In a prior article I had talked about why the government needs to create a recession in order to bring down inflation. I am not sure when exactly the recession will happen, but things are definitely slowing down.
While the erudite readers of this blog prioritize saving before spending; the majority of Americans rely on borrowing to fuel their spending. As interest rates climb, it becomes difficult to borrow and spend.
When a significant portion of the population curtails their expenditure, it inevitably results in an economic slowdown.
Slowdown in housing market
A great example of how interest rates are causing a slowdown is in the housing market. Not long ago people used to get mortgages for 2% interest rates. Now rates are touching 8%.
One might question the significance of a 6% increase in rates. After all, many individuals have received higher salary raises since last year.
But in practice a 6% rate increase does not mean you have to pay 6% more for the house.
Here is a home loan with 2% interest rate:
And here is the loan for the same house with 8% interest rate:
As the interest rate changed from 2% to 8%, the monthly loan amount jumped from 1,202 to 2,076. A 6% difference in rate leads to a 73% increase in the monthly payments!
Basically people are now paying almost double the money for the same house. No wonder home sales are falling off a cliff and people are feeling gloomy about the economy.
Stay the course
The general agreement amongst experts is that there will be a recession next year and it will be a mild one. But pundit have been wrong in the past so you never know if you will get a mild recession or a nasty one.
So in the Finer household, we are redoubling our efforts on the things we always do:
- Spend Less, Save More: Evaluating our expenses and cutting back on non-essential spending.
- Invest Wisely: Despite the downturn, continue to invest regularly. Historically, markets have recovered from downturns, and maintaining your investment strategy can yield long-term benefits.
As we approach this winter of economic uncertainty, we will stay the course with our saving and investing. Like all winters, this too shall pass, and before you know it will spring will be here.