Top Three Trends from Raddon’s Annual Lending Study
The financial press has been fairly outspoken about rising rates. Given the Fed’s persistence in raising the Fed Funds rate, we should expect this level of reporting, but has that concept filtered down to the American public?
In a recent Raddon study, Lending Insights: Loan Demand Rebounds but Challenges Persist, we find that yes, the borrowing public is aware of the rate environment and motivated as a result.
That’s just one of the findings from this year’s study. Every year, Raddon performs a “state of the industry” insights study on the borrowing habits, expectations, and behaviors of the American consumer public. Here are three trends we’ve noticed that may impact your plans for 2018:
1. Demand is way up.
Two years ago, in 2015, only 19% of Americans anticipated getting a loan in the next year. Today, that number is 28%, the highest percentage since 2011. Demand growth is paced by Millennials mostly, with 50% of that segment of the population anticipating borrowing.
So what explains this increase? We believe a combination of factors may be responsible:
- Improved economic and personal financial conditions
- Improvements in real estate and a Millennial drive towards home ownership
- A possible “Fear of Missing Out” on low interest rates
Whatever the reason, we expect that financial institutions looking to lend will find a stronger market for their services than they have in recent years. Having said that, 28% is still well below the over 35% numbers we saw in the decade of the 2000s.
2. Home purchases are beginning to see some significant shifts, with massive increased demand on the lower end of the housing market
We’ve written substantially about the rise in homebuying among millennials. 48% of Millennials anticipate buying a home in the next five years. That’s nearly half of a population of 28 million households. 13.4 million homes are a significant number, particularly since most of this demand will be on the lower end of the market.
In this study, however, we found that 11% of the baby boomer population also anticipates buying a home in the next five years, which computes to an additional 4.3 million homes. Notably, the plurality of these Baby Boomers (38%) anticipate trading-down for their next purchase, downsizing into a smaller home.
Given this increased demand on the low end, we do not see a corresponding push on the high end. Only 600,000 Boomer households anticipate trading up, and only 2.4 million Gen X households will join them.
All told, we expect these trends adding up to intense pressure on the low end, with a softening on the high end, particularly given the changes in mortgage interest deductibility included in the new tax bill.
For financial institutions, these trends should add up to the continued need to develop mortgage products to support the rising prices of the entry-level market and to prepare for declining values (or at least flattening appreciation) on the high end, which could impact equity lending.
3. Credit card demand is skyrocketing among younger households, fueled by pricing considerations.
Twice the number of Millennials and Gen X households anticipate opening a credit card from 2016. While institutions often focus on rewards as the driver of product adoption, younger consumers continue to state that pricing – annual fees and interest rate – are their primary concerns. Among higher-income millennials, 85% cite rate as very or extremely important, compared to only 62% for type of rewards. 68% care about credit limit.
While traditionally, we viewed higher-income consumers as using credit cards as a transaction channel, thereby being more focused on rewards and lower-income consumers using cards as a loan channel, carrying a balance and being more focused on rate. Higher-income Millennials however, seem in 2017 to be much more interested in borrowing on their card, and with that focus, they are much more interested than before in getting a better interest rate, particularly in light of perceived rising rates.
Marketing a low-rate card with balance transfer offers to these consumers could bring in significant balances from higher-rate cards.
Summary: Consumers are expecting higher rates and carrying costs for debt. They are looking for ways to lock in low rates now while they can, particularly for longer-term products like mortgages and credit lines.