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2018 Q4 2018 U.S. Economic and Credit Trends Outlook - FAQ

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3 necessary credits from other sources? What would be the impact of that for economic outlook? Answer: High student loan balances can impact the ability of consumers to access credit whether it's to buy a home, buy a car or start a business. This barrier to credit is likely a larger drag on economic growth than the potential for many borrowers to default on their student loans. Delayed car and home buying can slow economic activity. New business formations are at a multi-decade low -- a troubling sign for potential future growth. Unfortunately, there are no easy solutions to the current trends. Income based repayment plans are helpful for cushioning and spreading out the impact over time but they fail to address the fundamental problem of the debt balance itself. Question: With the lower demand for refinance due to existing low first mortgage rates, do you see that pushing equity line/loan borrowing up? Answer: Yes, we do expect to see slow and steady growth in home equity lending (both lines and loans) as homeowners' equity continues to grow. The pace of growth is likely to remain moderate given memories of the previous downturn and change in rules and standards that may make these lending products more costly. To the extent that existing homeowners are unable to find houses to "move up" to, they may prefer to stay where they are and remodel their existing properties. This will add additional demand for home equity products. Question: Can you speak more about wealth inequality and how it decreases demand for credit? Answer: Consumers who have experienced large increases in their real estate and/or financial wealth may wish to extract some of the gains through the use of credit. Borrowing against housing wealth with a HELOC is one example. To the extent that the growth in wealth is concentrated in a small segment of the population, the number of opportunities for lending may be more limited than if the gains in wealth were more wide spread. A counterargument is that those without wealth gains may have even higher demand for credit in order to bridge the gap. Whether or not lenders will provide this unsecured lending will depend on their view of borrowers' future income prospects. The type of credit provided to these two groups will vary significantly. Question: Do you have projections for Southern California housing availability and costs? Answer: Yes. Moody's Analytics provides projections for all states and metropolitan areas in the country. The outlook for Southern California has house price growth slowing but remaining positive in the 3-4% range for both LA and San Diego. Supply will remain constrained given some pullback in new construction activity. Rising prices along with rising interest rates will continue to place downward pressure on affordability.

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