Economy on a ‘razor’

While CUNA economists now expect the U.S. to sidestep recession, economic uncertainty remains amid a year that has seen credit union loan growth return to normal levels after growing nearly 20% in 2022—the sharpest increase since 1984.

“The economy is essentially on a razor,” says Mike Schenk, CUNA chief economist and deputy chief advocacy officer, noting that inflation has dropped to 4% after peaking at about 9% in June 2022.

Credit union loan growth was 1.7% during the first quarter of 2023. CUNA economists expect stronger growth during the second half of the year, forecasting 7.5% loan growth in 2023 and 8% in 2024.

They forecast 4% savings growth this year and 5% next year, and expect credit unions to end 2023 with a loan-to-share ratio of 84.3%, up from 81.5% in 2022.

Decreasing home affordability

Homes are becoming more difficult to buy, says Schenk, citing a National Association of Realtors estimate that affordability is at a 37-year low. That’s coming on the heels of strong mortgage growth and low interest rates in 2020 and 2021.

Prices rose during that time and interest rates followed suit in 2022, with 30-year fixed-rate mortgages surpassing 7%.

Affordability isn’t just about interest rates, Schenk says. “It’s about housing prices and the fact that income hasn’t kept up with inflation. We also have significant and longstanding supply issues in the housing market, keeping price increases relatively high.”

The Mortgage Bankers Association recently forecasted an 18% decline in overall home sales this year compared to 2022, including a 2% decline in new home sales, which are a primary driver of economic growth. First mortgages account for 36.7% of credit union loans outstanding.

Schenk says the U.S. hasn’t seen a home lending decline of this magnitude since 2008. Yet, he stresses that consumer finances are in much better shape today, with an average debt-to-income ratio of about 90%, compared to 125% in 2007.

“We’re not expecting a replay of the financial crisis,” Schenk says. “We’re leaning toward the idea that the bubble in housing is going to slowly deflate rather than pop. That’s because we haven’t seen the level of speculation we saw in the buildup to the financial crisis. We also see a lot of home equity and a strong job market. Households will be more resilient going into any downturn.”

Schenk anticipates a slowing economic environment will lead more people to use home equity to get through financial difficulties. Therefore, he expects second mortgages and home equity lines of credit to be relatively strong this year.

‘Decent’ auto loan growth

The auto industry is also experiencing an affordability issue.

“Again, it's about interest rates and prices,” says Schenk, citing Kelley Blue Book data that found that the average transaction price of a new vehicle in 2022 reached a record high of $49,771. “Cox Automotive is estimating overall auto sales will grow by just 0.6%, so it's kind of a break even forecast.”

CUNA’s May forecast found 3% growth in credit union auto loans, which represent more than one-third of credit union loan portfolios.

“It's not strong growth but it's decent, especially against the backdrop of the supply chain disruptions we've had the last couple of years,” Schenk says. “Those are not gone, but they're not as obvious. That's helpful in terms of overall sales.”

Greater demand for unsecured credit

“If there's a slowing in the economy and more people are out of work, we will continue to see greater demand for unsecured credit,” Schenk says. “A lot of people don't have money set aside in a rainy-day fund, so their fallback is their credit card or an unsecured personal loan.

“It’s good that those portfolios will be growing,” he adds, “but it’s not good because our most vulnerable members rely on that.”

Deteriorating asset quality

CUNA economists are forecasting a “pretty significant” deterioration in asset quality, with rising delinquencies and net charge-offs. However, both delinquency rates and net charge-offs were near modern-day lows before rising modestly over the past six months.

“Our baseline forecast has those numbers settling in at rates below the long-run average, not only at the end of this year, but the end of next year as well,” Schenk says. “Things will look more normal over this forecast horizon than they have in the last couple years.”

‘Engage in tough times’

What should credit unions do amid economic uncertainty, tightened liquidity, and slowing loan growth?

Behave like financial first responders and engage while other financial institutions pull back.

“We were chartered to help people get through tough times,” Schenk says. “It’s in our DNA to remain engaged and to be less likely than the for-profit sector to turn people away. There’s no magic wand or silver bullet. Continue to do what you've always done so much better than the rest of the industry.

“Engage in tough times. Turn to your mission and your purpose, and double down on why you were chartered. In the for-profit sector, there’s a fiduciary responsibility to protect capital in tough times. We have to do the exact opposite.”