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Households Better Prepared for Rate Increases This Time

by devteam May 21st, 2015 | Share

Earlier this week Freddie Mac asked if the housing market recovery couldrnwithstand a rate increase (the answer, with some qualification was yes).  Now the economists at Wells Fargo are askingrnthe same about household balance sheets.</p

The banks Interest Rate Weekly</iconcludes that should the Federal Reserve begin to increase rates as expectedrnit will have a “muted” impact on households. rnThe balance sheets of households are critical to the economy as a whole givenrntheir importance to growth in consumer spending.</p

Households are less leveraged than they were in past tightening cyclesrnand thus in a better position to withstand the higher rates. Financial obligationsrnfor debt, property taxes and lease payments currently stand at 15.3 percent ofrndisposable income, a level consistent with the record lows of the early 1980s.  When the last previous tightening cycle beganrnin 2004 the financial obligation ratio (FOR) was 16.7 which was 1.4 pointsrnhigher than today.  Additionally a higherrnsavings rate is providing households with an extra cushion against rising borrowingrncosts. </p

Part of the balance sheet dynamic is a national shift to fixed raternmortgages.  At the end of the last tighteningrncycle in 2006, 44 percent of mortgages carried adjustable rates.  As interest rates declined homeownersrnswitched to fixed rates and adjustable rate mortgages (ARMS) dropped to onlyrn2.5 percent of the outstanding mortgage debt at the height of the Great Recession.  That market share has since increased butrntoday only 18 percent of the $8.2 trillion in mortgage debt is in ARMs.  This means that, as of the first quarter ofrn2015 only $1.5 trillion of that debt would be affected by increasing ratesrncompared to about 30 percent or $2.5 trillion that was vulnerable in thernmid-2000s tightening period. New borrowers, whether taking fixed or adjustablernrate mortgages, will be affected by rate hikes but many fewer existingrnborrowers will be impacted. </p

Households are better prepared for a rising interest rate scenario inrnmore general terms as well.  Delinquencyrnrates, except for student loans, are better, or at least no worse, than in thernpast recession and more mortgages are being brought current than are fallingrnbehind.  Foreclosures and bankruptciesrnare declining.  Households, the banksrnsays, are also savvier about their finances and Congress has made severalrnchanges to enforce greater transparency on the part of those issuing credit.

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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