Inflation is much much higher when you count the cost of borrowing money


Here’s why Americans remain pessimistic despite a strong economy.


Inflation is lower- well not really lower but the annual inflation rate has slowed. We covered that subject in our February 20th blog post ‘Don’t believe the CPI Lie’. To summarize, inflation gets baked into future prices and rarely reverses course. In essence, higher prices become the new baseline to which future inflation is added.




However inflation is much higher than what the government reports because the Consumer Price Index doesn’t account for higher minimum credit card payments or higher mortgage payments thanks to higher interest rates. This is especially difficult for older homeowners or retirees on a fixed income.



However, inflation is much higher than reported. Just because the GDP growth and low unemployment are shining on the economic forecast doesn’t mean that many consumers are under a dark cloud.



This contradiction can best be explained in a new working paper from the National Bureau of Economic Research entitled, “The Cost of Money is Part of the Cost of Living”. This paradox between the indicators and consumer sentiment may explain the increasing American pessimism about the economy.




The working paper reads in part,  that consumer sentiment is “strongly correlated with borrowing costs and consumer credit supply”, more so than mere unemployment and annual inflation rates. The economy is booming, and everyone knows it – except for the American people says the Working Paper.



This should come as no surprise since home prices on average are 50% higher than they were when the pandemic began and the current average 30-year mortgage rate has increased threefold since 2021. Americans seeking to purchase a car may find qualifying for the loan difficult at best and certainly more expensive thanks to higher interest rates.



To put it simply, there’s a divergence between monthly CPI numbers and the American consumer experience.




Then there’s credit card debt. Older Americans carrying a credit card balance. On average cardholders with a balance are paying 5.25 percentage points more than they were before the Fed began its series of aggressive rate hikes. For example, a cardholder with a $10,000 balance only making minimum payments would be paying about $220 a month with a 16% interest rate. Today, that minimum payment would be $300 a month with the average 24% APR being charged by most card issuers today.




To put it simply, there’s a divergence between monthly CPI numbers and the American consumer experience, and older Americans are hurting.



That said, I have a closing thought for reverse mortgage originators watching.



The motivation behind how we approach potential borrowers is key to how receptive they are to potential solutions to their cash flow problems. Knowing the true cost of inflation think of yourself as a member of a search and rescue team. Searching for homeowners who need a solution to their financial predicament and when appropriate possibly rescuing them from unrelenting financial pressures in what should be their golden years.





Here’s how many Social Security recipients have their home paid off


The Social Security Administration’s report provides a treasure trove of data


What do the vast majority of age-eligible potential homeowners have in common? Social Security and for most it’s the linchpin of their retirement security.




With The Senior Citizens League reporting over 40 percent of retirees rely solely on Social Security benefits to survive, it is no surprise that 62% of program recipients report they are dissatisfied with their 2024 3.2% cost-of-living adjustment. Next year’s cost-of-living-adjustment may be disappointing as well. The projected cost-of-living adjustment for 2025 will be only 1.75 percent, a significant decline from the 3.2 and 8.7 percent increase in 2024 and 2023.




While Social Security benefits are adjusted annually based on the percentage increase of the Consumer Price Index (CPI) the accumulated cost of living far exceeds any boost in monthly payouts. We covered some of this in last week’s episode which exposed the CPI lie.




A survey from Atticus found nearly two out of five respondents plan to return to work due to the modest 2024 COLA increase. One 65-year-old woman responded to the survey saying, “Utility, insurance, heating, and food costs have risen 8-14% in the last year. The 2024 COLA doesn’t offset these rising costs”.




A 75-year-old woman said, “My medical insurance supplement nullifies the Social Security increase. The spike in food prices hits hard, especially for those relying solely on Social Security.”


Nadia Vanderhall, a financial planner at The Brands and Bands Strategy Group, told Newsweek, “Even though people can be within retirement for over 30 years, Americans are living longer while things are becoming more expensive.”




In response to the pressures of inflation, older Americans are making financial changes to cope with the higher cost of living. 64% are cutting back on their discretionary spending. This typically means less dining out or shopping. However, even more painful are the 36% who are cutting back on daily essentials. Consequently, older Americans are cutting back on groceries, medications, or healthcare visits.




Could a reverse mortgage provide some much-needed cash flow? Could these cash-strapped Social Security beneficiaries find relief by tapping into their home’s value?




To answer that question we look at the 2021 bulletin Housing Expenditures of Social Security Beneficiaries from the Social Security Office of Retirement and Disability Policy. The report data comes from Census Bureau data that surveyed households with at least one person receiving Social Security. Here’s what they found as of 2018. Renters accounted for 32.5% of Social Security recipients. Homeowners with a mortgage balance represented a median share of 25% of households, and only 12% owned their homes free and clear.


What HECM Pros Should Know About Inflation

There’s one conversation that every financial advisor should have with their clients. A conversation that should also be explored by reverse mortgage professionals with every potential borrower. Inflation. Questions such as “How are you coping with the higher price of everyday goods and services you’re paying today?” can reveal a cashflow crunch that needs to be addressed.

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