While the numbers may make it look like the overall U.S. economy is doing well, at the ground level the situation is much tougher and more grim.
The skyrocketing interest rates imposed by the Federal Reserve to tame inflation hung like a grim, dark cloud over would-be home buyers, car buyers, growing families, and businesses new and old, large and small. It meant missed opportunities, compromises, and waiting.
It's not that the average American is in poverty. It's that many are struggling and feeling squeezed more than they expected. In the American Dream, if you work hard, things will get better. Fair or not, this may be a big reason why many voters are expressing dissatisfaction with President Biden's economic policies.
The cost of borrowing money — mortgages, credit cards, auto loans — is at its highest it's been in more than two decades, and that's especially hard on California residents, where housing, gas and many other things are more expensive than in most other states.
California's economy is also highly dependent on interest-rate sensitive sectors such as real estate and high tech, which explains why the state's job growth has been slow and its unemployment rate is the highest in the country.
It becomes harder to budget
When interest rates rise, savers get more for their savings. But in America's consumer society, for most people, rising interest rates mean many things become a little (or a lot) more expensive — making it harder to make ends meet on your personal or family budget. That might mean giving up on that luxury car you've always wanted, settling for a smaller home, or taking shorter, less glamorous vacations.
And whenever interest rates rise, the impact is almost inevitably passed on to customers, forcing some to give up on purchases altogether.
Giovanni Panchame, a creative director at an advertising agency, understands these feelings all too well, and he often wonders what would have happened if he and his wife had bought their first home in 2020, as they had planned.
At the time, they were pre-approved for a 3.1 percent interest rate, about the national average, but after losing multiple bids, they decided to wait a few years to save up money for a better home.
Four years later, the couple is still renting an apartment in Culver City and are currently expecting their first child.
Hoping to buy a home and settle down before their son is born in December, the couple recently made an offer on a three-bedroom, 1.5-bathroom house in Inglewood for $885,000. They plan to put 10 percent down. With the average mortgage interest rate currently at 7 percent, monthly payments would be about $5,300, or $1,900 more than they would be if the interest rate was 3.1 percent.
The rise is due to the Federal Reserve's power to set the base interest rate, which determines nearly all interest rates in the economy. The Fed's base rate has risen rapidly over the course of nearly a year, from near zero at the start of 2022 to about 5.5%, the highest in a generation. Interest rates have been high before, but after two decades at near-rock bottoms, most people have become accustomed to both very low inflation and low interest rates.
“Obviously, looking back, we probably should have kept going and jumped into something,” said Panchame, 39. “We really sacrificed a lot to get to this point to buy a house, and now we feel like we got here but didn't move fast enough because interest rates got the better of us.”
Add in property taxes and home insurance, and the situation becomes even more painful for homebuyers, as these costs, along with the home prices themselves, have skyrocketed since the COVID-19 pandemic.
The typical buyer of a mid-range home in California that sold for about $785,000 in the spring was expecting total mortgage payments of about $5,900 a month, up from $3,250 in March 2020 and nearly $4,600 in March 2022, when the Fed began raising interest rates, according to the California Legislative Analyst's Office.
That wasn't supposed to happen: Raising interest rates too quickly and high, as the Fed has done to curb inflation, would have led to a decline in home prices.
But that didn't happen, mainly because there were relatively few homes on the market. Most existing homeowners had locked in low mortgage rates before the rate hike. Selling those homes at the time rates spiked would have meant higher prices and interest rates for other homes, or higher rents for apartments.
For most homeowners who were banking on record-low interest rates, low unemployment and incomes that generally grew at or slightly faster than inflation provided additional financial security, and many built up savings early in the pandemic, aided by government assistance.
All of this is supporting the strength of the overall U.S. economy and reducing the impact of rising interest rates.
“The consumer is doing their part,” said Claire Lee, a senior analyst at Moody's Investors Service, but added that there are signs that spending is slowing, as evidenced by consumers cutting back on credit card purchases.
Unlike most mortgages, interest rates on credit cards aren't fixed, and the average interest rate is now nearly 22%, up from 14.6% in 2021, according to Federal Reserve data. That's starting to squeeze more borrowers, adding to anxiety.
Increasing credit card debt
In California, the 30-day delinquent rate on credit cards is approaching 5%, a rate not seen since late 2009, at the end of the Great Recession, according to the University of California, Berkeley, California Policy Institute.
Lower-income and younger borrowers are more likely than higher-income people to default on credit card, auto and other consumer payments — and they are the ones most affected by rising interest rates.
Christian Shorter, a self-employed technical serviceman in Chino, just bought a used Volkswagen Jetta for $21,000. He put $3,500 down and financed the rest over 69 months at 24 percent annual interest. His monthly payments are more than $480, and he'll have paid about $15,000 in interest at the end of the loan.
Shorter, 45, said his credit isn't great. He plans to take out a personal loan when interest rates fall to pay off his car loan. “Absolutely, absolutely, the Fed should lower interest rates,” he said.
Rising interest rates and new-car prices are causing some car buyers to downgrade to less expensive models, but the biggest change, especially in California, is that more buyers are switching to electric vehicles to save on fuel costs, said Joseph Yun, a consumer analyst at Edmunds Inc., an auto research and information company in Santa Monica.
He said that in May, buyers financed an average of about $41,000 for a new car at a 7.3% interest rate (compared to 4.1% in December 2021), with monthly payments of $745 over 69 months.
“A large portion of the public is looking at the auto market and saying, 'We have to wait until something changes, like interest rates or dealer incentives,'” Yoon said.
Many small business owners who drive much of Los Angeles' economy can't afford to wait out the pandemic: They need money to survive, or even to expand when times are good.
But many businesses can't get loans from traditional commercial lenders, and when they do, they are typically charged 9% interest rates — more than double what it was before the Fed hiked rates, according to a survey by the National Federation of Independent Business.
As a result, more people in Southern California are seeking help from lenders like Los Angeles-based Lendistry, one of the nation's largest minority-led community development financial institutions.
Lendistry CEO Everett Sands said applications were up 21% and loan amounts up 33% from January to May compared to a year ago. The company's interest rates range from 7.5% to 14.5%.
“Business owners are tenacious, entrepreneurial and persistent, so they always find a way,” he said, adding that many have side jobs such as driving for Uber or delivering for Instacart at night.
Still, higher borrowing costs will inevitably mean less money to spend on investing in new technology and software, hiring additional staff and slowing owners' expansion, Sands said.
“Some people fail in their progress.”
“When you put everything on the line, you become desperate.”
— Jurni Rain, Grits and Waffles
Journi Lane, 42, launched her brunch business, Grits & Waffles, as a ghost kitchen in February 2022, preparing food orders for delivery services. She maxed out her credit cards and took out merchant cash advances (kind of like a payday loan with a super-high interest rate) to fund it. She ended up with $70,000 in debt.
“When you put everything on the line, you're desperate,” says Lane, a Dallas native who moved to Los Angeles a decade ago and worked as a manager at California Pizza Kitchen and the Cheesecake Factory. “I don't care about interest rates. It's somewhere between passion and insanity.”
Since then, she's paid off the entire loan on her shopfront, and her business has boomed: Last year, Laing expanded from a ghost kitchen to a tiny spot in Pico-Union with three tables. Now, she has 17 tables and 14 staff members.
She plans to move to a larger location in Koreatown this fall and has her sights set on opening a second restaurant in South L.A. But she worries she could have expanded sooner if interest rates were lower and her access to financing better.
Economists call that opportunity cost. For Laing, it's personal.
“Certainly, lower interest rates would have helped,” she said.
For many others, they will continue to wait for interest rates to fall without the comfort of intermediate success.
Lynn Miller, 60, started looking to buy a home in Orange County about a year ago, wanting to upgrade from her current 1,600-square-foot apartment.
“It's not bad, but it's not my home. The dishwasher is no good, the washing machine is old,” she said of her rental in Corona del Mar. “Obviously, I'm not going to invest in all those appliances. It's just different not having your own home.”
It was a daunting task, she said, especially plugging her numbers into mortgage calculators from Zillow and Realtor.com, which provide estimates based on current interest rates.
“It's shocking when you look at the monthly payments,” said Miller, the marketing consultant. “It will get better, but right now it's not getting better.”
She's still house hunting — she'd like to buy a detached, three-bedroom house with a backyard where she can keep her dogs — but for now she's going to wait.
“I'm still waiting because I'm confident interest rates will come down,” Miller said, but acknowledged it was all speculation. “We may end up waiting a long time.”