Many of you have gone to the grocery store and bought your groceries and left looking at your receipt in shock as to what did you buy for this amount of money that you just spent.  I know I have recently.

And many of you have gone to the gas station to fill up your tank and left shocked again at how gas prices have gone up at least 25% in certain areas from the day before Russia invaded Ukraine.

And many of you who are renters, the average rents increased almost 30% in the Phoenix area in 2021, more than double the national average. Rents are projected to increase by another 20% in 2022.

All we know is that just about everything is going up. We are all experiencing sticker shock.

The Consumer Price Index (CPI) for all food increased 1% from February 2022 to March 2022, and food prices were 8.8% higher than in March 2021. The food-away-from-home (restaurant purchases) CPI was 6.9% higher than March 2021 while food at home (grocery store) prices were 10% higher than one year ago in March.

FRED Consumer Price Index for All Urban Consumers

With regards to income, since December of 2020, nominal wages and salaries were up 4.5 percent, the fastest increase since 1983. Yet U.S. companies found employers are now budgeting an overall average salary increase of 3.4% in 2022, which is less than half the current inflation rate though notably it represents a substantial rise from the average 2021 salary increase of 2.8%.

Social Security and Supplemental Security Income (SSI) benefits for approximately 70 million Americans have increased 5.9% in 2022.

Nominal wage growth has been far below target in recovery

As you can see wage increases have not kept up with the increase in inflation.

And with the Fed announcing half a point increase in the upcoming Fed meetings in June and July to combat this inflation.  What does this mean for you?

The federal funds rate is the interest rate at which banks and other depository institutions lend money to each other and is used to control the supply of available funds and hence, inflation and other interest rates. Raising the rate makes it more expensive to borrow. That lowers the supply of available money, which increases the short-term interest rates and helps keep inflation in check. Lowering the rate has the opposite effect, bringing short-term interest rates down.

Rising interest rates mean borrowing costs more which typically affect your short-term borrowing costs for credit cards and auto loans and home equity lines of credit and adjustable rate mortgages.

Rising interest rates will also affect the savings rate.  Many of you may have noticed an increase in the rate offered for savings accounts at your financial institution.

For longer term mortgages like the 15, 20, and 30 year fixed mortgages, they are tied to Treasury yields and the broader economy, and are indirectly affected by the rate hikes since the news of the rate hikes are already priced into mortgage rates.

What we have now is the average interest rate for a 30-year fixed-rate mortgage currently is at about 5.50%, the highest since 2009, and up more than 2.0% points from 3.00% last December 2021.

On a $350,000 loan, a 30-year, fixed-rate mortgage would cost you about $1,475 a month at a 3.00% rate. If you paid 5.50% today, that would cost you about $1,987 a month which is an extra $512 a month or $6,144 more a year and another $184,320 over the lifetime of the loan.

FRED 30 Year Fixed Rate Mortgage Average in the United States

Economics Professor Andrew Johnston says the expectation is that inflation will likely get worse before it gets better. He adds that expectations for a recession in the next few years have also increased.

“Even before Russia’s war further spurred price increases, robust consumer spending, steady pay raises, and chronic supply shortages had sent U.S. consumer inflation to its highest level in four decades. In addition, housing costs, which make up about a third of the consumer price index, have escalated, a trend that seems unlikely to reverse anytime soon.

One bright side is that your home’s equity has increased double digits and in some areas by as much as 19.1% nationally in January 2022, compared to January 2021 with Arizona leading the way at 28.3%. Projections on price increases in the Valley will continue into 2022, but at a slower pace.

Utilizing real estate is still a great way to build generational wealth.

With this current state of the economy and interest rates still historically low, now is the time to take a look at your financial picture.  With so many unknown factors beyond our control, we need to safeguard ourselves and plan and budget accordingly.

If you have questions about the health of your finances, or want to look at using the equity in your home to consolidate your debt and save money, or want to see what your move up and move down options are, I am here to answer any questions that you may have.

I have been in the mortgage industry for over 30 years and have experienced the highs and lows of the market so please feel free to reach out to me anytime with any questions.  Schedule a time to chat with Lillian Wong.