Wednesday, the Federal Reserve is expected to indicate how quickly it will push up interest rates.
Ordinary Americans can expect monthly payments on home purchases to rise, selling houses they already own to get tougher, and interest rates to jump on credit cards and other consumer loans.
Recent retail sales reports indicate the average family is spending freely and not saving very much.This may be a good time to trim back—families may need to borrow in an emergency and higher interest rates will take a bite out of the family budget.
The Fed has been purchasing $85 billion in mortgage-backed securities and longer term Treasury Bonds—economists call this "Quantitative Easing."
These purchases have fueled, until recently, rock bottom mortgage rates and a much heralded surge in housing prices. The latter could well prove unsustainable, because Wall Street speculators have been doing a lot of the home buying, even as the demand for home ownership is the United States is actually waning.
More Americans are choosing to rent that's because many young families, saddled with huge student debt and earning less than their parents, can’t consider purchasing a piece of suburb heaven.
The Zillow Survey of 105 economic forecasters, in which I participate, has the surge in housing prices slowing significantly in 2014 and 2015. This deceleration could turn into a housing market collapse if the Fed pulls back on easy money too quickly, and many more homeowners could owe more than their homes are worth.
Car sales and prices have been booming, as Ford, GM and others have offered customers with good credit scores quite reasonable rates on new car loans. Their financial affiliates will face much higher costs for funds, and automakers will have to pass along higher interest rates to customers and trim incentives.
If you genuinely need a new car, this may be the best time to get that good deal. Higher borrowing rates will hit the used car market hard, lowering your trade-in value—along with higher interest rates, that will push up the monthly payment on new vehicles.
Stock prices have soared—investors can’t get much interest on bonds, and dividend yielding stocks have been the best alternative.
As the Fed pushes up interest rates, well-rated corporate bonds and the debt of the better-run state governments will become attractive, and stocks, especially dividend paying stocks, will lose their appeal.
Overall, the stock market will be challenged to continue rallying, and ordinary investors should greet with great skepticism broker calls about can’t miss opportunities.
Most stock prices move with general trends in the market, and the opportunity your broker hails will have to be so good that it won’t likely be offered to ordinary retail investors.
The big shots on Wall Street will keep those hot prospects for themselves and the carriage trade—families big enough to be companies in their own right.
The percentage of take home pay Americans save has never been high, but lately we have been spending so freely that the percentage we put aside is now lower than a snake’s belly.
This is a good time to rethink the family budget. If you have credit card debt, pay it down as quickly as you can.
If you really need a larger home and are confident you can sell the home you own, and your job is very stable, this may be the best time to buy and lock in a mortgage rate you many not see again for a long time.
If you really need a home improvement loan—for example, much needed repairs you can’t do yourself or another room for the twins that unexpectedly arrived—now is the time.
Don’t borrow the money for a bigger SUV than you need or don’t need at all, or another wide screen TV. Sedans, older vehicles and smaller monitors will be cool again when interest rates surge.
It’s time to reflect on the lessons of the Great Recession. Families who are thrifty and only use credit for good purposes keep their homes from foreclosure, send their kids to college—without piling up excessive debt—and sleep better at night.