Mortgage Market Facts
So…here’s a question for you. How much is a TRILLION dollars? If you answered, “it’s a lot”…you are correct. A Trillion dollars is a very large sum of money. To put it in perspective, a MILLION dollars is a stack of $100 bills about 40 inches tall. A BILLION dollars requires those $100 bills to be stacked up alongside the Empire State Building…twice! But a TRILLION dollars would require those bills to be stacked up alongside every single building in Manhattan…and you’d nevertheless have money left over.
Here’s another way to measure a Trillion dollars – the complete US economy is $13 Trillion dollars. In fact, the only other country with an economy over $5 trillion is Japan. And the total net worth of everyone in the complete US combined is about $45 trillion dollars. So yes, a Trillion dollars is a whole lot of money.
But did you know that there is over $3 trillion dollars of home loan debt well above 8%, and in many situations much higher? And as all this debt continues to adjust higher, the increased payment load is putting many homeowners in a tough position. Although an Adjustable Rate Mortgage or Home Equity Line of Credit has been a terrific money-saving option over the past few years, it is time to take a look at debt structure and strategy, and determine what planning steps may need to be taken. The news is loaded with stories of foreclosures being on the rise across the nation, as many consumers are unable to manager their new higher payments and have not planned in improvement.
Let’s look at some facts.
There are currently about $1 trillion dollars noticeable on Home Equity Lines of Credit (HELOC’s) alone. HELOC loans are tied to the chief Rate, which rides 3% above the Fed Funds Rate. Most add a margin above chief, with the average being 1% – but some can be much higher. This tells us that the current average rate for HELOC loans is about 9.25%…now that’s a huge rate! Just over two short years ago, these rates were only around 5%, so although the climb has been gradual, the rates have become very steep, with payments to match.
Now let’s look at the first mortgage market. Presently, there are $2 trillion in Adjustable Rate Mortgage (ARM) loans that are set to adjust during the next 18 months alone! What will these rates adjust to? Many ARM loans have caps, but often the first adjustment can move by as much as 5 or 6%. This can average a payment increase of hundreds of dollars, which many homeowners are not prepared to manager.
Why have adjustable rates risen so high?
Good question. Although the Fed does not control mortgage rates themselves, many shared ARM rates are tied directly or indirectly to the Fed Funds Rate…which has risen 4.25% over the past two years. And the Fed may not already be done with their rate hikes however! Why? Because the economic headlines don’t have them quite convinced that inflation is under control, and tweaking the Fed Funds Rate is how they attempt to control inflation. Inflation is simply when goods and sets keep becoming increasingly more expensive to buy over time, and if need stays high, then prices stay high right along with it. And need in the US has been high! We are a nation of spenders and consumers, and all the increased domestic and foreign need has kept the prices of our products climbing.
So in comes the Fed, slinging around Fed Funds Rate hikes left and right! Why? By making it more and more expensive to finance products and supplies with these rate hikes, both consumers and businesses will pull back their purchases as rates keep getting higher and higher. As need slows, price increases will naturally have to slow down in addition, thereby keeping inflation under control. But until the Fed feels inflation is controlled…the hikes may keep on coming. And already when the Fed pauses, all the adjustable rate mortgages which have however to adjust will likely have some surprises in store, unless some improvement planning is done.
What can you do right now to help?
Although the media often causes us problems with their doom and gloom message about housing and the economy, this particular topic is one where they truly are helping consumers by spreading the information. Although an Adjustable Rate Mortgage or Home Equity Line of Credit has been a terrific money saving strategy for the past several years, the current economic and financial climate method that it may be time to consider a change.
The bottom line is that consumers must plan ahead, and make sure their debt strategy will continue to be sound in the confront of changing rates…and allow you to keep them as a client for the long term. And what better way to show your clients that you truly care about them, than to make sure they and their family are financially sound and protected for the future?