The Consumer Debt Anchor 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 investorswho 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):
The Financial and Asset Bubble – Since the official start of our six (6) yearlong “Credit Crisis”, we have all seen the various wide-ranging extremes of the financial and asset cycles with both busts and booms. During the past several years, our economy has experienced deflation, inflation, and potentially hyperinflation partly due to a weakening U.S. Dollar, declining job numbers and investor demand, and various financial strategies and bailouts.
As the securitization market for mortgage loans has effectively been “frozen” for several years as I had forewarned many of my readers in various regional and national real estate publications several years in advance of the “official” start of The Credit Crisis back in 2007, we primarily have seen loans being funded which are backed by governmental bodies via Fannie Mae and Freddie Mac (both taken over by the U.S. government back in September 2008) and FHA (government insured financing).
The last big “real estate buying” period for both residential and commercial real estate properties nationwide was around 2007/2008. As real estate investors we should be aware that many of the existing 5 year fixed commercial loans used to finance those real estate investments may be ballooning or becoming all due and payable in 2013.
Ballooning Commercial Mortgages
Upwards of 4,750+ CMBS (Commercial Mortgage Backed Securities) with loan balances near $55 billion may need...
In Southern California, upwards of 55% of all homes purchased in 2012 may have been acquired with either all cash or FHA loans partly since the secondary markets are so restricted. A very high percentage of these home purchases were for homes priced below the conforming / FHA loan limits of $417,000.
Many of these all cash buyers were investment or hedge funds, domestic and foreign. Obviously, the mortgage lending markets have tightened up significantly since 2007 with the Jumbo Mortga...
The ongoing and worsening Credit Crisis continues at a rapidly escalating downward spiraling pace. The various bailout programs offered by governments and Central Banks worldwide have done absolutely nothing to help the everyday citizen on the street.
These bailout programs have only worsened the financial crisis worldwide, and have adversely impacted our once capitalistic wa...
Since the Credit Crisis began back in the Summer of 2007, both commercial and residential property values have fallen significantly throughout the USA. As I have written before, property owners are more likely to walk away from their “upside down” homes, office buildings, retail shopping centers, or other types of properties if their existing mortgage debt exceeds their current market value.
Thankfully, home prices have begun to stabilize or increase in price ranges of between 5% and 20%...
Real Estate: An Exceptional Hedge Against Inflation
Whether one believes annual government statistics which allege 3% to 4% annual rates of inflation or if one chooses to take a closer look at the costs for their goods and services in real life which seem to increase in price closer to 8% to 10% + each and every single year, I do know that the cost of gasoline, food, water, and utilities has skyrocketed in recent years thanks to our weakening U.S. Dollar.
Historically, real estate has been one of the best forms of investment...
The Shadow Inventory vs. Declining Home Listing Inventory
How is it possible that home listing inventories have fallen in many regions by upwards of 30% to 70% in year over year comparison numbers in spite of our ongoing sluggish economy? With the rapid home listing number declines in various regions, then many homes have increased in value by 5% to 17%+ just over the past year as well.
Are there potentially several million "Shadow Inventory" foreclosure homes which may have been delayed partly due to a wide variety of legal and financia...
What is easier to fund today - commercial or residential loans?
Are 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, a...