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May 1, 2005 — The latest findings of the Experian-Gallup Personal Credit Index show little change in consumer sentiment regarding their credit, with the Index showing only a slight improvement from April. March's benchmark Index stood at 100, dropping sharply to 82 last month, due to pessimism over consumers' future debt and bills. Rising slightly this month to 86, May's index reflects a two point rise in consumers' optimism of both their present and future credit situations.
May's slight gains are driven by higher optimism among females, respondents ages 30-49, as well as those with annual incomes under $40,000. By contrast, respondents ages 50-64 reported a sharp drop in consumer sentiment in May.
70% of Americans expect housing prices to increase over the next year, while 24% expect them to remain steady; only 5% expect housing prices to decline. Most of those expecting price movement anticipate modest changes, though 1 in 4 (23%) expect prices to rise by 10% or more.
Despite the general assumption that housing prices will continue appreciating, 3 in 4 expect interest rates to increase over the next year, while only 3% forecast declines. Of those expecting rate increases, half (51%) believe rates will rise by one point or less, while a third asserting that a two point rise is imminent. Still, 14% of respondents believe rates will rise by more than two points over the next year. Typically, housing prices fall as interest rates rise.
Rising rates could hurt consumers with variable rate mortgages
Most consumers recognize the interest rate risk associated with variable rate mortgages, preferring a fixed rate mortgage as rates rise: 82% of respondents planning to borrow money for a home within the next six months assert that now is a better time to have a fixed rate than a variable rate. Yet, 1 in 5 (21%) of these respondents assert they are "somewhat" or "very" likely to take out a (variable) adjustable rate mortgage. Adjustable Rate Mortgages, or ARMs, offer a low "fixed" rate for a set period (usually one to seven years) and then substantially increase the borrower's mortgage payment thereafter, escalating even further as interest rates rise
A number of consumers believe a housing bubble is possible
Overall, about 1 in 4 (23%) Americans have heard about a possible housing "bubble," (a condition in which housing prices drop sharply after prolonged periods of price increases) with the remaining 77% saying they have heard "little" or "nothing at all about it." Nonetheless, when told specifically what a housing bubble is, 4 in 10 consumers (37%) say it is "somewhat" or "very" likely that such a situation could occur within three years. Consumers earning less than $40,000 per year are especially likely to express this view (46%).
About the Personal Credit Index
The Experian-Gallup Personal Credit Index is a monthly survey among a nationally representative sample of 1,000+ respondents, focusing on consumers' ever-changing attitudes and perceptions relating to their current credit situation and future expectations. Specific areas of inquiry include debt load, credit score, borrowing, and repayment ability. The survey's margin of error is +/- 3%.
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Little Change In Personal Credit Index
Experian-Gallup Personal Credit Index rises 4 points from April 2005:
- Continues to reflect concern over consumers' future debt situation.
- Worry over consumers' ability to pay their current bills rose slightly.
Almost 2 in 5 Foresee A Housing Bubble
Likelihood of housing bubble (big drop in housing prices) over next 3 years
3 in 4 Anticipate Higher Interest Rates
Expectations of mortgage interest rates over the next year
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