In the US, High Interest Rates are Forcing People to Cut Back

 

Image Source: Al-Jazeera

Americans are feeling high interest rates, forcing them to hold off on buying homes, cars, even groceries.

Between high interest rates and rising inflation, Amira Alsamadesi, a law student and mother of two who lives in St. Louis, Missouri, is feeling "stressed," she said. "It definitely caused differences at home."

"In the summer, my husband and I wanted to go to a wedding to introduce our new baby to relatives," she said. "Finally, he traveled alone. We're trying not to hang on to debt, so we've refused to work with a family."

Elsamadicy is one of millions of Americans feeling aggressive pressure from the United States Federal Reserve to bring inflation closer to its 2 percent target, rising from a peak of more than 9 percent in June last year.

In the process, it has raised its benchmark interest rate from near zero to 5.25-5.55 percent in March 2022. Although it did not raise rates at its last meeting in September, it signaled that interest rates will remain "high for a long time" as it tries to contain inflation.

Recent external shocks – a sharp rise in tensions in the Middle East and the renewed prospect of an imminent US government shutdown – have intensified the debate over whether the Fed will raise rates again this week.

The Fed's work is further challenged by the fact that despite seismic shifts in monetary policy, unemployment, which typically rises with higher interest rates, remains at a multi-decade low, at just 3.8 percent of U.S. employment. are out of

And while inflation eroded real wages in 2021 and 2022, workers saw wages rise ahead of inflation from March, boosting consumption. Retail sales rose 2.5 percent in August compared to the same period last year.

According to Dan Baker, co-founder of the Washington, D.C.-based Center for Economic and Policy Research, "The U.S. economy presents a stark picture. High borrowing costs have started to take their toll, but the labor market is strong and the U.S. Continue shopping."

Meanwhile, total consumer debt hit an all-time high of $17.06 trillion in the second quarter of 2023, an increase of $2.9 trillion since the end of 2019. "But," says Baker, "most of the debt in the U.S. is tied to housing and housing. Prices stay high."

Simply put, higher borrowing costs have led to higher liabilities

When the Fed raises its benchmark rate, it raises the cost of credit throughout the economy. All new debt — credit card payments, auto loans, mortgages — is affected. Existing floating rate contracts are also extended.

"Clearly, many borrowers are struggling. Rising interest rates have made it harder for Americans to check off important milestones like starting a business or buying a car," Baker said.

"The picture is clearly different for people. For retirees and those at the lower end of the income spectrum, frustration has understandably shifted from inflation to higher borrowing costs. It is also for people who want to buy a house,” he added.

These risks keep the outlook for the US economy unchanged. 

If rates stay high for a long period of time, a recession becomes more likely, Baker said. "But it is not in the Fed's interest to end the wave of bankruptcies."

'Maybe one day we can afford to buy a house'

The oldest American success story has long involved home ownership. Today, the homeownership rate is 66 percent and home equity is the sole source of material wealth for most Americans.

During the pandemic, housing prices were shot in the arm as far-flung workers spread to less urban areas in search of more space. Between December 2020 and December 2021, the median home value increased by $52,667 (which is more than the salary of an average worker who earned $50,000).

Although housing demand has started to cool, mortgage rates remain sky-high, doubling over the past 18 months to 7.79 percent on 30-year fixed rates. Approximately 95 percent of all US mortgages are fixed-rate. 

According to data from real estate analytics firm Black Knight, more than 40 percent of all US mortgages originated in 2020-2021, when interest rates were near-zero. In turn, many Americans have been reluctant to list their homes, as moving would increase their mortgage costs.

There are 40 percent fewer homes for sale now than before the pandemic, which has driven up prices. In turn, 2.4 million potential buyers have been put off buying a home over the past year, as reported by Harvard University.

"My wife and I had our second child this year," says Giulio Del Buffalo, who works in advertising in Brooklyn, New York. "We've lived in a two-bed rental for a while. Last year, we started looking to buy a three-bedroom. But at current rates, the mortgages are double what we started looking for."

Rising mortgage costs have exacerbated wealth inequality. The average net worth of homeowners is now 40 times that of renters, much of which was accumulated since 2020.

"Prices were already rising back in 2019, but the pandemic supercharged those trends," Del Buffalo said. "Maybe one day we can afford to buy a house, but not now."

Expensive vehicles

Ford Broncos in front of Gus Machado's Ford dealership on Monday, Jan. 23, 2023 in Hialeah, Fla. U.S. I

In the U.S., average monthly new car payments hit an all-time high [File: Marta Lavender/AP Photo]

High interest rates are also holding back other purchases, such as cars. 

The average monthly new car payment rose to an all-time high of $730 in the second quarter of this year. In other words, the average American now spends about 10 percent of their earnings each month to pay for their new car.

That's on top of higher vehicle prices, driven by increased demand during the pandemic and reduced supply on the back of shuttered factories, semiconductor shortages and disrupted shipping lines.

According to Kelly Blue Book, a California-based vehicle appraisal and research firm, new vehicle prices increased by 30 percent from March 2020 to March 2023.

As a result, at current prices, a new car payment for the average American household is equivalent to 42 weeks of income, up from 33 weeks before the pandemic.

Angelique Spencer, who is retired and lives in Bellingham, Washington, wants to buy a car for her mother. "Mum always bought used, but now she's turning 80 [years old]. We want to get a new car so she can have service coverage if there's a problem," he told Al Jazeera.

"I did the math, and for a $40,000 car, she'd have to pay about $600 a month. She couldn't afford it on her own, so I'd have to help. But if auto rates go up again. , or if a car company tries to second-fiddle his credit score, I'm not sure what our options would be."

In the first two quarters of 2023, auto loan delinquency increased across all age groups. The increase was highest among those under 30 years of age. The pressure on young borrowers will soon increase, as the student loan repayment holiday ended last month.

Spencer added, "She needs a car. Mom lives in Texas where public transportation is limited. But helping her would have financial implications for me. I might have to cut back on food and medicine. . Still, we're hoping to be able to stay one step ahead of the debt."

Credit Card Struggle

Americans are also trying to stay one step ahead of credit card debt — the most common form of debt in the United States, with 84 percent of adults having at least one.

For the past five consecutive quarters, credit card balances – the total amount owed – have risen due to rising interest-rate credit and were 16 percent higher in the second quarter this year than a year ago as the average rate on cards now drops. Interest is 20.72. percent. 

New credit card delinquencies — accounts that are 30 days past due — rose to 7.2 percent during the April-June quarter, up from the pre-pandemic level of 6.86 percent in the second quarter of 2019.

Card balances decreased during 2020. COVID-19 stimulus checks, paid holidays and pre-emptive use led to an increase in savings accounts. But it reverted after 2021 due to an increase in 'normal' spending, followed by an increase in inflation.

As savings dwindled, consumers again became dependent on debt to maintain their standard of living. As of February, 37 percent of adults said they use a credit card to cover basic living expenses.

In its latest household debt report, the New York Fed calculated that card balances rose by $45bn, or 4.6 per cent, on a quarterly basis, surpassing $1 trillion for the first time.

"For the past year, I've had to do a delicate dance every time I've gone to the grocery store," said al-Samadesi, a law student who lives in St. Louis. "I had to weigh the quality of my food against what I could buy on credit."

"I think credit card rates have gone up 200 percent over the last year. It hits me the hardest when I've paid off a big chunk of debt, and then two months later it starts again. Goes … like I'm back to square one," Alsamadesi said. "We're having to cut back on restaurants and vacations just to stay on top of credit card bills."

(Courtesy: Al-Jazeera)