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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):
August 8, 2008

California Sets Another Record For Foreclosure Losses In A Month (July '08)

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Now the numbers are beginning to escalate into a downward "death spiral" for properties in California. There were over 26,500 homes taking back by banks in the month of July alone. 

The dollar amount of loans taken back by banks in California were over $12.5 Billion. This was a 25% increase over the previous ALL TIME record months of May and June ($10 Billion Plus each). 

In a high percentage of cases, the properties had large 2nd mortgages which were completely wiped out. This dollar losses are usually not even counted in these dollar amount losses. I would venture to guess that the dollar amount of loans taking back AND the completely wiped out 2nds at the final Trustee's Sale were closer to $15 Billion plus in July alone. 

Property owners are seeing their new lower sales comps being established by these horrific foreclosure numbers. Investment groups who are purchasing these discounted REO pools at 50 cents on the dollar or below are seemingly the only ones making any great money these days in regard to California real estate.

Comments

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Jerry Gardner on August 11, 2008 2:10 PM
One would have thought that we all would have learned our lessons in the late 80s and early 90s, but during much of the frenzy we saw a lot of smart people doing dumb things. A lot of blame certainly goes to subprime, but as much should go to the actions of many of us in lending who felt like there was no end in sight to higher values. That is what fueled the frenzy that made many homeowners comfortable with high risk loans like option arms.  Like the early 90s though, certain things seemed to point to a bottom in sight, like different economists saying so, the media reporting it, and certain markets responding to it; all of which continue to appear in recent news. I see it as I do valuations, the foreclosure market is resetting prices and we are seeing faster sale times in a number of places. All of those point to good things ahead despite the bad way of getting there.
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