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Amidst the continuing stream of bad news about volcano eruptions, a worldwide string of earthquakes, and Tiger Wood’s marital woes, one piece of news, which may have much more far-reaching implications for Americans, has gone all but unnoticed: interest rates on mortgages, credit cards and other types of consumer loans are set to go higher.
We’re not talking about a temporary spike in rates. Rather, economists, who don’t often agree on many things, almost all agree that the golden age of easy credit, which Americans have enjoyed for the past several decades, is drawing to an end.
For most anyone born after 1980, it’s hard to imagine that barely 30 years ago, 30-year mortgage rates stood at 18.2 percent, more than three times as much as the current rates, which lie just above 5 percent.
Since 1981, interest rates have been steadily declining, fueling a partly credit-driven economic boon. Buoyed by easy and cheap credit, American consumers have enjoyed increasingly affluent lifestyles with only modest increases in income. Now, however, according economists, the time has come to pay the pied piper. The combination of high deficits, our nation’s burgeoning debt, a continuing weak economy, a weaker dollar, and renewed fears of inflation all combine to push interest rates higher—even as the Fed Funds rate has held mostly steady at record lows for more than a year.
Mortgage rates are among the first type of consumer loan to show signs of increase, with the rates on 30-year mortgages recently reaching 5.31 percent, the highest level in eight months. Credit card interest rates have been steadily on the rise too, in part spurred by the continuing weak economy. According to the Federal Reserve, the average credit card interest rate reached 14.26% in February, up from 12.03% of two years ago. For the average American household, that 2.23% jump amounts to approximately $200 more down the drain in interest per year, according to the New York Times. Furthermore, economists predict credit card rates will rise again—and at an increased pace: by the end of this fall, experts expect to see the average APR hovering between 16 to 17 percent.
The easy access to cheap credit over the past three decades have left many consumers in a vulnerable position. While disposable income increased modestly, from 10.7 percent to 12.6 percent, over the last 30 years, total household loans increased nine-fold, in part fuelled by the low interest rates. With interest rates set to go higher, many Americans will be faced with the harsh reality that going forward, it will be increasingly expensive to spend more than you earn.
As rates on car loans, mortgages, and credit cards begin to rise, consumers will be forced to cut back on their borrowing. Right now, household debt (hovering around $13.5 trillion) surpasses disposable income by $2.5 trillion. In the future, fewer Americans will be able to afford shouldering such sizable obligations and households will be forced to rely on their income, not credit, to cover expenses.
On the brighter side, this turn of events is expected to steer many households into more economically stable positions. Unfortunately, the unwinding of excessive debt levels is unlikely to be a smooth process. Even the well-to-do may well find that the dream home in Southern California is going to have to wait until more funds are in the bank.
