An American Nightmare

Interest rates used to be a topic confined to the annual meeting of the gnomes of Zurich or to hushed discussions by corporate treasurers. Now everybody is talking and worrying about them. "I don't ever remember feeling so tense over the prime rate," says Ellen Greenfield, 27, a reporter for Women 's Wear Daily, the trade publication of the garment industry. "I follow it daily."

The prime rate, which despite its modest gyrations last week is still at a nosebleed high of 20%, is a convenient bench mark for interest rates. Most consumers, though, get such things as mortgages and installment loans at several points below the prime.

Even so, a conventional 30-year mortgage now costs 16%, bank installment loans are 18% to 19%, and credit card companies are charging 20% on unpaid balances.

Even the neighborhood loan shark, who sometimes was demanding 60% last year, has raised his fee as high as 80%.

For many consumers the high interest rates are quickly destroying the American dream of an ever increasing standard of living, including bigger homes, flashier cars and newer gadgets. Nowhere is this more evident than in the housing market. Just a decade ago, many Americans expected to own their own homes; today far fewer do.

Last year only 18% of those who bought new homes were first-time owners, less than half the level of 1977. The rea son: sky-high mortgage rates.

The construction industry grimly jokes that it now takes two working wives to afford a house.

Maureen and Pierre Eustis of New Orleans, for example, are both 27, have been married five years, and would like to buy a house. Both work to earn a combined income of $25,000, but they can not afford a house. Says Maureen: "By the time we save enough to put a down payment on a house, the interest rate has climbed so much we can't afford the kind of house we want."

Those who already own their houses are discovering that they cannot sell them. Last May, Management Consultant Robert Nortillo, 41, put his four-bedroom home in the Hoffman Estates suburb of Chicago on the market for $102,000. When it did not sell quickly, he had to leave his wife and five children in Illinois and begin commuting twice a month to his new job in New York City. Although he has lowered the asking price twice, at $95,000 his house remains unsold. "Mortgages are available," he says, "but they are so darned unreasonable that no one is willing to take them."

Many businessmen who cannot survive the high interest rates end up in bankruptcy. Dun & Bradstreet reports that there were 11,782 bankruptcies in 1980, in contrast with 7,757 in 1979. Small business is suffering especially hard. Last year, for example, 1,600 auto dealers had to close up shop because they were squeezed between high interest rates and low sales. Many people starting new companies are being forced to retrench. Don Middleberg, who is chairman of his own New York advertising and public relations firm, put off the purchase of a badly needed $16,000 word processor last month after his bank had jumped the lending rate from 12% to 22% in just eight weeks. Said he: "High interest rates

are putting a squeeze on profits throughout our agency. We have to look very hard at salaries and what we buy."

The soaring cost of borrowing money and the lingering effects of last year's credit controls have had a strong impact on consumer habits.

Installment credit, which was rising at the rate of more than $3 billion a month in 1979, had slowed to a scant $146 million a month through October 1980. Credit cards are going into the drawer or into the wastebasket; more Christmas shoppers this year paid with cash than with plastic. Purchases that cannot be paid for immediately are often postponed. Last week when the washing machine wouldn't work, Cookie Sullivan, 35, a Winchester, Va., secretary headed for the Laundromat. Says she: "I'll be damned if my husband and I can afford a new machine with today's financing charges."

High interest rates have taught many consumers to become as adept at juggling their finances as the treasurer of a multinational corporation. Jay Houghton, 28, a Detroit advertising executive, "floats" his bank account by writing checks for bills as soon as they come in, but he does not mail them until three or four days before they are due. He also puts major purchases on his credit card, but then pays the bills in full as soon as they arrive. Says he: "This way I get 45 days of free credit." As long as interest rates remain in double digits, such feats of financial legerdemain may be some of the most innovative and productive work done in the American economy.

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