Inflation Leading to Foreclosures
Is the Biden engineered inflation leading to foreclosures? If so, will it cascade into 2008 level panic? Many actions taken over the past two years eerily mimic the events and policies leading up to 2008. Read our other posts which list a number of actions taken on the path to a possible financial meltdown. Is it time to not buy a house?
Pick up a copy of Winning Mortgage, Winning Home now. Why? The market is turning. The turn started with slowing home sales for 6 straight months. Desperate buyers kept prices up trying to buy before rates spiked. But rates have now spiked. The principal and interest portion of mortgage payments has already jumped 50% in the last 6 months. Rates are now over 6.00%. Inflation is still running rampant. Recent buyers underestimate the effect of inflation on their financial condition and the percentage of mortgages as adjustable rate mortgages instead of fixed rate has tripled. Property taxes are spiking with the spike in home prices. Property insurance is based on replacement cost of homes and the cost of building materials has also spiked. Look for increases in insurance costs.
Add all of this together and the turn in the market will be leading to buying opportunities. Winning Mortgage, Winning Home and this site explain due diligence, financial preparedness, planning and care in borrowing for and buying the best home and home mortgage. Panic has not yet set in, but read our posts on consumer sentiment and other factors which will lead to a drop in home prices by the end of 2022. You have time to prepare and take advantage. Start now!
Who is Struggling
According to a new Bloomberg report, over one-third of Americans earning at least $250,000 annually are living paycheck to paycheck. Only 5% of the nation earns over $250,000 per year, and this is who the politicians would call “the rich.” One in ten noted that they struggled to cover their household expenses in April.
This is especially true for Millennials who lack decades of savings and were forced to purchase housing [ed. who forced them into buying a house they can’t afford???] and other big-ticket items at the historically high price levels. Among those earning $250,000 or more per year, 55.4% of Millennials reported living paycheck to paycheck. In the $100,000 to $150,000 income range, 63% of Millennials reported an inability to save. Living paycheck to paycheck comes with the risk of slipping into debt. One in nine respondents from a Fed survey admitted that they could not afford a mere $400 emergency expense. In this current economy, the wise are reassessing their spending as inflation is not expected to decline anytime soon.
This does not even take into account the stress on normal families not earning $250,000 a year. Inflation pains them more. Food and energy take a larger percentage of the budget than for those earning $250,000. The federal government created inflation and shortages hurt these families the most. They need to read Winning Mortgage, Winning Home to look at options to help protect their home financially.
May Inflation Scorches Consumers and Forecasters
Once again, forecasters and “experts” were surprised by a scorching inflation report exceeding all predictions. More than a year ago, we wrote that the current administration spending plans coupled with Federal Reserve willful, politically correct, blindness might push inflation to 10% or more by the end of 2022. As of May 2022, it was running at 8.6% year over year. However, on a trend basis looking at 2022 numbers for the past 3 and 6 months, inflation already reached 10% for the trailing 3 month trend. This is what you, as a consumer, is seeing. Inflation increases start slow (12 months ago) and jump in later months.
Gasoline prices led the way during the year, but the increases were slowing in the most recent months, down from a 96% rate in March to 65% in May. Still a giant leap, but likely the rate of increase will continue to fall on the 3 month trend. Food prices continue a steady march upwards and are now at a rate of increase of more than 12% over the last 3 months. This is likely to continue its upward trend in the near term. Shelter increases, now at 6.4% for the trailing 3 months are likely to continue to increase, possibly at an even more rapid pace as new lease rates and owner occupied equivalent rent increases lag by 8-12 months.
How long until these costs start affecting borrowers ability to pay the mortgage? Probably when real estate taxes hit later in the year, more borrowers will start falling into the delinquent or past due category. But since most borrowers escrow taxes and insurance, this may not happen until mortgage payments jump after the first of the year as shortfalls in their escrow accounts become pronounced!
Housing Expenses a Leading Cause of Stress
Housing expenses, which typically take up large chunks of the budgets of wealthier people, have skyrocketed during the pandemic. For example in Orange County, California, a top-tier home cost $1.7 million in April, up from $1.2 million in February 2020, based on Zillow Group Inc. data. A mortgage on that house, assuming a 20 percent down payment, would cost about $100,000 per year. That’s 40 percent of a $250,000 annual pre-tax income.
Approximately 61 percent of consumers overall reported living paycheck to paycheck in April, which is a nine percentage-point increase from last year. The results come as U.S. food inflation continues to soar past a 41-year high and gas prices surpass $5 in throughout the country, reaching $6 and $7 in some areas. Remember, members of the current administration, and Biden himself, called for ratcheting up gas prices to force electric cars ($50,000 to $100,000 to buy) on the country. But without fossil fuels, there is no electricity to power electric cars. Renewables make up a miniscule fraction of power needs and are never projected to provide for the energy currently consumed.
The survey found that many higher income households are using credit cards to “finance their lifestyles,” but they are also able to completely pay off the balance.
“US consumer borrowing soared in March by the most on record as credit-card balances ballooned and non-revolving credit jumped, highlighting the combined impact of solid spending and rising prices,” the report states.
Time to Buy or Not?
With inflation ravaging the US and other crises impacting everyone, is it a good time to buy? Some individuals are contrarians and go against the crowd. The crowd has been on a FOMO binge. But now the tide on buying sentiment has changed. According to Fannie Mae, the sentiment is that its a terrible time to buy.
They think it’s a good time to sell.
Consumers are Deeply Worried
The University of Michigan’s headline Consumer Sentiment Index slumped to 50.2 in June. This reflects its worst level since records began back in the 1970s. In fact, it surprised forecasters with a dramatic drop in June. Forecasters expected a slight decline to 58.0 from 58.4 in May.
The Consumer Expectations Index fell to 46.8 from 55.2 in May. This also feel far short of the forecast of 54.5. It also set a new record low. Meanwhile, the Current Conditions Index fell to 55.4 from 63.3, well below the expected decline to 62.5, its worst level since May 1980. One-year inflation expectations rose to 5.4% from 5.3% in May. Five-year inflation expectations jumped to 3.3% from 3.0%. Since inflation is currently running above 8% and is at 10% on a running 3 month basis, look for further worry in upcoming measures.