While others wait for turmoil, one man arms himself with data
With seemingly everybody waiting for the other shoe to drop, what’s overlooked is examination into the structural integrity of that falling footwear that may ensure a soft landing. The metaphor here is the economy against a backdrop of market uncertainty that makes for blaring, doom-and-gloom headlines among the most alarmist of us.
Armed with data, Vadim Verkhoglyad is here to rebuke prevailing narratives painting the gloomiest of outlooks. “Constant discourse around whether the US will enter a recession is causing people to look for evidence of systemic risk in consumer markets when it just isn’t there,” Verkhoglyad, VP and Head of Research Publication at fintech firm dv01, said. “Instead, we should be focusing on real concerns for households.”
In a telephone interview with Mortgage Professional America, Verkhoglyad sought to dispel rumors about the state of consumer markets while casting a spotlight on the critical housing shortage that has exacerbated a slowdown in the single-family market.
Is credit card debt growing?
Take headlines dealing with rising credit card balances and consumers dipping into their savings, for example. “These articles are worrying and using metrics which are easily misconstrued,” he said. “The problem with the savings rates chart is it doesn’t indicate savings. It indicates this is consumption and this is income growth. When you have inflation, that number is going to decrease.”
The main crux: “The thing that’s important is it’s not negative,” Verkhoglyad said. “Even though you have income growing faster than wage growth, the number is still not negative. All it means is that you’re consuming slightly higher than the change in income. It doesn’t mean you don’t have savings; it doesn’t mean you don’t use savings to fund consumption; it doesn’t mean you’re taking out more credit. It’s just an equation. If that’s the starting point and you’re building your narrative off there…well, you’re starting your narrative at the wrong place.”
After all: “Consumers build their savings over years and decades,” he added. “They don’t build them over quarters.” Rather, growth in credit card balances is simply a correction from the last two years’ low debt levels, and a result of consumers forming new households and opening lines of credit, he said. “The much-touted personal savings rate actually does not reflect what we think it does and it ignores consumers’ ability to fund savings out of asset appreciation,” he noted. “Accurate data shows the consumer market is healthy and Americans’ net worth is growing.”
Who will suffer most from inflation?
His research also contradicts narratives related to inflationary impact on various income levels: “The thing that’s really important is you’re also seeing it manifest in different income scales, and you’re not really seeing it manifest really at the lower income scales – which is contrary to the narrative because you would think inflation hurts the lowest-income consumer the most. But that’s not really what we’re seeing. What we’re seeing is the uptick in consumer credit growth is fairly benign and fairly similar to what we saw from 2018 to 2019.”
According to his research, from Q1 2021 to Q3 2022, the change in net worth was positive across all income percentiles, with the growth strongest among lower-income households. During this same period, assets rose at a faster pace than overall borrowing. Over the past six quarters, consumer debt rose slower than 2018/2019 which was a time of far less worry about consumer balance sheets.
Prevailing narratives – read news reports – don’t take the purchase of cars (and, to a lesser extent boats and tractors) into account, he noted. “Even with the growth in consumer credit, there’s been an equal and larger growth in consumer durable assets. The reason that’s important is that that’s mainly cars. It really means that when consumers are taking out debt today, it’s to buy something like a car. It’s not to load up the credit card,” he said of consumers. “Even as their liabilities are growing, their assets are growing at such a larger rate that their net worth is really growing.”
Is there a great recession coming in 2023?
Then there’s the granddaddy of them all – the “next Great Recession” narrative. “Instead of worrying about ‘the next 2008’, we should address a tangible concern – the housing shortage and inaccessible mortgage market,” Verkhoglyad said. “We are in the midst of a decade-long critical shortage of housing,” he noted. “We’re no longer asking if there’s a shortage but debating how many millions short we are.”
The global financial crisis, he said, "left a permanent imprint on the US financial system, creating a vacuum of financing options for a significant portion of households,” (referencing global turmoil marked by a period of extreme stress in global financial markets and banking systems between mid-2007 and early 2009). “Part of the problem was a lack of accessible and reliable data, but robust and data-driven underwriting can make a substantial difference in the mortgage market.”
In rebuking prevailing narratives, Verkhoglyad said he scoured through his firm’s internal data along with that of the Federal Reserve.
