Housing Payments and Increasing APRs are Going To Sink the Boat

As a mortgage loan officer, I get an insider’s view and true pulse of what is going on based on what I get to see from sales activity on the actual tangible side of real estate, but also what is going on with our buyers and their money. Indulge me for just a minute as a explain both side of what I mean.

I have partnerships with amazing Realtors that hustle and work hard for their business. And many of them are nervous. Scared. Slow. It’s a quiet time as far as activity when compared to the last few years where people were almost frantically purchasing, like they were going to end up homeless if they didn’t buy (pay over list price for) a home.

In just the last few months, I have completed hundreds of pre-qualifications and pre-approvals and what many households can qualify for is for a purchase price that simply doesn’t exist. “Congratulations, you are pre-approved for a purchase price of $260,000. That keeps you at your goal payment of $2,000 a month and that seems to be about as high as we can get approval for.” At least in Central Florida, $260,000 home price is a unicorn.

While costs have gone up so much, when inflation is factored in, the average American's salary increased by only $2300 a year. Realtor.com reports that buyers have lost about $107,000 in buying power this year between higher priced homes, inflation and higher rates.

So my discouraged prospective client either settles for a home they simply don’t want or they continue to pay over-inflated rent that stretches them beyond their comfort zone. And this, right here, the housing payment, this is what is going to pop our bubble. If your household now has to pay hundreds more a month towards rent (or hundreds more per month because your homeowners insurance and property taxes have now gone up), where is that money coming from?

I can’t tell you just how many people, when I pull a credit report, have dozens of credit cards with balances on them. Dozens with balances is not as uncommon as you might think. Many people have maxed out credit cards. Millions of households carry credit card balances. And these APRs are going up. Most credit cards have a variable interest rate that is tied to the WSJ Prime Index Rate. It has increased 5 times this year and it about to another two times this year. When the Fed meets on November 2 and likely to aggressively raise the rate (it wouldn’t surprise me if they went for a full 1% this time instead of the .75% they have raised it the last few meetings) that will raise the Prime rate again as well.

According to a report I just read, as of September, the average credit card APR is 21.59%. This does not account for the Fed rate hike that just occurred and the next ones later this year. For households that carry a balance on their credit cards, which millions do, this is unwelcomed news as more of their payment will go towards interest and buckle up, buttercup, because the minimum monthly payment will be increasing as well.

This is where the avalanche begins. People will not be able to make the minimum monthly payment on every credit card they have. Did you know that a current creditor can tap into your credit at any time? So if you are late on your Capital One Card, your Discover Card can tap into your credit, see you are late, and get nervous that you are going to stop paying them as well. We will see credit card companies reduce the limit on credit cards, or even freeze access to that available credit, which further perpetuates the problem as you will not be able to use those credit cards to cover the shortage that was created by higher housing payments.

Friends, I am nervous about our immediate future. If you look over to the top right hand side of your LinkedIn page, take a look at those headlines. Here is a short overview of what I am seeing as trending headlines:

Goldman Sachs in huge reshuffle?

Layoffs latest: companies making cuts (which include 42,000 tech workers through mid-September)

Twilio laid off 850 people. Peloton cutting staff for the 4th time this year, this time around 500 employees. DocuSign cut 670 employees. Gap cut 500 corporate jobs.

Friends, these are all sectors, all industries. Not just mortgage. Not just retail. This is going to hit hard and it is going to hit fast. Please be ready. Have an emergency fund of cash to get you through a few months. If you are in the position to pay off credit cards, pay them off and avoid that unnecessary interest. Rent a room out. Shop at discount stores. Eliminate subscription services or some of the “extra” indulgences, if even for a while. Bring as much value as you can to your employer if employed, or your clients if self-employed. And have faith that God will bring us through.

I am often asked if I think this is going to be like what we experienced in 2008-2012. I think it will be similar, but different. And I am not sure how our broke government is going to “bail” us out when things get hard. Headlines such as this one are the most concerning: Nearly half of Americans earning more than $100K now report living paycheck to paycheck from Yahoo! Finance from a report from LendingClub.

So the time to prepare for the flood is before you are standing in a foot of water. Let’s be aware of what is going on, be ready, and be united.

70% of what makes up our GDP is consumerism. It’s us… spending. You can’t spend what you don’t have. I am anticipating most everything in the financial world to soon come to a screeching halt. Be emotionally and financially ready. Economists are going to try and tell you the recession pain is months and months out, sometime down the road. It is here, Be ready. ?