Money For Nothing
This week’s inspiration for my article comes from Dire Straits’s 1985 smash hit “Money for Nothing.”
I hear many reasons as to why folks are holding off on purchasing a new home. One is that rates are too high, making home buying unaffordable, and they want to wait until the rates go back down closer to 5%. While rates have risen over the past 3 years, the rise in mortgage rates may not be the only reason that people are waiting to purchase a new home, and for this reason, it may also be why rates getting back down to 5% may not happen for a couple of years.
I believe the main reason for the slowdown in home purchases is a massive increase in non-secured debt/overall monthly expenditures by the average American Household. Household debt reached yet another record last month, surpassing $17 trillion. According to the Consumer Expenditure Survey from the Bureau of Labor Statistics, the average monthly household expenses, which includes everything from rent/mortgage payments, credit card payments, car payments, utilities, education, food, medical, clothing, insurance, and several other smaller categories), is over $6,400 per month against a monthly gross household income of around $8,500 per month. In other words, they are living paycheck to paycheck. We spend over $10,000 per year per household on food, which is not outrageous, but $3,900 of this $10,000 is purchased outside grocery stores. For instance, dining out costs around $75 each week, or more than $300 per month.
Average household credit card debt is now close to $8,700, or a minimum payment of over $200 per month. Assuming you are paying a minimum of 2.5% of the balance with an interest rate of 22%, this would take you over 37 years to pay off. To pay off this $8,700 in, let’s say, 5 years, your payment would be closer to $250 per month. What we know is that average credit card debt continues to rise each year as well as the fact that many of us have more than one credit card. While purchasing goods and services tends to make for a “healthy” economy, it also keeps prices higher, thus creating inflationary pressures, which keep rates high, including mortgage rates. It is my opinion that we, the American public, have kept our economy artificially stronger due to our continued use of credit cards, which will come back and haunt us in the future.
Mortgage rates follow inflation. If we continue to buy goods and services with money we do not have but use credit cards to purchase these goods and services, we keep the economy moving along, which will keep prices at or even higher than current levels. Thus, mortgage rates will stay near current levels until we see a notable drop in inflation, which can only happen if we see the economy begin to slow. More than likely, that will not happen until credit card debt is maxed out, which I believe we could be seeing that time coming soon.
Think about it… Statistically, we are spending the majority of what we make in a system that allows us to have the “buy now, pay later” mindset. Would it be easier to purchase a new home at today’s rates if you had $500 to $1,000 less per month in credit card/lines of credit monthly debt? Of course, it would. The average person is paying close to 22% on credit card/line of credit debt on an asset that they purchased, which in most cases is depreciating or even consumed, and they do not think twice about it. However, they have a problem with a 7% mortgage rate spread over 30 years on an asset that can return 5%+ per year in many cases.
Bottom line, until we see overall consumer debt slow, which will slow our economy and bring inflation down, I do not see mortgage rates falling below 6% this year, but if they do, it may not be until the end of the year.
We, the American Consumer, have created this issue. While I am not a huge fan of tariffs (possibly an inflationary move), maybe this will slow purchases due to higher prices in the short term, which could ironically bring rates down.
I hope I am wrong about rates not going below 6% by the end of the year, but it is hard for mortgage rates to move lower if we keep spending money we do not have on depreciating and or consumable goods and services. Simply put, we are spending “Money for Nothing.”
Remember… the BEST RATE… IS A LOCKED RATE… with a float down… ask me about our program that allows you to lock your rate and then float down if rates move lower.
Make sure you (or your buyer) get pre-approved before looking at homes so we can determine if you are looking in the correct price range and have you armed to submit an offer with a pre-approval letter!
Thank you for reading this blog. I hope that the facts and insights I share provide value to you.
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Blog post date: Thursday, January 30, 2025
