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Something’s Gotta Give
Unfortunately, you can’t eat gasoline.
If you look closely at Wednesday’s inflation report, energy was really the only area where we saw a meaningful decrease in consumer prices.
In particular, gas prices came down 7.7% in July. Compared to June’s 11.2% increase, that’s sweet.
You can probably chalk up this decrease in gas prices to softening demand.
It’s no wonder we’re seeing this dynamic at the pump. It’s because of this that inflation was flat between June and July. Because pretty much everything else increased in price or stayed effectively flat between June and July.
The cost of food at home increased 1.3% month over month. Food away from home went up 0.7%.
For real relief, we need prices – in multiple areas – to come down as much as gas prices did in July. While it’s nice to pay less at the pump this month than you did last, you’re still paying 44% more to fill up than you did this time last year.
It’s these year-over-year increases – 10.9% in the food index, 5.7% for shelter, 10.4% for new vehicles, 8.5% for overall inflation – that really matters.
Simply stated, if you’re paying considerably more for day-to-day goods and services than you were last year – amid stagnant income – you have less excess cash. You might be struggling. This means something’s gotta give.
Scroll with us, as The Juice explores exactly what this something might be.
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House Rich, Cash Poor – 2022 Style
Source: New York Fed
Remember that chart and the inflation data, as we follow the numbers.
And, as the chart shows, delinquencies on HELOCs are outpacing mortgage delinquencies.
Why? Because people continue to tap into record equity on their homes to raise cash for one reason or another. With mortgage rates around 5%, they’re certainly not refinancing, so HELOCs are the answer, particularly if you’re house rich and cash poor.
What Also Happens When You’re House Rich, Cash Poor?
Maybe you turn to credit cards for everyday life.
While the tale of two consumers hypothesis still lives (the struggling poor and the super comfortable spenders), that’s not what we’re talking about here.
We’re talking about the millennial who purchased a home during the pandemic and now regrets it.
Study after study indicates considerable buyer’s remorse.
Seventy-five percent of recent homebuyers in a Zillow survey regret some aspect of their purchase. The number came in at 72% in a report from Clever Real Estate.
Among the top reasons for regret: the hidden costs of home ownership and a monthly mortgage payment that’s too expensive.
Say it again. House rich and cash poor.
So if it’s not an HELOC to provide a cash cushion, make ends meet, or generate some spending cash, maybe it’s credit cards.
Don’t Be A Delinquent
Of this skyrocketing household debt, $435 billion is past due. And $294 billion is seriously past due. As in, 90 days or more past due.
We’ll continue tracking the data, but it sure feels like it all ties together. At least for some consumers.
The costs of inflation and home ownership prove too much to handle leading to debt in the form of HELOCs and credit cards.
The harder it becomes to handle the latter, the worse things might get for at least some participants in our strong, but at the same time seemingly fragile economy.
The Bottom Line: We walk a fine economic line in this country.
Because consumer spending comprises two-thirds of our economy, we require debt to keep things propped up. As the Fed continues to raise interest rates to tame inflation, that debt becomes more expensive to carry, particularly credit card debt.
With delinquencies under control, this spending makes bank stocks and names such as Visa (V) and Mastercard (MA) attractive. The more you swipe, the more money the latter two make. And, if you carry a balance, but make at least your minimum credit card payment each month, the banks stay happy.
With this in mind, if you think the debt story we’re telling will lead to an implosion, consider sitting on the sidelines. Then, scoop up these financial services stocks at what will likely be bargain prices if you’re an investor with a long-term time horizon.
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