The study, which analyzed data from December 2003 through December 2013, found the switch back to paying for the house before the plastic was seen in September 2013. Consumers had changed priorities in September 2008, when the mortgage crisis drove consumers to pay credit cards ahead of mortgages.
The one thing that didn’t change: consumers have put their auto loans before their mortgages and credit card payments—and by a wide margin—since at least 2003.
“One of the biggest impacts of the Great Recession to the credit system was its influence on consumer payment patterns,” Ezra Becker, co-author of the study and TransUnion VP of research and consulting, said in a statement. “As unemployment rose and home prices cratered, increasingly more consumers were faced with financial constraints and had to make difficult choices—and many chose to value their credit card relationships above their mortgages.”
TransUnion said it looked at the delinquency spread between mortgages and credit cards over the past decade to determine how much of an impact housing prices had on the rate of payment of credit cards versus mortgages. The company compared that spread to the Standard Poor’s Case-Shiller 20-City Home Price Index.
If the 30-day credit card delinquency rate was 1.5% and the 30-day mortgage delinquency rate was 2.25% at a given point in time, the result is a 0.75% spread between the two variables.
“This was an especially enlightening part of the study, because we found home price appreciation and depreciation can impact mortgage and credit card payment patterns quite differently, depending on whether consumers consider the environment ‘normal,'” said Toni Guitart, co-author of the study and TransUnion director of research and consulting.
Guitart said the housing market saw “massive” home value appreciation between 2003 and 2006, but during that period the spread between credit card delinquency and mortgage delinquency remained effectively the same. Home value appreciation, while big, was expected and therefore not a driver of change. “However, once home values experienced major declines in 2007 and 2008, the delinquency spread narrowed to the point where more people were opting to pay their credit cards before their mortgages—something that was unimaginable just a few years prior,” he said.
Through all of 2006 the HPI was near its all-time high at just above 200, and the 30-day delinquency spread between credit cards and mortgages maintained a stable, negative level. For example, in June 2006 the spread was -1.18%, which was derived by subtracting the credit card delinquency rate of 2.47% from the mortgage delinquency rate of 1.29%. The HPI was 206.31 at that time.
Over the following two years, the HPI dropped 21% to 161.82 by September 2008. This in part drove increasingly more consumers to pay their credit cards before their mortgages, causing the delinquency spread to move 122 basis points from -1.18% in June 2006 to +0.04% in September 2008.
This new payment hierarchy trend—more consumers choosing to pay their credit cards and go delinquent on their mortgages—continued for five years, with a peak delinquency spread in June 2010 of +1.18%.
“When the market dynamic is what people expect, i.e., home values are increasing and unemployment is under control, then the payment hierarchy is stable. It is when an unexpected shock hits the market, such as home value depreciation or major increases in unemployment, that the payment hierarchy is subject to change, as consumers reassess which loan relationships are more important to them at that time,” said Becker.