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):
April 11, 2013

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 investments to counteract or to benefit from high rates of inflation. Traditionally though, when inflation rates are high, then the Federal Reserve typically likes to increase interest rates in order to potentially offset or slowdown high rates of inflation. On the other hand, low rates of inflation may then lead to lower interest rates. Today in 2013, we have both record low interest rates and increasing inflation.

Historical U.S. Median Home Sales Prices: The Past 50 Years

According to data published by the U.S. Census Bureau, the median priced U.S. home back in January of 1963 sold was just $17,200. Ten years later in January 1973, the median U.S. home was still a quite low $29,900. Twenty years later in January 1983, the median U.S. home price increased significantly to $73,500.
Thirty years after the original 1963 date, the median U.S. home price finally crossed the $100,000 threshold level as it reached $118,000 in January of 1993. Forty years after the 1963 date was reached in January of 2003, the median U.S. home price reached $181,700.

Today in 2013, which is fifty (50) years after the original 1963 year used in my study for this article, the median U.S. home sales price reached $170,600 (according to the National Association of Realtors). Sadly, the median U.S. home sales price in 2013 is below the median home sales price of ten years ago (2003 - $181,700).

“Upside Down” or Ride The Inflation “Wave” Again

Numerous housing studies on “upside down” properties note that people are more likely to walk away from their home when their existing mortgage debt exceeds their current market value. Whether an “upside down” or overindebted homeowner tries to use a “Strategic Default”, a “Short Sale”, or a conventional home sale, the owner may not financially benefit, regardless. As a result, neighboring homes may be adversely impacted by another distressed foreclosure sale in the neighborhood.

Question: What is one of the best ways to improve the value of real estate than by using national economic and financial strategies to increase property values? Answer: INFLATION. When home values increase, then existing homeowners have more incentive to stay with their properties. If less people choose to allow their lenders to foreclose upon them, then less foreclosures means better overall home values for each and every neighborhood nationwide.

A combination of record low interest rates and more access to government backed mortgage loans such as FHA will also allow more borrowers to qualify for larger loan amounts. Obviously, a borrower who qualifies for a $200,000 mortgage loan today based upon interest rates in the high 3% range might have only qualified for $150,000 at a 5% or 6% rate range in recent years.

The more borrowers who qualify for larger loan amounts will then drive up home sales prices for the existing homeowners. For the bulk of Americans, their net worth is derived from their ownership of real estate. If home prices increase, then property owners tend to get happier and then spend more money on other consumer items which stimulates the overall U.S. economy.

“Inflate or Die”
As I have written before, the Federal Reserve and U.S. government have tried to stimulate the U.S. economy by flooding the markets with cheap money so that they, and U.S. consumers, may invest in more stocks, bonds, real estate (properties and mortgages), and other assets in order to try to inflate our way out of this financial mess, or “Credit Crisis”, which officially began back in the Summer of 2007.

Since bank savings rates today offer customers effectively NEGATIVE NET RETURNS after one factors in the costs of taxes, inflation, and bank fees, then the higher returns offered in the stock market and real estate properties today seems much more appealing. The recent 14,500+ Dow Jones index levels are a testament to the success of that strategy of “Quantitative Easing” (create money out of thin air in order to buy assets), “Operation Twist” (drive interest rates even lower), and other types of intentional rigging and manipulation of the financial markets.

Since last year, we have seen how home prices have begun to increase once again due to the combination of record low interest rates, home listing inventory levels down near nineteen (19) year lows, and investors looking to earn decent yields well over their negative net returns offered by their local banks’ savings accounts.

In many regions of the U.S. such as the “Bubble” states of California, Nevada, and Arizona, home prices have increased between 5% and 20% in just the period of one year due to increasing demand for homes, and a decreasing supply of available homes for sale on the MLS (Multiple Listing Service).

Nationally, the median U.S. home sales price increased 5.9% between the end of 2011 and the end of 2012. This 5.9% home appreciation figure in 2012 was the largest home price increase since August of 2006. Historically, U.S. homes have increased an average of about 3% per year so the 2012 median price increase was almost double the typical annual home inflation rate.

Today’s bidding wars on numerous properties for sale, due to the unusually low home listing supply, and continued record low interest rates have continued to drive home prices higher in 2013.

As long as rates and home listing supplies remain low, then we should hopefully just yet inflate our way out of the financial mess one way or another. Don’t be surprised to see 2013’s home appreciation gains possibly even exceeding 2012’s numbers!!!

The U.S. economy needs a healthy housing market in order to get back on track so let’s all hope and pray for continued positive news for the real estate and financial markets. 

To read the original published version of this same article on CRE (Creative Real Estate) Online, please click on this link here:


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