John McColgan’s opinion piece got me thinking about how the economy affects the safety and fear people feel.
We’ve become so accustomed to low nominal interest rates that 5% mortgage sounds outrageous. But, remember the early 1980s? Since then, real interest rates (nominal rate minus inflation) haven’t fallen as fast as nominal interest rates. As a result, your real interest payments haven’t fallen as fast as your nominal interest payments.
While nominal rates affects how much you can borrow for a home, your real mortgage payment (nominal payment minus inflation) falls when inflation exists even though the amount you pay the mortgage company is unchanged. That helps to make housing an inflation hedge. When house prices rise, home ownership is even more lucrative. That’s some help when household paychecks don’t rise.
Considering that real household income (paychecks minus inflation) has been fairly flat since the mid-1990s, having low nominal interest rates has helped those same households. It’s only been over the last few years that real median household income in the U.S. has reached the levels seen back in 1995!
When we compare that fact with stock market gains over that same period, it’s no wonder income distribution has finally become a hot issue. Of course, the real problem is wealth distribution. It’s gotten much worse since Clinton’s financial deregulation mania.
We economists are concerned about worsening income and wealth distributions because they lead to greater family and neighborhood instability, potentially lower growth, and fewer economic opportunities.