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Are Credit Card Defaults A Leading Indicator Of Foreclosures?

By
Real Estate Broker/Owner

If credit card defaults are any indication of future foreclosure activity, the housing market still has a ways to go until it finds a bottom.

According to a Reuters report, credit card defaults reached record highs in April.  The following is a comparison of the default rate from March to April of major credit card issuers:

Citigroup:  9.66 / 10.21

Wells Fargo:  9.69 / 10.03

JPMorgan Chase:  7.13 / 8.07

Discover:  7.39 / 8.26

The "exception" to this trend was Capital One which showed virtually no change between March and April because, "it changed its customer bankruptcy accounting, waiting longer to declare the debts of bankrupt customers uncollectable."  Scott Valentin an analyst with FBR was quoted as saying, "We expect a 'catch-up' in May, which will likely cause a large spike in the May net charge-off rate."

While there may or may not be a relationship between the actual default rate of credit cards and foreclosures, I don't think it requires to much imagination to connect the dots that if consumers are no longer paying on their credit cards, their mortgage will likely be the next thing to go into default.

If this relationship is true, we can expect to see a sustained increase in foreclosures over the next several months and unfortunately with demand for real estate as weak as it is, this next wave of foreclosures will put additional downward pressure on home values as there won't be enough buyers to absorb the excess supply of homes.

Comments(7)

Sandra White
John L Scott Real Estate - Port Townsend, WA
Experienced Residential Resale Broker

Interesting figures.  I am afraid you may be right.  Thanks for the info.

May 17, 2009 08:13 AM
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Mark, the numbers don't look good for the future; and with rising unemployment they have only one way to go.

May 17, 2009 08:34 AM
Sylvie Conde
Sutton Group-Associates Realty Inc., Brokerage - Toronto, ON
Broker, Toronto Real Estate

Very interesting.  I keep reminding my clients not to charge more than they can afford to pay each and every month.  I keep telling them that if they stay out of trouble with their credit cards, they will probably be fine with their mortgage.  People just don't realize how far in debt they can get with two or three cards with very high limits.  And with unemployment the way it is, hopefully things won't get worse.

May 17, 2009 08:53 AM
Mike & Cindy Jones
Florida Homes Realty & Mortgage - Jacksonville, FL
Real Estate - (904) 874-0422 - Jacksonville, Fl

In years past it was easy for people who let their credit card balances get too high to just get a home equity loan and pay them off. Now with declining home values most folks can't do it.......now the likelyhood of defaults is increasing. Yikes!

May 17, 2009 09:09 AM
J. Philip Faranda
Howard Hanna Rand Realty - Yorktown Heights, NY
Associate Broker / Office Manager

This is also doing violence to the confidence of people who are not distressed but might be buying a home. They simply won't look at anything that isn't priced for a firesale. People who have taken care of their homes all their lives and done nothing wrong who just want to sell, cash out and downsize are getting hosed. 

May 18, 2009 02:03 AM
Mark MacKenzie
Phoenix, AZ

Sandra:  Thanks :)

John:  Agreed, that is certainly the trend.

Sylvie:  Thanks for the comment

Mike & Cindy:  Good points

J:  Good points

May 18, 2009 03:30 PM
Sandy Shores FL Realtor®, Melbourne Real Estate
M & M Realty of Brevard Inc. - Melbourne, FL
Brevard County Real Estate, Florida's Space Coast

Hi Mark, I would imagine that there is a direct correlation with credit card defaults and foreclosures.  I believe we will see more foreclosures in days and months to come.

May 19, 2009 01:06 AM