MacroMonitor Market Trends highlights topical news and trends of interest to you and your colleagues. If you would like more information about the items in the newsletter or would like to discuss other ways that we can assist you in your research and marketing efforts, please contact us.
In this issue:
Direct Marketing Gains Ground
The 2006–07 MacroMonitor data highlight the increased willingness of U.S. households to obtain various financial products by direct means (mail, telephone, or Internet). The credit card, by far, has been the most successful financial product sold through direct marketing. But as Figure 1 shows, other financial products—from insurance to loans and investment products—are making substantial gains in reaching consumers through direct marketing.
Nearly six in ten U.S. households obtained a credit card through direct means in the two years before the 2006 survey, a 10% increase from the incidence that the 2004 data reported. Among insurance products, the incidence of obtaining homeowner's and renter's insurance via direct means experienced the most substantial gain: up by 36%, from 14% in 2004 to 19% in 2006. More households, however, obtained motor-vehicle insurance through this medium: 24% in 2006 and 21% in 2004. Meanwhile, the incidence of households' obtaining a home equity loan or line of credit through direct means jumped by 63% (from 8% to 13% between 2004 and 2006), likely influenced by the real estate boom and easy availability of credit during this period.
Although consumers are now more accepting of direct marketing channels, the MacroMonitor also shows a significant proportion of households continuing to prefer old-fashioned face-to-face interaction with their financial providers. CFD can identify which consumer segments are most receptive to direct marketing and which delivery channel (mail, telephone, or Internet) is most effective for which type of financial product or service. Using CFD's wealth of data and knowledge enables financial providers to create the right mix of financial products and services delivered through the right channels to the right customer segments.
Age: The Most Significant Difference among Owners of Subprime Mortgages
The beginning of the decade was plagued by a terrorist attack in New York, a war in Iraq, and corporate scandals in the United States that caused U.S. financial markets and the economy to take a nosedive. To encourage growth and recovery, the Federal Reserve Board cut interest rates and sustained them at record lows, thus allowing lending institutions access to cheap money and creating an environment for the housing market to thrive in. Banks, credit unions, savings and loan institutions, and other finance companies used this opportunity to widen their loan portfolios by creating accessible and attractive unconventional loans for otherwise noncreditworthy individuals.
The two most significant of these unconventional loans are interest-only loans and adjustable-rate mortgages (ARMs). The MacroMonitor began tracking interest-only loans in 2006, and our current data show 7% of U.S. homeowners currently making interest-only payments on a mortgage. We have tracked ARMs, by contrast, for much longer, and our data show that that incidence has risen 24% in the past ten years: from 17% to 21%.
The MacroMonitor reveals little if any significant demographic differences among households with subprime mortgages, whether by income, race, sex, marital status, or level of education. It is not surprising, however, that the one significant demographic difference among these households is age. Typically, access to credit is lower among younger households because of their lack of assets, short employment tenure, or limited credit history. But the subprime market changed that access. The MacroMonitor reveals that home ownership among households whose primary head is younger than age 35 has grown 44%: from 32% in 1996 to 46% in 2006. Spurring this growth have been large numbers of subprime mortgages. The MacroMonitor shows that 10% of home-owning households whose primary head is younger than age 35 are currently making interest-only payments. By comparison, just 6% of households whose primary head is older than age 35 are making interest-only payments. In addition, one-third of the younger households own an ARM, in comparison to 17% of the older households.
Retiree Life Events and Transactions
Anecdotal evidence from focus groups reveals that more often than not, instead of one's retiring, retirement happens to one. As Figure 3 shows, a strong correlation exists between households' having retired in the past two years and households' having had a major illness or becoming disabled or unable to work in the past two years.
A correlation exists also between recently retiring and recently experiencing a significant drop in income. This correlation is not surprising, although it is somewhat alarming for nearly one-third of retiring households to have a 25% drop in income. Perhaps the drop in income for so many retiring households explains the correlation between households recently retiring and those recently going from full-time to part-time employment—given that many recent retirees need to supplement their retirement income.
Recently retired households also are much more likely to have made certain financial transactions during the same two-year time frame. First and foremost among these transactions is obtaining financial planning and advice. And it is not educational-expense planning or debt-consolidation assistance that they obtained but retirement planning (29%), investment planning (24%), tax planning (22%), and overall comprehensive financial planning (17%). Other activities conducted by recently retired households in the past two years include purchasing a CD (23%), investing in an MMDA (19%), buying stocks (17%), investing in an annuity (6%), and contributing to or rolling over IRAs (15% and 10%, respectively). Recently retired households also obtained supplemental insurance (10%) and opened a relationship or packaged account or an asset or investment management account (12%).
When marketing retirement products and services, financial institutions would do well to consider that retirement may be less a planned action and more a reaction to events beyond the control of the retiree. In addition to emphasizing what people should do to prepare for planned retirement, financial institutions and their intermediaries could also include discussions about the possibilities of forced retirement and its associated issues.