Consumer Debt Levels are Maxed out

Hello Everyone and thank you for watching. This is Gia with Palm Beach Premier Real Estate here in Boca Raton Florida with your 2-minutelocal market report for JANUARY 2019.

So this month, Grant and I wanted to take another look at some concerning and potentially recessionary macro-economic signals emerging that are flashing the proverbial warning lights – …..and as Ray Dalio, the founder of Bridgewater Associates once said in Principles… …..…. “You need an accurate assessment of reality in order to produce a good outcome….”

So let’s take a look at some economic data that’s beginning to concern us ….So in no particular order…here’s just a small sampling of what we’ve been observing:

  1. Existing home sales: Sales on a nationwide level are off by 8.5% over the prior year, and are headed much lower as the effects of prior mortgage rate increases sink in. Job losses in the next recession will likely compound the problem for housing
  2. To be clear, the year-over-year numbers are far more important than month/month because the previous month will be revised again and includes seasonality factors.
  3. The January numbers were woeful to say the least - some might even call them a "plunge." – and to correct some myths – It wasn’t because of high interest rates or low inventory – we would propose that the consumer is simply tapped out with debt
  4. To give these numbers some additional context - Sales of previously owned U.S. homes fell to the weakest pace since November 2015, indicating that the housing market remained in a slowdown despite a drop in mortgage rates.
  5. To underscore our theory that many households have too much debt service to afford the monthly cost of home ownership (despite nearly zero down mortgage opportunities and historically low interest rates) …consider the following data:
  • A record 7 million Americans have now fallen 90 days or more behind on their auto loan payments. That’s 1 million more than the previous peak in auto loan delinquencies in 2010
  • There is over $1 Trillion dollars of revolving consumer credit card debt!
  • Student Debt levels have tripled since 2006 and delinquencies have multiplied by a factor of 8!
  • Retail Sales numbers in January were down 1.5%
  • Home Equity has been tapped over these past 7 years or so of real estate price appreciation - And Real wages haven’t maintained pace.

Also, keep in mind that this has been the longest running economic expansion since 1900 – so a slowdown is inevitable

The Federal Reserve for example is now so concerned with an economic slowdown here that they just did a very rare “PIVOT”) - an “about face” if you will -  having previously indicated 2-3 more interest rate hikes in 2019 – they’re now slamming on the brakes and saying “let’s wait for more economic data for guidance”

Meanwhile, geo-political issues add further cause for concern.

GOLDfor example - a traditional flight to safety – has seen a nice spike upwards in price - up $58 since Jan 1st (4.5%) – The price of gold has climbed more than 12 percent in the six months through Wednesday and offers a potential hedge against global political uncertainties like the U.S.-China trade war. 

Treasury Yields would seem to indicate that there wont be any interest rate hikes for some time

Mortgage purchase apps down 6% last week. That's 4 weeks in a row of declines DESPITE a big drop in rates.

Looking ahead for the rest of 2019 as it relates to housing:

We can certainly extrapolate some themes here:

First - The average household’s cost to service debt has reached a point at which it will become more difficult and challenging to find buyers who can qualify for a conventional mortgage (FNM, FRE, FHA) –

Second - Housing affordability issues will continue to be a theme going forward

Third – Inventory will continue to Increase, prices will soften and properties will likely sit on the market for extended periods of time

Finally–The effects of the worldwide economic slowdown will be felt here in the USA throughout 2019 and into 2020 and will have a knock-on impact for the housing market

Going forward we will definitely be keeping a continued close watch on prices, interest rates, inventory levels and the number of closed sales.

If you’ve been considering buying or selling - Please give us a call for a confidential consultation at 561.395.8418 or email us at Info@PBPrealestate.com - we’re here to help!

As always we look forward to speaking with you. Thank you again for watching. We’ll see you next time…. J