Older Americans are caught in the toxic mix of inflation and increasing debt
Americans have more debt than ever before which is especially dangerous for older Americans living on a fixed income. Today individual debt levels and credit delinquencies are approach pre-recession levels similar to those seen before the Great Financial Crisis and Recession of 2008. Relief in the form of lower interest rates is increasingly unlikely as the March Consumer Price Index (CPI) report shows the rate of persistent (not transitory) inflation is accelerating. The Federal Reserve still has a long way to go before they feel compelled to cut interest rates- that is unless the economy slips into a recession.
Today we will examine the economic headwinds that have resulted in higher rates and increasing pressure on Americans- especially seniors.
Inflation and higher interest rates are a toxic mix that is pushing more Americans into financial jeopardy as many purchase increasingly expensive everyday purchases on credit.
March’s inflation report released last week came in at its highest level since December. The annual rate of inflation grew to 3.5% in March- well above the central bank’s target of 2 percent. This may lead Federal Reserve Governors to grab their erasers for any planned rate cuts later this year or even consider increasing the Fed Funds Rate.
“If we continue to see inflation moving sideways, it would make me question whether we needed to do those rate cuts at all,” said Minneapolis Federal Reserve Bank President Neel Kashkari.
Earlier this month Federal Reserve Governor Michelle Bowman told attendees at the Shadow Open Market Committee in New York, “While it is not my baseline outlook, I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse”.
Presently, these hawkish viewpoints are in the minority but that could change. In his letter to shareholders JPMorgan Chase CEO Jamie Dimon the bank should prepare for rates as high as eight percent or even more. Dimon notes the government’s deficit spending is is effect acting as an economic stimulus- a policy that undermines the Fed’s efforts to curb inflation.
So how are American’s coping with today’s higher prices? It’s likely with their credit cards. Federal Reserve data shows that delinquency rates for consumer debt are climbing fast approaching the levels seen in the years leading up to the 2008 recession. Does this mean we’re on the cusp of a recession? Not necessarily but the correlation is interesting. What is certain is if interest rates are increased delinquency rates would worsen.
When it comes to debt held by Americans aged 65-75 MarketWatch reports the following averages for 2022. The average mortgage balance was $175,670, installment loans 28,690, car loans $23,690, and an average credit card balance of $7,720. Those numbers are likely even higher today and will continue to trend upward. Case and point.
The pre-tax income for Americans between the ages of 65-74 only increased 4.6% from 2019-2022 while inflation increased by 13% during the same period. Overall credit card balances have surged 47% over the last three years and nearly half or 46% report they are carrying credit card debt over month-to-month. All which points to the increasing pressure older Americans living on a fixed income in retirement are facing.
3 Comments
Shannon – Great info. My concern is that the movement we have made as an industry to a more strategic use of Reverse mortgages will head back to far more Needs based cases. In any case, the good news is that homeowners have a potential solution!
Thank you, John for your observations!
John,
I have noticed a lot of confusion over needs based versus so called “strategic use” of HECMs since around 2018. The basic facts are that the 10/2/2017 changes resulted in seniors who need a strong boost to their cash flow being excluded from the program due to being short to close by large sums of cash once indexed interest rates began returning to their more historic levels.
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At the pre 10/2/2017 PLF levels and MIP structure, HECMs were even more geared to strategic use than now. Back then at the current expected interest rates, HECMs simply provided more proceeds than today. It seems the marketing folks were asked to come up with ideas to redirect our unsuccessful marketing efforts to the needs based customer following the 10/2/2017 changes especially after the rise in the expected interest rate index. The marketing people did just that and created a lot of unnecessary confusion over our markets before 10/2/2017 and after 10/1/2017.
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The truth is there are two basic marketing groups when it comes to HECMs, first time reverse mortgage borrowers and current HECM borrowers who want to refi into another HECM or other reverse mortgage. Anything else is more about putting lipstick on a very, very scaled down product as reduced HECM endorsements indicate.
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To those in our industry fiscal 2022 was a great and record year. To HUD, despite the higher volume, they are expecting hugh losses to the MMIF as a result. We do not seem to understand the problems HUD faces. We look at satisfying our own “greed” as the great (at least in his own mind) Gordon Gekko would describe it and are hail the results. We seem to have no concern over what it did to the MMIF per HUD’s 9/30/2023 projections. Ignorance is bliss at least for a while.
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So how bad are things today? Expected interest rates are slightly higher than when I first became aware of HECMs, 20 years ago yet for a 62 year old their proceeds were over 50% of their MCA at closing in the summer of 2004. 74 year olds were about 12% higher. Tell me what those PLFs are today.
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As to endorsement volume since fiscal year 2009 (an all time peak at over 114,000 HECM endorsements), we have been in clear decline in the last 15 years. It is so BAD now that for the first six months of this fiscal year, total HECM endorsements for the industry as a whole are just 13,225.
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I am projecting that the endorsement volume for this calendar quarter ending June 30, 2024 will be just 5,900 which is less than 2,000 per month. That will put total HECM endorsements for nine months then ended at just 19,125. All of the amounts reported in the last two paragraphs (including this one) are at 21 year lows. AND the trend as of today seems as if it will go even lower, especially if the Fed has to increase interest rates yet higher before they lower them.
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Trying to buck this trend is not so easy.