Americans Finally Start to Feel the Sting From the Fed’s Rate Hikes
Those who need to borrow now are getting a lot less for their money
By Rachel Louise Ensign| Photographs by Yasmin Yassin for The Wall Street Journal
Updated Sept. 26, 2023 at 12:17 am ET
Rising interest rates are hitting Americans’ finances.
Consumers in the market for loans to buy homes and cars are discovering that, because of the Federal Reserve’s rate increases, their money gets them a lot less than it would have a few years ago. Meanwhile, those with credit cards and other loans that carry rates pegged to broader benchmarks are finding they have gotten much more expensive.
Fed officials signaled last week that they plan to keep interest rates high for quite a while. For families who don’t need to borrow, higher rates might not affect daily life too much. But for those who do, the Fed’s aggressive rate increases are really beginning to sting. “The bite is starting now,” said Liz Ann Sonders, chief investment strategist at
Charles Schwab
.
Borrowers shopping for mortgages or auto loans are experiencing sticker shock. New 30-year fixed-rate mortgages today carry rates around 7%, up from 3% two years ago. That increase can mean a home buyer has to pay hundreds of dollars more a month compared with two years ago. Rates on car loans have also shot higher.
Buying 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.
He estimates that the typical American household would need to use 42 weeks of income to buy a new car, as of August, up from 33 weeks three years ago. The National Association of Realtors calculates that the typical American family can’t afford to buy a median-priced home.
Daniel Waddell started looking for a home in St. Paul, Minn., in January. Mortgage rates kept ticking up during his search. He eventually bought a three-bedroom, one-bathroom home this spring after offering over the asking price. His mortgage rate is about 6.5%.
Waddell and his wife, Payton Waddell, are deferring other purchases because of the $2,600 monthly mortgage payment. The 25-year-old consultant would like to replace the car he has been driving since the start of college, but he now plans to put off that purchase as long as he can.
The Fed released its summary of economic projections at the latest FOMC meeting. What does it say about the current state of the economy and what will policy makers do next? Photo: Al Drago/Bloomberg News
Even so, Waddell said he is glad they got the house. Otherwise, he and his wife might have given up. “Rates are obscenely high and it doesn’t seem like they’re going down anytime soon,” he said.
The typical consumer’s debt burden remains relatively modest because so many people locked in low rates on mortgages or car loans before the Fed started its rate-rising campaign. Many consumers are also benefiting from earning higher rates on their savings accounts.
But some with lots of credit-card debt are feeling particularly strained. “Consumers are carrying much higher balances than they were two years ago,” said Charlie Wise, head of global research and consulting at
TransUnion
. “There are always people at the margin where any increase in rates is going to hurt them.”
The typical credit card carried a 20.7% interest rate in May, up from 14.6% in February 2022, according to the Fed. Americans’ collective credit-card debt just passed the $1 trillion markfor the first time.
Ryan Gomez started accumulating credit-card debt in 2020 after he lost his job in food production and started community college to become a psychologist. After his rent in Portland, Ore., went up, Gomez used his cards to cover basic expenses and unexpected veterinary bills for his cat. Then rates began rising, sending the interest rate on his primary credit card up to nearly 25%. His minimum monthly payment started going up, and he reached a point where covering that was becoming a struggle.
“The rates are so bad now, you can’t dig out of that hole,” said Gomez, 38. He eventually worked with a nonprofit to enter into a plan to pay off the $17,000 balance at a discount.
Gomez has taken odd jobs to make the monthly $340 payment and delayed purchases such as dish soap. “The only place to cut corners is basic human activities,” he said.
Daniel Waddell says he and his wife might have given up looking if they hadn't found their house in St. Paul, Minn.
Even some well-off customers are getting hit. Rates on securities backed-loans, which are backed by a customer’s investment portfolio, also generally move alongside rate benchmarks. They have risen from about 3% before the Fed raised rates to around 8% now.
Mike Law, 71, wanted to buy a home in Estero, Fla., last fall but didn’t want to deal with the hassle of getting a mortgage. Instead, the certified public accountant took out a roughly $600,000 loan backed by his investment portfolio.
The bank charged him the Secured Overnight Financing Rate, or SOFR, plus 2.40 percentage points. Then SOFR rose, sending his total rate about 2 percentage points higher.
The high rate was a jolt after a decade-plus of ultralow rates. “My psyche just wasn’t used to that,” Law said. He sold off part of his investment portfolio to pay back the securities-backed loan.
“If rates hadn’t continued to go up, I probably wouldn’t have sold as many stocks and bonds as I did,” he said.
Americans Finally Start to Feel the Sting From the Fed’s Rate Hikes
For families who don’t need to borrow, higher rates might not affect daily life. But for those who do, higher rates are really starting to hurt.
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