I2C Credit Economy May 2024 Banner

New Homes and Cars ‘Completely Unaffordable’ Amid High Interest Rates, Says Moody’s

woman paying bills, using calculator

The Federal Reserve indicated last week that higher interest rates will likely stick around.

And as The Wall Street Journal (WSJ) reported Tuesday (Sept. 26), this situation has begun to impact households who need to borrow.

“The bite is starting now,” Liz Ann Sonders, chief investment strategist at Charles Schwab, told the WSJ.

The report points out that new 30-year fixed-rate mortgages now carry rates of around 7%, compared to 3% in 2021. The same situation is true for car loans.

Purchasing a home or car right now is “completely unaffordable for the typical American household because you’re mixing the higher borrowing costs with the high prices,” said Mark Zandi, chief economist at Moody’s Analytics.

Zandi estimates that the average U.S. household would need 42 weeks of income for a new car, as of August, versus 33 weeks three years ago, while The National Association of Realtors estimates that the typical American family can’t afford a median-priced home.

Meanwhile, recent weeks have seen the news that America is wrestling with record-high consumer credit card debt — more than $1 trillion — leading to concerns about credit insecurity for consumers and providers alike.

Making matters worse is the fact that 80% of Americans are now facing financial challenges after exhausting the savings cushion they built up during the pandemic.

As noted here earlier this week, new Federal Reserve figures show that — outside the wealthiest 20% of Americans — most consumers have spent down their savings and have less cash on hand than when the pandemic started.

That lower 80% has seen a drop in their bank deposits and liquid assets since COVID’s peak in 2021, after adjusting for inflation, while the wealthiest one-fifth of households still have cash savings about 8% higher than pre-pandemic levels.

Real incomes are falling as well, with the U.S. Census Bureau announcing earlier this month real median household income dipped by 2.3% from $76,330 in 2021 to $74,580 in 2022.

“Income estimates are expressed in real or 2022 dollars to reflect changes in the cost of living,” the Bureau announced. “Between 2021 and 2022, inflation rose 7.8%; this is the largest annual increase in the cost-of-living adjustment since 1981.”

Real income is typically defined as a measure of purchasing power. When it falls, consumers get less for their dollar, and as expenses rise the declines can be enough to push at least some people into a more financially precarious position, with 61% of American consumers now living paycheck to paycheck.