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):
Question: Historically, which asset class of investments has benefited the most over the past century as related to a combination of low interest rates and increasing inflation? Answer: Real Estate.
In recent years, interest rates have fallen to near record low levels while inflation continues to rapidly increase. Typically, rates and inflation are inverse to one another, and are akin to being on a “see saw”. The lower interest rates tend to fall, then th...
In recent years, apartment buildings have become quite a popular investment option for real estate investors interested in finding good yields for their money. With mortgage underwriting guidelines tightening up considerably for residential properties (1 to 4 units), more real estate investors have decided to acquire apartment buildings.
As interest rates have fallen dramatically, many apartment and commercial mortgage rates have also dropped to incredibly low ranges somewhere within 3%...
Are Commercial Loans Easier To Fund Today Than 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.
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...
*** Linked below is a newpaper article which I wrote for the Palisades Post (Pacific Palisades, CA) back on June 11, 2008 as I tried to explain the early stages of The Credit Crisis.
"There is really no true precedence for what is happening in the world's financial markets and the impact of the ongoing credit crisis. Today's financial markets are far more complex than in the past, thanks to the fact that Main Street has essentially merged with Wall Street over the years.
Since the last market peak near 2007 or 2008 for both residential and commercial real estate properties nationwide, many of the existing 5 year fixed commercial loans may be ballooning or becoming all due and payable in 2013.
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 ser...
What options are there for someone who has no equity left?
At present, there are more homes in foreclosure and with negative equity of 50% or more than there are "non distressed" homes currently for sale in the USA.
As both short and long term interest rates may likely soon rise due to the weakening Dollar, rising government debt, lack of positive results from the Fed's "Quantitative Easing" programs or other stimulus programs, then we may see an acceleration of properties headed toward foreclosure as adjustable rate mortgages may soon rise as well....
Today's Blog is about how to get out of a home which may be currently "upside down" (or the mortgage balances exceed the current market value). In California, approximately 50% of all homes which currently have a mortgage balance may now have zero to negative equity. Nationwide, the number of all homes with mortgage balances by year end may also be similar to the same 50% figure.
According to recent information, the percentage of all home sales in both Orange and San Diego Counties which were...
As mortgage loan underwriting guidelines continue to tighten up across the U.S., our group continues to try to provide our clients with non conventional ways to purchase or sell real estate throughout many areas in Southern California.
The number # 1 most important factor in real estate is the availability of financing options both to get in (purchase) and to get out (sale). As most of us know by now, the "easy money" mortgage loan options of the late '90s until mid 2007 was the primary catal...