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Skyrocketing Consumer Debt & Falling Rates
With home mortgages, the primary collateral for the loan balance is the home itself. In the event of a future default, the lender can file a foreclosure notice and take the property back several months later. With automobile loans, the car dealership or current lender servicing the loan can repossess the car.


Homeowners often refinance their non-deductible consumer debt that generally have shorter terms, much higher interest rates, and no tax benefits most often into newer cash-out refinance mortgage loans that reduce their monthly debt obligations. While this can be wise for many property owners, it may be a bit risky for other property owners if they leverage their homes too much.

With credit cards, lenders don’t have any real collateral to protect their financial interests, which is why the interest rates can easily be double-digits about 10%, 20%, or 30% in annual rates and fees, regardless of any national usury laws that were meant to protect borrowers from being charged “unnecessarily and unfairly high rates and fees” as usury laws were originally designed to do when first drafted.

Zero Hedge has reported that 50% of Americans don’t have access to even $400 cash for an emergency situation. Some tenants pay upwards of 50% to 60% of their income on rent. A past 2017 study by Northwestern Mutual noted the following details in regard to the lack of cash and high credit card balances for upwards of 50% of young and older Americans today:

* 50% of Baby Boomers have basically no retirement savings.

* 50% of Americans (excluding mortgage balances) have outstanding debt balances (credit cards, etc.) of more than $25,000. 

* The average American with debt has credit card balances of $37,000, and an annual income of just $30,000. 

* Over 45% of consumers spend up to 50% of their monthly income on debt repayments that are typically near minimum monthly payments.

 

Rising Global Debt 

 

According to a report released by IIF (Institute of International Finance) Global Debt Monitor, debt rose to a whopping $246 trillion in the 1st quarter of 2019. In just the first three months of 2019, global debt increased by a staggering $3 trillion dollar amount. The rate of global debt far outpaced the rate of economic growth in the same first quarter of 2019 as the total debt/GDP (Gross Domestic Product) ratio rose to 320%.

The same IIF Global Debt Monitor report for Q1 2019 noted that the debt by sector as a percentage of GDP as follows:

  
Households: 59.8%

* Non-financial corporates: 91.4%

* Government: 87.2%

* Financial corporates: 80.8%

 


Rate Cuts and Negative Yields

As of 2019, there’s reportedly an estimated $13.64 trillion dollars worldwide that generates negative yields or returns for the investors who hold government or corporate bonds. This same $13.64 trillion dollar number represents approximately 25% of all sovereign or corporate bond debt worldwide. 

 

On July 31, 2019, the Federal Reserve announced that they cut short-term rates 0.25% (a quarter point). Their new target range for its overnight lending rate is now somewhere within the 2% to 2.25% rate range. This is 25 basis points lower than their last Fed meeting decision reached on June 19th. This was the first rate cut since the start of the financial recession (or depression) in almost 11 years ago dating back to December 2008.
 

It’s fairly likely that the Fed will cut rates one or more times in future 2020 meeting dates. If so, short and long-term borrowing costs may move downward and become more affordable for consumers and homeowners. If this happens, then it may be a boost to the housing and financial markets for so long as the economy stabilizes in other sectors as well such as international trade, consumer spending and the retail sector, government deficit spending levels, and other economic factors or trends.

We shall see what happens in the near future in 2020 and beyond.

* The blog article above is a partial excerpt from my previous article entitled Interest Rate and Home Price Swings in the Realty 411 Magazine linked below (pages 87 - 91):
May 27, 2010

The Financial Markets Continue To Defy Logic

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The U.S. Senate recently passed a bill which may outlaw all stated income (or "no income verification") real estate mortgage loans nationwide. The bill now will go to Congress for a vote as well. If Congress also passes this "no income verification" ban nationwide, then it may go into effect later this Fall, or early next year.  

As the residential and commercial real estate markets continue to weaken, any attempt to limit the availability of non-conventional type mortgage financing may only further weaken both the national housing market as well as the overall economy.

Consumer spending traditionally represents approximately 2/3's of the overall U.S. economy, and sluggish retail numbers in recent times do show that many consumers are not spending as much these days. As a result, more retail shopping centers are closing down nationwide due to the high vacancy rates and reduced monthly income.

In the 1st Quarter of 2010, FHA insured purchase money mortgage loans surpassed all funded Fannie Mae and Freddie Mac purchase loans combined for the first time ever. As Fannie and Freddie typically control the bulk of all mortgage loans nationwide, this new trend setting situation with more funded FHA loans is not encouraging news.

FHA (Federal Housing Administration) has been technically insolvent for years. These highly leveraged (up to 97% LTV) loans have become the new "sub-prime credit" type mortgage nationwide for many borrowers as they allow lower FICO credit scores, lower cash reserves, and higher debt to income ration numbers.

The default rates for FHA are staggering which may only cause the financially weak FHA insurance program to worsen much more in the near term. In many cases, the mortgage borrower is financially more solvent and liquid than both their funding bank as well as the FHA insurance program, sadly.

The Federal Reserve has kept interest rates at artificially low 0% (ZERO) interest rates for the past 17 months in order to partly stimulate and improve the financial and real estate markets. The Dow Jones index is approximately 11% off it's highs from just one month ago as we enter the traditionally slow and stagnant Summer investing season.

The P/E (Price to Earnings) Ratio numbers seem to make no sense for many of the Dow 30 and the S & P 500 companies as so many of these stock values may be tremendously overvalued when compared to other P/E ratios used in years past.

In January of 1981, the Dow Jones index was near 960, and the U.S. Prime Rate hit 21.5% as the Fed tried to "quash inflation" back then. Today, the Dow is near 10,000, and the Prime Rate has hovered within the 3.25% to 4% rate range, and short term rates have sat near 0% (zero) for almost the past 1 1/2 years. What happens to the financial and investing markets if and when the short and long term rates begin to move upward?

True national unemployment numbers may be north of 20% now as opposed to the government's figures which are closer to 10%, according to various prominent economic forecasters. Gold continues to increase in price as it is considered more of a "safe haven" type investment than the more volatile and less liquid stock and real estate markets as gold now approaches $1,200 per ounce.

The U.S. Dollar Index has moved upward from 75 to 87 since last December. The U.S. bond market continues to struggle in recent times as it is challenging to attract enough true third party investors in the form of individual investors or foreign governments who may be willing to invest in the USA's short or long term debt at rates. The current bond offering prices and yields seem awfully low, and not in line with the potential risk of the investments.

The recent passing of the "Audit the Fed" bill by the U.S. Senate (passed 96 to 0) is both potentially positive (in the long term) and negative (in the short term). As many politicians and citizens have realized in recent years, the privately owned and controlled Federal Reserve has incredible power and authority in our day to day lives as well as operates in a very secretive and autonomous way.

Since the official start of The Credit Crisis back in 2007, the Federal Reserve has worked diligently to try to keep various banks, Wall Street investment firms, and insurance companies solvent and liquid by providing them with emergency loans in the form of Term Auction Facilities, Term Securities Auctions, and other similiar sounding "bailout" loans which may amount to many trillions of dollars.

As these loans were made anonymously to some of the biggest financial institutions in America, the "Audit the Fed" bill may force the Federal Reserve to release the list of banks, insurance companies, and Wall Street firms who received these same emergency loans.

If this information is made public, then it may potentially hurt the stock and bond values of these same financial institutions as their investors may soon realized how insolvent many of these same firms are today. This, in turn, may cause a further weakening economy for so many other reasons which may take another 10,000 plus words to better explain.

Short term, foreclosure and tax lien investments may be some of the better investment options for a "buy and flip" investment strategy (call or email me for details). The old "buy and hold" real estate investment method may not be as effective as the new "buy and flip" methods during the depths of the ongoing Credit Crisis as prices continue to stagnate, or fall in many regions. The ongoing "foreclosure wave" continues to increase in size which, in turn, may only further suppress future home price values.

As I still am concerned about a "hyperinflationary recession/depression" in the potential near term due to a weakening U.S. dollar coupled with asset deflation in the form of stocks, real estate, and other hard assets, investors must continue to pay attention to what is really happening in the financial markets to better understand how serious this economic and financial situation is here both in America and worldwide.

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