The latest installment of the NY Fed’s monthly consumer poll was released on Tuesday. Who’s excited?!
Not the Fed. As far as I’ve ever been aware, the survey isn’t especially relevant for the FOMC. At the least, I can say it’s nowhere near the top of the list when it comes to macro inputs the Committee considers when making bad policy. (See what I did there?)
So why mention it? I don’t know, honestly. Because it’s Tuesday. There was one actual takeaway, where “actual” means “notable,” from the latest poll. Debt delinquency expectations deteriorated for a fourth month. Specifically — and I’m lazily quoting directly from the press release here — “the average perceived probability of missing a minimum debt payment over the next three months” rose to 14.2%.
As the figure shows, that’s the highest since April of 2020. If you recall, there was a bad cold going around right about then.
The figure includes two series from the demographic breakdown. As the NY Fed noted, the increase was “most pronounced for respondents between ages 40 and 60 and those with annual household incomes above $100,000.” That latter point’s certainly not to say poor people are “winning.” Delinquency expectations for respondents making less than $50,000 are significantly higher than for those making six figures — 20% versus 8.4%.
Inflation expectations in the survey were generally stable. The one-year point was unchanged at 3%, while medium-term expectations moved up to 2.7% from 2.5%.
Meanwhile, and more interestingly, nearly a quarter of car trade-ins were under water in Q3, according to an Edmunds report released on Tuesday. The average negative equity on those vehicles was $6,458, a record. Somebody called Jessica Caldwell — she’s head of “insights” at Edmunds — stated the obvious: It’s not “the end of the world” if you’re “a grand or two” upside-down on your car, but if you’re $10,000 or more under water, as a growing share of Americans apparently are, it’s “nothing short of alarming.”
How bad is this? Bad. On every score, it’s bad. More than one in four American car owners who’re under water on their vehicles have more than $10,000 in negative equity, Edmunds said. If you read “40 Acres” — and, more to the point, if you read it all the way through, to the end — that’ll sound familiar. Without mincing words, if you have $10,000 of negative equity in your car and you go to the dealership with that vehicle and try to “trade” it for something else which you also intend to finance, and you stretch out the payments, you’re signing your own economic death certificate.
I hope — if I was religious, I’d pray — that everyone reading this site understands how such a transaction works, but if I can save just one financial life today, it’s worth recapitulating. If that’s you — i.e., if you’re the person trading in an under water car — here’s what’s going to happen. The dealer’s going to roll up your negative equity into the price of the vehicle you’re buying, and that’s going to be the principal amount of the loan: The price of the car you’re buying, plus the $10,000 of negative equity in your old car which the dealer will have to settle on your behalf. If you’re the type of person who’s financially illiterate enough to sign on that particular dotted line, chances are you’re broke and your credit score sucks, which is to say you’re going to need an extended loan term and you’re going to get the worst possible rate. In the end, you’re going to drive out of there (probably fast, smiling like an idiot and playing loud music to celebrate the end of your financial life) in a rapidly depreciating asset which you paid a $10,000 premium for, and financed over far too many years at an exorbitant rate. Depending on the size of that loan, and what your other financial goals are, you might’ve just ruined your future, and maybe that of your whole family too.
Caldwell didn’t quite put it that way, but she almost did. “With prices and interest rates being as high as they are, it’s critical for consumers to think beyond the monthly payment and be honest with themselves about their ownership habits,” she said. “A seven-year auto loan is a one-way ticket to negative equity if you know you’re not the type of person to keep a vehicle for that long.”
God bless Jessica Caldwell, whoever she is. Because she sounds like someone who’ll shoot you straight.
Incidentally, car salesmen who facilitate the kinds of loans mentioned in this article should be arrested for fraud, in my opinion.
This is exactly why I am more favorable to Fed rate cuts and thought they should’ve started earlier.
I would hate so much for Karl Marx to be proved correct.
Auto loan delinquency rate exceed pre-pandemic levels in 2022 and has continued rising. The auto loans taken out in 2021-2023 when car prices were very high are probably almost all in a low-to-negative equity state. Regardless of car price; the more expensive the car, the steeper the depreciation. Add high insurance premiums to loan payments averaging $600/mo, and plenty of lower-income will be stressed, as well as mid-income who overextended themselves. I imagine tens of thousands of auto loans will be defaulted on in Florida and the SE.
https://www.federalreserve.gov/econres/notes/feds-notes/rising-auto-loan-delinquencies-and-high-monthly-payments-20240926.html
I’m still trying to wrap my head around the fact someone can have $10k negative equity on a car. The truth is many people simply do not understand what “financing” an asset means in practice and how debt payments work. I recently met a friend from grad school I had not seen in a long time, we both took student loans to help pay for master degrees more than 20 years ago. His lawyer advised him this year to stop making payments on his student loan since he owes more than the original loan amount and would be better off taking the hit to his credit score for now while keeping the extra cash. I paid my loan years ago, when I asked my friend if he had always paid the minimum required each month his answer was “yes.” There you have it, we make it too easy for folks to enter debt without understanding the breakdown for each payment and how changes in interest rates affect the equation.
Hat off to H’s Truth Social.
When my nieces/nephews reach 25 I offer to fund them a ROTH for $5K and will match $1K a year. But, first they have to answer 5 questions correctly. Questions:
1. Buy a $100 shirt using credit card (17%), make minimum payment, how many payments will it take to pay it off and how much will the shirt actually cost?
2. Invest $5K at age 25, add $2K every year, assume 5% annual return – how much will you have at age 65? Same numbers but start at age 35, how much at age 65? What is the difference between starting at 25 vs 35?
3. And 3 more…
Interesting learning process for everyone, their parents like it the most – who listens to parents LOL
I’d be interested in seeing your other 3 questions as I’d like to give your test to my 20 year olds (before I too start helping them fund a ROTH) once they get their first jobs.
Bill_G, I have two nieces who are on board and a nephew has been stalling for almost a year. Both nieces manage their own ROTH investments – learning and having fun actually. Total of five but several years before others reach 25. Honestly, when I was young, my financial literacy was pathetic, I learned the hard way. Probably why I’m doing this. My two nieces were not much better but they both are now making better decisions.
The other 3 questions:
3. Two people age 25 have jobs paying $50K. One works for the same company/job until 55 getting, 3% increases every year. The other person changes companies every 3 years with 12% increases – ages 28, 31, 34 – then stays at last job until 55 getting 3 % raised each year. What is the salary of each at age 55?
This is a factoring type question. Say a person bounces a $100 check the 1st day of each month, then covered the check plus $35 fee 7 days later for 1 year (12 months), what is the banks percentage return on investment? I don’t tell them the bank uses the same $100 to fund the bad check every month. I also ask, does the bank like your business?
Last question is more social. I ask them to research the top reasons for divorce or breakups. Where does financial/money differences or orientation rank?
Good Luck….Rick