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2017: Can Households Survive Higher Borrowing Costs?

San Diego County Consumer Finance Trends

San Diego County CA— Can local consumers handle higher lending costs for purchasing homes, making repairs, remodeling, buying cars and trucks, attending school, surviving life events, and other credit decisions if interest rates rise in December after a policy meeting?

“It all depends,” said Dwight Johnston, chief economist for the Ontario, CA-based California Credit Union League. “If the Federal Reserve raises rates multiple times between now and the end of 2017 because the economy is relatively strong, the job market is solid, and wages are rising, then consumers can probably withstand paying more in interest on their payments.”

Recently the League released its latest San Diego County Consumer Financial Trends Report. Households of all incomes continue taking advantage of low interest rates for first mortgages (purchase and refinance), second mortgages, Home Equity Lines of Credit (HELOCs), new and used auto loans, credit cards, student loans, business loans, and other loans. But rising interest rates may add a new dimension to this picture.

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Dwight Johnston

From September 2015 to September 2016, membership at locally-headquartered credit unions in San Diego County rose 8 percent (73,800 new members) to a record 1 million individuals (at 18 credit unions)—a first-ever occurrence. Total lending increased 14 percent, hitting a record $12 billion loaned-out. And total deposits increased 9 percent, hitting a record $15.1 billion. The data shows that credit unions continue gaining market share in financial services.

“Higher interest rates on credit cards usually make little difference to consumers unless there’s a dramatic increase,” Johnston said. “Auto sales are somewhat impacted by higher rates, but not too severely.”

Mortgage activity reacts differently. “While refinancing is already in a steep drop after mortgage rates spiked in November, new home purchases might fare better than you’d expect in a rising-rate environment,” Johnston said. “The California housing market can handle a modest increase. The 30-year mortgage rate would need to rise to at least 5 percent or above to cause a home-buying slump. There’s also a housing shortage in California just as demand is rising from potential buyers who are finally ready to enter the market.”

Fueling the borrowing spree at credit unions, banks and other lenders is what many experts say is a mixed-bag economy. Growth in consumer spending and business investment has been “too slow” for some policymakers. Still, others anticipate a “new normal” for years to come and are getting used to recent post-recession trends that are slower and defy history.

One interesting fact: California’s economy continues to outpace the U.S. economy according to several economic forecasts published over the past couple of years. Additionally, the state’s per-capita personal income rose 5.2 percent in 2014 and 5.4 percent in 2015, jumping from $48,470 to $53,740 over a two-year period according to a November 2016 analysis by the U.S. Bureau of Economic Analysis (a total change of $5,270 or 11 percent).

*Monetary policymakers (the Federal Reserve’s Federal Open Market Committee) will meet Dec. 13-14 to decide whether to raise the “federal funds rate” — the benchmark interest rate that marketplace rates are tied to.