The automobile and housing markets reveals the death spiral of high inflation and high interest rates

While the Biden Administration brags about how inflation is declining, consider purchasing a car or a house where increased prices combine with spiking rates to cost consumers over a thousand per month, every single month.  It’s no surprise almost two thirds of the country lives paycheck to paycheck and credit card debt is at an all time high.

Recently, President Biden has been insisting that inflation is on the decline, suggesting that we’ve seen prices peak and can expect relief in the months ahead.  Earlier this month, the President issued a statement following the release of the March Consumer Price index.  “Today’s report shows continued progress in our fight against inflation with the 12-month inflation rate at the lowest level since May 2021. This progress follows last week’s news that our job market remains historically strong.  Inflation has now fallen by 45% from its summer peak. Gas prices are down more than $1.40 from the summer, and grocery prices fell in the month of March for the first time since September 2020.  In recent months, we have also seen price declines for items like used cars, smart phones, and other electronics. While inflation is still too high, this progress means more breathing room for hard-working Americans – with wages now higher than they were 9 months ago, after accounting for inflation.”  There is some nominal truth to this.  The Consumer Price Index peaked in June 2021, when prices rose on average by a whopping 9.1% year over year.  Since then, it has declined fairly steadily to 6.0%.  Reasonably good news, until you stop to consider two things.  First, the 6.0% figure does not suggest a decline in prices.  Prices still rose year over year since last March, three times higher than the target figure of 2%.  Second, these price increases have occurred while interest rates have also risen to the highest level in recent memory and in an economy highly dependent on credit, the average consumer is paying far more than inflation alone would suggest, especially for big ticket items.

The automobile market presents a case study of this principle in action and the actual numbers are staggering.  In March, the average payment for a new car reached $730 per month, the highest on record according to Edmunds.  The average for a used car is $556, an increase of $147 per month or 26.4 percent in less than three years.  Given the rise in interest rates only began in earnest last year, we can expect this trend to continue.  Some evidence for this can already be gleaned in the percentage of payments over $1,000 per month.  In January 2019, these high payment buyers represented a scant 5% of the overall market, but barely for years later, they now account for 17% of new car sales.  Further, these buyers are paying these higher amounts for a longer and longer time period.  In 2004, less than 1% of car loans were for six years or over.  Today, that number is 30%.  Needless to say, the impact is felt most severely on lower income purchasers.  “The pressure is most extreme on the lower credit consumers, because not only are they dealing with the interest rate move and inflation and vehicle prices, but they may also pay a premium because their credit is not as good,” explained Jonathan Smoke, chief economist at Cox Automotive.  The average buyer choosing a 70 month loan with an outstanding balance of $28,700 will end up paying back $39,606 in interest alone, also according to Cox.  A family making the median income in the United States will work for 43 weeks straight to purchase a car, almost a full year, especially if you account for after tax income.

The rapid increase in interest rates is having a similar impact on the housing market, where the average payment on a 30-year fixed mortgage is $3,048 and on a 15-year fixed, $3,976.  The median tells a better story at $1,672, but this is based on data from 2021, long before the interest rate spike.  In 2021, the average mortgage rate was well below 4% for a 30-year fixed, but over the course of the past year it has risen to just below 7% for a well-qualified buyer, while many are still paying 8% or higher, translating into a huge increase in monthly costs.  How much?  The monthly cost for a $200,000 home loan in 2021, including principal and interest, was $806, but today payments on the same exact loan are up to $662 per month higher, or approximately $7,900 per year in interest alone on a relatively small loan in a metropolitan area.  Incredibly, these rates could go even higher for the average buyer beginning on May 1, thanks to little publicized rule changes instituted by the Biden Administration under the Federal Housing Authority.  Next month, Fannie Mae and Freddie Mac will institute new “loan-level price adjustments” that will reduce rates for those with “riskier credit backgrounds,” in other words those who probably shouldn’t be purchasing a home in the first place in the wake of the 2008 mortgage meltdown, while increasing them on those with better credit, all in the name of “equity”.  As The New York Post recently described it, “A little-noticed revamp of federal rules on mortgage fees will offer discounted rates for home buyers with riskier credit backgrounds — and force higher-credit homebuyers to foot the bill, The Post has learned.  Fannie Mae and Freddie Mac will enact changes to fees known as loan-level price adjustments (LLPAs) on May 1 that will affect mortgages originating at private banks nationwide, from Wells Fargo to JPMorgan Chase, effectively tweaking interest rates paid by the vast majority of homebuyers.”  In other words, the Biden Administration believes well qualified buyers can afford more than the current $662 per month premium on a mortgage as a result of spiking interest rates, and rather than taking steps like reducing government spending and streamlining regulations to reduce inflation overall, they are more than willing to have you and your family pay more.

The combined effect is like nothing I’ve ever seen in my adult lifetime, only heard about as a child in the wake of the stagflation that crippled the county in the late 1970s and early 1980s.  Between your house and your car, people taking out new loans, which in the housing market would generally be younger, non-affluent individuals, you are likely to be paying a truly astounding $800 per month higher than you would’ve barely two years ago.  This is, of course, in addition to the increase in prices on everything else.  Electricity prices alone were up 14.3% just last year, and gas prices were up even higher.  Experts expect an additional increase of 10% on energy this year alone even if inflation continues to slow.  USA Today reported in January, “Economists say consumers should expect their electric bills to continue rising at a fast pace as liquified natural gas, a key fuel for generating electricity, remains in short supply in the U.S. and companies’ operating costs rise.  Average U.S. electricity prices could rise at a 10% clip again this year and possibly next, predicts Mark Wolfe, director of the National Energy Assistance Directors Association, even though economists have forecast overall inflation to ease to between 3% and 4% by year-end.”  Gas prices are also expected to climb again for the summer driving season, especially after OPEC announced an unexpected production cut last month.  Super was back to over $4 per gallon in New Jersey as of this weekend, and if past is prologue, we can expect to hit $5 by Memorial Day.  Moody’s and other economic firms estimate the average cost of inflation per family to be about $433 per month, though some put the figure as high as $717, but once interest rates are included into the equation, the actual number for anyone buying a house or a car, much less both, is up to double that figure, for a truly brutal $1,500 per month, close to what used to be the median cost of a mortgage in the US in its entirety.

Therefore, it is not remotely surprising that high-interest credit card debt is also on the rise.  Earlier this year, the personal finance website WalletHub reported that credit card debt surged $180 billion in 2022, the highest ever recorded for a single year and almost half the total ($86 billion) was added in the fourth quarter alone.  The average household owes $9,990, up 9% from late 2021.  “Everything seems to cost more. People are paying more for food, housing and gas. Generally, it’s the practical stuff that gets people into credit card debt,” explained Ted Rossman, credit expert at CreditCards.com. “It’s all contributing to increased balances.”  Not surprisingly, credit card interest rates have also risen to record highs of 20.4%, meaning just like car loans and mortgages, consumers are spending more and more of their income simply on interest payments. The average family making the minimum payment and paying the average rate will spend about $2,000 on credit card interest alone in a single year.  This is especially troubling when 64% of consumers were living “paycheck to paycheck” at the end of 2022, an increase of 3% of 2021, representing some 9.3 million people who rely on incredibly high interest credit cards for unexpected expenses.

Overall, it is impossible to see how this is sustainable.  It’s a classic death spiral, where inflation drives people to borrow and interest rates increase the cost of borrowing by well over $1,000 per month for some families.  There are, of course, those who believe relief is in sight given inflation has slowed, but to this observer at least, that seems to be either wishful thinking or political spin.  The Federal Reserve fully intends to continue increasing interest rates, likely another .75% which would drive up borrowing costs even further long before they start to come down.  Unless anyone thinks the Reserve will decrease rates overnight, we can assume that these elevated rates are the new normal for at least the next three years or more, considering any rate reductions will likely occur in increments of .25% or at most .5% applied on a quarterly basis.  The impact on the average family and the overall economy will be almost incalculable at that point, literally tens of thousands of dollars per family, if not more.  At this point, everyone should be asking themselves:  How much more can you afford?  Perhaps most incredibly of all, a significant minority of voters do not appear inclined to hold President Biden accountable for this sudden change in their financial affairs, at least so far, even though 100% of these potentially cataclysmic happenings have occurred while he was in office.  According to Real Clear Politics, his average approval rating is 43.8%, not setting the world on fire, but not abysmal either.  This is baffling because politics has generally been governed by the old adage that people vote with their pocketbooks, meaning the vast middle of the electorate is neither Republican nor Democrat.  They vote based on what they see with their own eyes and its impact on their family.  Here, the impacts could not possibly be worse, indeed have not been worse in generations, and yet the President remains a slight favorite in next year’s election.  We are truly in uncharted territory and can only hope he enters a well-deserved death spiral of his own soon.

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