Staying on Top of Economic Insights & Trends is Paramount for Your Business

Posted By: Rebecca McLean ICOR Blog & News,

I hope this update finds you and your family well! Keeping abreast of trends and being briefed about how the changes in the economy may affect your business is just one of many ways you benefit from being a member of National REIA. I wanted to share some interesting economic insights that have emerged recently that may affect how you plan for 2024 as a real estate investor.

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Just a few days ago, the Bureau of Economic Analysis revealed that the US economy expanded at an
impressive rate of 4.9% in the third quarter, 2023. This is a significant jump from the 2.1% growth we
saw in the second quarter.

While we’re still waiting on numbers from other major global players, it appears that the US is outpacing most, except for perhaps India and China. Interestingly, China had a 5% annualized growth rate but is now grappling with economic challenges. We are all waiting for the other shoe to drop as everyone knows that they’ve been propping up their economy even more than we have and an economic crisis is inevitable.

A key driver of this US growth is consumer spending, which makes up a huge portion of our economic activity. In September alone, spending increased by 0.7%, following a 0.4% rise in August. This boost is largely attributed to increased spending on services like international travel, housing, utilities, health care, and airline transportation.
But let’s jump to October. We’re now seeing some potential challenges on the horizon for consumers.

Credit card interest rates are soaring above 20% for unpaid balances. Mortgage rates have hit 8%, auto finance rates are at 7%, and student loan payments are no less than $500 a month. I can’t even imagine what those stats will look like after the major spend for the holiday season is over.

But here’s the most concerning statistic; Consumer debts aren’t being paid on time. VantageScore CreditGauge, a credit risk tool developed in partnership with the nation’s three largest credit reporting agencies (Experian, Equifax and TransUnion) reported Oct. 31 that early-stage delinquencies spiked from 0.84% in August to 0.91% in September across all consumer loan products. And we’re seeing this trend extend to mortgage and auto loans as well.

Recent data from the Federal Reserve Bank of New York confirms this trend. Household debt has climbed to a staggering $17 trillion, with about $1 trillion coming from credit cards. Notably, mortgages remain the largest debt for many Americans, totaling around $12 trillion.

What may be more concerning is that, after prolonged stability, mortgage delinquency rates are beginning to inch upward again.

According to the National Mortgage Professional, the national delinquency rate for September reached 3.29%, marking a 12 basis points rise from August and a 13 basis points year-over-year increase. This shift represents the most significant, and only the second, annual uptick in the past two-and-a-half years.

As for auto loans, in September, the percentage of auto borrowers who were at least 60 days late on their bills rose to 6.11% according to a Fitch Ratings report. That marks the highest default level since 1994. A big part of the reason for these defaults is the monthly car payments, which have risen sharply ever since interest rates started climbing. A Financial Times report concludes one out of every five car owners with a loan has a $1,000 monthly car payment.

I am curious to see what the fourth quarter will look like when the numbers come out in late January. Some predictions show that the economy will grow by 4 or 5 percent. However, how much will the debt levels of the American consumer grow?

With the labor marketing making it appear that anyone interested can find a high paying, flexible job, it can often boost consumer confidence to the point that overspending occurs, whether the consumer can actually afford it or not. This surge in consumer spending—often beyond means—raises concerns, especially as we approach the peak retail spending season.

For us as real estate investors and small business owners, this race to spend can have disastrous results as 2023 turns to 2024. Rent may not be paid on time, ability to finance purchase of a newly rehabbed house might be tougher and paying back any private money loans may become a challenge. If banks begin to be concerned the ability to get conventional loans may lessen. Any change in the economy can radically affect our industry. Let’s stay aware and ready for potential challenges in the coming quarters.

For well-informed and well-prepared investors, opportunities always abound! One way is to stay connected with your local REIA for information about the local economy and to National REIA for national trends and data. Visit daily for updates and use the National REIA data portal powered by Homeworthi to see how your area is performing against national averages. Rebecca McLean is the Executive Director of National Real Estate Investors Association.