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Higher interest rates, lower consumer spending

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Cars sitting in a dealership lot.
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With 30-year residential fixed mortgage rates now at 5 percent in the U.S., higher interest rates are hitting the real estate market.

On the heels of the September 0.25 percent rate hike, mortgage applications fell 32 percent lower than last year, when rates were a full percent lower. And new home sales plunged 5.5 percent in September.

Applications to refinance existing mortgages, which are a strong indicator of how the market responds to rate increases, sunk 9 percent, a more than 33 percent drop over last year.

And trending toward its worst year since the financial crisis, the S&P Supercomposite Homebuilding Index is down 36 percent this year.

Beyond real estate, on auto sales fronts in the U.S., new vehicle loans also are tanking. While mainstream business media will blame some of the declines on looming tariffs, the more direct tie is rate increases that make already strapped consumers unable to manage the debt.

The auto industry is expecting a 7 percent decline in new vehicle sales in September. And the higher interest rates imposed on new vehicles is sending consumers to used car lots at a record pace. Used vehicle sales, according to several sources, are soaring, up between 4 and 10 percent.

What is noteworthy with these trend lines is the direct effect even modest increases are having on large consumer bases who are essentially living paycheck to paycheck.

Indeed, the Fed has made eight modest rate increases in two years, pushing baseline rates closely tied to consumer debt only to about 2 to 2.25. But the last increase is ticking up credit card, mortgage, auto and other lines of credit to ranges that stifle consumer spending.

Further, student loans, which ballooned during the last decade, increasing 157 percent and saddling graduates with $1.5 trillion in debt, will also directly impact recent graduates whose wages can’t keep up with rate increases of privately-held student bank loans.

And the rate hikes are coming at a time when U.S. household debt is at an all-time high, hit an astounding $13.3 trillion at the end of the second quarter 2018. And household debt is rising at a rate 60 percent higher than the increase in wages.

Further, Americans today owe 26 percent of their income to revolving credit debt, they have less and less cash to spend. Especially if gas prices increase sharply, money spent on retail or entertainment and leisure, will go into the gas tank.

Today, four in every ten adults are not able to cover a $400 emergency expense. And more than 50 percent of all consumers are struggling to cover such basic expenses as rent and food. TJ


TREND FORECAST

While the U.S. can boast a 50-year low unemployment rate and healthy Gross Domestic Product growth, a simple fact of the decade-old “recovery” fueled by cheap money schemes is that wages for working class households remained flat. Most jobs don’t support a middle-class life after accounting for cost of living increases, according to a new study by Third Way.

Thus, even modest rising interest rates will intensify the debt load on consumers, and significantly cool spending in several sectors, including retail, travel, restaurant and leisure.