Food and Energy Cost Factors in Mortgage Default
Have you properly adjusted your budget for the cost of your new home? Did you consider the soaring food and energy cost factors in mortgage default in order to avoid being a foreclosure statistic? Winning Mortgage, Winning Home provides detailed discussions about budgeting to avoid mortgage default.
You’ve already seen prices soaring for food, groceries, and energy. Oil prices have doubled to more than $100 per barrel since the Biden administration canceled US pipelines and energy projects. Wind and solar energy cost 2-3 times more to produce and they only operate intermittently. They require backup generation to provide reliable electricity.
Gasoline prices have about doubled over the last year. Natural gas prices have also doubled and many may see fuel cost surcharges on energy bills. These two categories make up part of the 7.9% consumer inflation recently reported as the highest in 40 years. That ignores the more than 9% inflation in producer prices which reached an all-time record. So more price increases are already coming your way as a consumer. Did we mention soaring rents not yet factored into the inflation numbers?
Note that the last time such a confluence of energy, rent and food/fertilizer cost increases came in around the 2008 time period. If that rings a bell, that’s the last time a lost of foreclosures and defaults resulted from owners unable to pay mortgages. But even in that time period, the cost increases were much, much lower.
Additional Inflation Coming This Summer and Fall
But 7.9% inflation may be a low point for the rest of 2022. We hope not, but there are major cost components of inflation not yet realized but still heading your way. Inflation in energy prices for January and February only factored in oil prices of $75-80 per barrel. At $120, that’s another 50% increase. A 42 gallon barrel with a $40 price increase is about $1 per gallon more. That will flow to gas prices in steady increases perhaps over the next 60 days. Oil production is down 15-20% in the US since the Biden administration took over. New additions have been severely limited. As a result, the US lost its status as energy independent. As a further result, the US now buys Russian and other oil.
Natural gas prices have been steady in recent months, but still up 80% from a year ago. That’s also 200% over the past two years. Again, new additions to production are still being limited.
On the food front, fertilizer prices are now up 200-300% over the past year or so. Much of the production of fertilizer requires use of fossil fuels. Fertilizer costs make up about 15% of crop prices. Doubling and tripling this cost would likely push up crop prices by that amount (by 15% or more). That jump would flow to consumers as crops are harvested in the summer and fall. Planting occurs in the spring and costs will be incurred now but passed on later. More below.
Food and Fertilizer Prices (From Farm Bureau Market Intel Publications)
Among farmers and ranchers, very few topics are being discussed as much as the skyrocketing cost of fertilizer and increasing concerns regarding availability. Given that fertilizer costs account for approximately 15% of total cash costs in the U.S., fertilizer prices are the number one issue on farmers’ minds as they begin to set up purchases for the 2022 growing season. Unfortunately, the fertilizer sticker price farmers in some areas are reporting is up more than 300% and delivery times are anyone’s best guess.
We’ve seen this before, in 2008. During the 12 months ending in April 2008, nitrogen prices increased 32%, phosphate prices increased 93% and potash prices increased 100%. Prices remained there through 2009, then dropped, ultimately returning to pre-2007 levels by the end of 2009. That price surge was associated with strong domestic and global demand, low fertilizer inventories and the inability of the U.S. fertilizer industry to adjust production levels. This time around, those same factors are at play, along with several others that add an extra layer of uncertainty. Read more here.
