#432: Why Investors Should Care that Americans Are Saving Less Money

Should landlords worry that so many Americans are saving less money than they were just a few years ago? I sat down with lender Joe Massey of Castle & Cooke and Ironton Capital founder Lon Welsh to talk about why this trend is increasing, and what it means for the rental market.

Three Learning Options!

1. Listen to the podcast “#432: Consumer Debt Trends” Denver Real Estate Investing Podcast
2. Watch the YouTube video.
3. Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.

How the Savings Rate Dropped from Pre-Covid Levels

Before the pandemic, Americans were saving about 9% of their disposable income. In early 2020, that number increased as people started to worry about the economy and most places shut down. Stimulus checks added another bump in the savings rate and the average was as high as 35% in mid-2020.

Now, the rate is down to about 2-2.5%. It has not been that low in a long time. We’re seeing that consumption is staying about the same, but everything costs more because of inflation.

Another concerning trend is a recent poll that shows many Americans say they would struggle with a surprise bill, even one that’s $1K. While people with a higher education level and income bracket tend to have savings, the disparity between that group and everyone else is striking. The impact of inflation on the lower end of the economic spectrum is considerably higher.

Increasing Credit Card Debt Correlates to Inflation

There’s been a massive increase in credit card debt as well. This debt had been increasing before the pandemic, but then it went down once people received stimulus checks and couldn’t spend money because so many businesses were closed.

Once inflation started going up, savings went down, and debt increased. Often, people facing high inflation tried to make household changes to cut down on spending, but they burned through their savings and increased their credit card spending.

Castle & Cooke has seen an increase in credit card usage among their clients, too. They get an alert when clients start using more than 75% of the limit on a single credit card. In the past, they used to get 3-7 alerts monthly. Now, they’re getting 3-15 per day.

While traditionally credit card spending was reserved for big purchases, most of today’s spending is just people struggling to pay bills. Even if people cut back on spending, they can’t cut out costs like gas and groceries.

How Homeowners Can Consolidate or Pay off Debt

When debt becomes too much, people generally look into refinancing their homes. These days, most homeowners have a ton of equity they can tap into. There are three main options they have for using their home’s equity to pay off debt.

Option 1: HELOC

A Home Equity Line of Credit (HELOC) isn’t a great solution to this problem. Essentially, they’re turning small credit cards into one large one that has foreclosure rights. While HELOCs are good for people with the opportunity to earn a high income or bonuses, they aren’t the best choice for someone who doesn’t have major fluctuations in income.

Option 2: Fixed Rate Second Mortgage

Fixed rate second mortgages could be a good option for some people, but the challenge in today’s climate is that interest rates are at 10-12%. This may work for some people with debt as that tends to be lower than the interest rate on their credit cards.

Option 3: Full Refinance to Consolidate Mortgage and Debt into One Loan

25% of people choose this option, and it’s almost always the best choice. All interest is tax deductible and the rates are lower. Although people may not want to give up their low mortgage interest rate, it usually saves them money overall because the total spread of interest rates is lowered.

Bottom line: if you’re upside down on your credit cards, don’t be afraid to call your mortgage officer and say you need help.

What Can Real Estate Investors Expect from the Market?

Even though many people are struggling with bills, don’t expect to see a wave of foreclosures. Because so many homeowners have equity in their homes, they’re more likely to sell for a profit before they would foreclose.

As so many people grapple with inflation, expect to see fewer first-time home buyers than we would normally expect. The increase in prices and interest rates means that people who would usually buy now are being pushed back into the renter pool.

Investors who buy a property now are getting a fixed rate mortgage and a home that will increase in rent and value over time. Don’t just focus on cash flow but look at the overall returns.

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