financial landscape and make informed decisions. 

Unraveling affordability challenges  

Inflation's impact on households

There has been an increase in delinquencies, particularly in sectors vulnerable to inflation, such as credit cards and auto loans. Additionally, the conclusion of stimulus packages has played a role in the financial landscape, impacting borrowers who now face new payment obligations like student loan repayments. Many borrowers are encountering new financial challenges — especially with student loan repayments resuming — contributing to the overall impact. Balances and utilization rates are also on the rise, with inflation exerting pressure on various consumer profiles, especially affecting lower-income consumers and younger borrowers. 

Credit scoring models post-pandemic

Credit scoring models, particularly VantageScore 4.0, have performed as designed during and after the pandemic. Market adoption of VantageScore's usage has witnessed significant growth, with a 30% increase in 2020, totaling more than 19 billion credit scores since. While models are performing well, the relative risk represented by scores has changed due to dynamic factors, requiring continuous monitoring and adjustments. 

Signals and indicators for financial circumstance changes

Monitoring broad indicators, such as the relationship between scores and risk, reveals the importance of understanding and adapting credit policies based on this relationship. Further, the availability of trended data in credit files provides a more granular view of consumer behavior, allowing lenders to identify important indicators such as credit card payment behaviors and payment habits on installment accounts. 

Implications for portfolios and benchmarking

When it comes to portfolio comparison, drilling down to the product and vintage levels can help one understand how a portfolio compares to the broader market. Tools like risk ratio enable lenders to benchmark shorter time horizons, providing more flexibility in assessing recent loans' performance. 

There's a growing trend toward incorporating alternative data and innovative analytics, such as cash flow analysis, to enhance risk insights and promote financial inclusion. Moreover, ongoing monitoring and model governance are paramount to ensure continued effectiveness of credit scoring models. 

For a comprehensive assessment, rank ordering performance is key for understanding the score-to-risk relationship. 

Q&A

Finally, during the question-and-answer portion of the webinar, our guests addressed key questions submitted by attendees about the economy and credit performance. 

Amy Crews Cutts responded to inquiries about the probability of a recession, emphasizing the challenge in defining it but also suggesting the consensus often includes two consecutive quarters of negative growth and a rise in unemployment. Given positive economic indicators, the earliest such criteria might be met is in the latter half of the next year. 

The conversation then shifted to understanding how low-income consumers are faring with credit. Jeff Richardson highlighted the rise in default rates among lower-income consumers, signaling economic pressure. Delinquency rates in middle-income consumers have also increased recently, suggesting a potential contagion effect. Our experts emphasized the importance of granular data for lenders catering to these markets. 

In conclusion

We hope you’ll join us for our next Market Pulse webinar on Thursday, February 15.  We will share in-depth analysis on navigating the auto industry in 2024. Register here.