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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):
March 26, 2013

What is easier to fund today - commercial or residential loans?

real estate investingAre commercial real estate loans easier to find than residential loans today? Had I asked that question back in 2007, most people would have then said “No way.” Today, many investors and brokers may have to really think about it first prior to giving an answer one way or another.

Since the last real estate market peak near 2007, both the residential and commercial market sectors have sadly experienced massive price declines. In many cases, homes, retail shopping centers, land, hotels, and other types of properties have had their values cut in half or more.

Commercial Investment Property & Type of Loans

As it relates to the commercial property sector’s last market peak near 2007 or 2008, many of the existing 5 year fixed commercial loans may be ballooning or coming all due and payable in 2013. In many cases, commercial loans are fixed for shorter 5, 7, and 10 year terms so they must be refinanced or paid off more often than residential loans.

Upwards of 4,750+ CMBS (Commercial Mortgage Backed Securities) with loan balances near $55 billion may need to be refinanced in 2013 alone. Sadly, a very high percentage of these same potentially ballooning commercial mortgages may not have sufficient income to service the existing mortgage debt.

In addition, there may be an additional 6,300+ non-CMBS commercial mortgage loans (according to Bloomberg Financial News) with balances of almost $79 billion that may be coming all due and payable in 2013. Which of these properties may qualify for a new commercial loan though today?

Banks Attitude Towards Commercial Investors & Loans

In many situations, the existing commercial mortgage debt may currently exceed the conservative market value today in 2013 based upon the income and expenses for the existing properties. Yet, some mortgage lenders or servicing companies may accept partial payoffs almost akin to a residential “Short Sale” by way or either a sale or a refinance. Property owners may wish to consider trying to remain somewhat optimistic in spite of their challenging financial position today.

Most banks still don’t want to foreclose on their properties so they may better realize today that a partial payoff may be much better for them than a foreclosure. Many lenders today may agree to some type of a discounted payoff which may be a “Win / Win” for all parties.

Current Commercial Investing Outlook & Interest Rates

The most encouraging part of the commercial real estate industry today is that interest rates continue to hover near records low rate ranges (3% to 5%+). With lower interest rates today, then borrowers may lock into this historically low rates and potentially improve their monthly cash flows significantly.

If lending may hopefully ease up later this year as it relates to both residential and commercial properties, then sales and property values may begin to increase more so than in years past. Once again, it is the availability of capital that may best determine the direction of U.S. property values.

The combination of housing listing inventory levels near eighteen (18) year lows, near record low interest rates, and pent up housing demand have fueled price gains of between 5% and 20%+ in various U.S. housing regions between 2012 and 2013. Let’s hope that the price appreciation trends continue along with a stronger job market and overall U.S. economy!

*** To read the original version of this article on the REI (Real Estate Investing) Club website, please click on this link: http://www.reiclub.com/realestateblog/are-commercial-loans-easier-to-fund-than-residential-loans/#comments

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