Guest post by John Kiernan
As we prepare to close the book on another $100+ billion holiday shopping season and our seventh consecutive year of economic growth, it’s worth taking stock of where the U.S. consumer currently stands as well as what 2017 likely has in store. Because while things might seem peachy now, they always do until they’re not.
With that in mind, WalletHub put together some personal-finance predictions for 2017 in consultation with a panel of leading industry experts. And without further ado, here’s what we expect to go down.
1. Runaway Credit Card Debt Makes 2017 Look Like 2007
Consumer overleveraging is poised to be one of the biggest themes in personal finance in 2017. WalletHub projects we will end 2016 with a net increase of $80 billion in credit card debt, which would bring outstanding balances to a level not seen since the Great Recession.
Our saving grace so far has been the charge-off rate stubbornly hovering near historical lows, which means people are still able to pay their monthly minimums on time. But delaying what seems inevitable might only make matters worse, giving cardholders more time to rack up debt and positioning us to fall from a greater height. Our spending habits show no signs of slowing, after all, and we certainly aren’t repaying more of what we owe.
When the levy ultimately breaks, with charge-off rates rebounding to historical norms, consumer credit quality will drop and lender underwriting standards will tighten. It might not happen within the new calendar year, but we’ll be a whole lot closer to credit-card-debt catastrophe when 2018 rolls around.
2. Two Fed Rakes Hikes Will Exacerbate Overleveraging
The interest rates on new credit card offers have moved in lockstep with the Federal Reserve Open Markets Committee, increasing by 24 basis points in accordance with the Fed’s 25-basis-point hike in December 2015 and rising by 15 basis points in Q3 2016 in advance of the Fed’s subsequent quarter-point increase this December. And with all signs, including the FOMC minutes, pointing to multiple rate hikes in 2017, things are looking ominous for already overleveraged consumers.
“The federal funds futures market suggests that market participants there are expecting maybe two 25-basis-point hikes next year, increasing the federal funds rate from about 64 basis points at the start of the year to about 105 basis points at the end of the year,” said Scott E. Hein, faculty director of the Texas Tech School of Banking and co-editor of the Journal of Financial Research. “While this is a good place to start, I personally foresee up to four rate hikes, with the target next year being closer to the Fed’s inflation target of 2%.”
If rates rise as expected, debts will eventually become more costly and less sustainable. And when that happens, charge-off rates will inevitably begin to rise from historical lows – 2.86% as of Q3 2016 – to levels more in line with the 2000-to-2007 average of 4.93%.
3. Rising Rates Won’t Slow Auto & Home Sales
Although rising rates figure to put a damper on credit card spending, by increasing APRs that are already quite high compared to most other consumer lending products, they could very well have the opposite effect on auto and home sales. “We may see a nice bump in home sales and mortgage availability as buyers see low-interest rates slowly fading and banks have higher rates to buffer against risk,” Robert Eyler, director of the Center for Regional Economic Analysis at Sonoma State University,” told WalletHub.
As a result, we expect continued sales growth for both homes and vehicles in 2017, albeit with signs of tapering, considering the record-setting tear we’ve been on in recent years and the headwinds that rising rates will ultimately provide.
4. The S&P Won’t Do Much Better Than An Online Savings Account
Historically low rates of return from bonds, CDs, and other deposit accounts have helped to prop up the stock market in recent years, as investors worldwide search for yield. However, it seems as if the tables are starting to turn. Priced at roughly 26 times earnings and setting all-time records, the S&P 500 does not appear to have much room to run in 2017. And that is why the likes of Morgan Stanley, UBS, and Credit Suisse all expect the S&P to end the new year at 2,300, which would represent an increase of just 1.86% from the closing price on Dec. 16, 2016. And others, such as Citi (2,150) and Goldman Sachs (2,200) are eying even lower levels.
Meanwhile, online savings accounts offer an average APY of 0.65%, which is tops among deposit accounts. Furthermore, the best accounts have rates as high as 1.1%. The question, therefore, becomes how consumers will choose when confronted with the decision between a modest risk-free return and the boom-or-bust potential of a stock market apparently approaching its top.
5. The Average Credit Score Will Rise 5 - 10 Points in 2017
The average American currently has a credit score of 668, which is generally classified as “good.” Fortunately, we can expect that average to get even better as negative records from the Great Recession continue to fall off peoples’ credit reports. Most derogatory marks stay on file for a period of seven years, with the exception of bankruptcy, which lasts a decade.
Rising scores should enable consumers to at least partially offset the increase in borrowing costs brought on by higher rates. And it will give the most opportunistic consumers the ammunition they need to qualify for a good balance transfer deal and get out of debt. The fact that free credit scores are so readily available is quite helpful in this regard, as consumers can monitor their improvement and apply for better deals at the most opportune time.
At the end of the day, no one truly knows what the future holds for their wallets at the start of any new year. But it’s important to be as prepared as possible because while foresight pays big in personal finance, getting blindsided can cost you dearly. So watch out for these developments in 2017 and take the necessary steps to ready your finances for whatever comes your way.
John Kiernan is Senior Editor of the personal finance website WalletHub, which offers free daily credit scores, 24/7 credit monitoring, and personalized savings advice.