This week on “Inside the Economy”, we discuss the Federal Reserve & housing. With the upcoming Federal Reserve meeting in early November, the economy and the consumer are waiting to see where interest rates go. Will it be enough to dampen inflation as we move closer to 2023? The housing market continues to soften with mortgage rates above 7% and new loan applications at pre-pandemic lows. Why have prices remained steady and what does that mean for the housing market going forward? Tune in to learn about this and more!
- Oil is back above $85 per barrel
- Jobless claims remain at lows
- Outstanding consumer credit is on the rise
- Manufacturing remains strong
Welcome to another edition of Inside the Economy. I’m Larry Howes. I wanna talk about the Federal Reserve and its activities right now. It’s sort of at war with the S&P 500 and the rest of us. The numbers fundamentally haven’t changed very much. The CPI numbers came out just a little while ago and headline is still at 8.2 the core, 6.6. We kind of expected this. It’s too early in the cycle to think the numbers are going to adjust and I’ll get back to that. Unemployment went down to 3.5 and that wasn’t just seasonality. The actual unemployment numbers did go down even before what we would traditionally call holiday hiring for temps.
We’re far away from affecting the unemployment and the employment side of this economy like I’ve mentioned several times. Adjustments like this start with housing, go through consumer, go through manufacturing, and they end up with employment. We are a way from employment. Everything in that market is relatively rosy. Crude oil, well the Saudis decided they want to maintain a reasonable price, West Texas Intermediate was on its way to $60 a barrel. So, they cut their production back. They kind of needed to. 30-year mortgage, they claimed today is at 6.9. You couldn’t possibly get one at 7%. Most of a 30-year fixed mortgage marketplace after the fees are in the 8s and that’s going up more. The 2-year bond which is an important indication of where the Federal Reserve is going, 4.4.
On November 2nd, we’re going to have another meeting of the Federal Reserve and they are going to decide whether they’re going to increase a half a percentage or three quarters of a percentage. Right now, we’re at three and a quarter. If they do three quarters of a percent, 75 basis points will be at 4. Cust of money will be at 4. If it’s a little less, well, we’ll deal with that. But the 2 years at 4.47 suggest they’re not going to stop at 4, as I was hoping. I like to think they’re not going to go as far as 5. But some of these things like right here consumer price index numbers, I just went through. The big dramatic numbers are the year over year annualized numbers. Sometimes they shift into that. Sometimes they don’t. The 3-month annualized is way down.
We knew this was coming. We knew this was coming two months ago. It’s just starting to show in the data now. It’ll be a couple of months before the year over year data come down. The Fed looks at this side of the coin and says, well, maybe we went far enough maybe we went too far we won’t know for a little while. But November 2nd is going to put an interesting piece of psychology in the S&P 500. Consumers continue to, well the spending isn’t booming, but they continue to be okay with spending. They’re just using their credit cards. Non-revolving credit which is the dark color here is pretty stable. It’s not outrageous. It’s certainly not a bubble. Credit card usage, it’s way up. Some of that is inflation about 12% of that is inflation. Some of that is, well, we’re just going to go out and do it now in hopes of things cheering up sooner rather than later.
One of the issues is here. Social Security just put out the national wage average number. In 2020 that number was about 55000 a year. Average wage, 55000. 2021, it’s about 60,000. Up about 8.5. It’s a pretty good jump. I don’t think that jump is going to be repeated. It’ll be close but not that much. It still puts them at 60,000. If you take the home price and we’re talking national average now. Compare that to the wage base, houses are very expensive, very expensive. They are out of the reasonable marketplace. You don’t even have to mention how relatively expensive a mortgage is, its price. A consumer really has only input on one side of this entire equation. It’s not the cost of money, it’s price and the housing market has not adjusted yet.
Denver and a lot of these popular marketplaces had a quick retraction in price. We talked about that in July down a good number. That has stabilized. It certainly has not collapsed. Prices have stayed up in many respects due to the number of deals that are all cash that never even reached the conventional marketplace like a typical listing or how many days are on the listing. They buy them off the marketplace. Close them. We don’t know what the price is. So, fundamentally, the homes that are listed are still too expensive.
Mortgage applications, well, they’ve collapsed. Independent Mortgage Brokers are as a career in trouble. They’re going to be a disaster until the end of the year. I think it’s going to be a whole different marketplace starting in the first quarter next year. This is going to be very difficult to recover from. Where we are is, if you look at there’s some of us that really understand some of these numbers. This is the average 30-year mortgage. We’ve been a little low. Money’s been cheap. Money’s been free. The Federal Reserve is going to adjust that up and they’re doing that right now and I’d like to think that they’ll get some place where a long-term mortgage will be great if it stayed in the fives. Right now, that might be a little optimistic. They’re probably going to target for a more adjusted economy of a 30-year mortgage in the sixes, low sixes.
A lot of the drama in the rental market and the ownership equivalent rents and a lot of components that marketplace follows. A lot of the dramas moved out of that. They are adjusting down and some of the inflationary numbers that have driven home prices where they are, driven mortgages up where they are. Kind of driven wages up, groceries up 13. I mean it kind of goes on and on and on. The Fed has got to move to slow that stuff down and some part of the marketplace is already contributing to that, others not yet.
Apartment vacancies, well they’re on their way down. Apartment vacancies have kind of normalized. Vacancies were up relatively up during the big housing boom in 2007, 2008. It has come down. It is corrected down. Where that marketplace is going? It’s not booming in growth anymore. They’ve kind of hit the wall. Rent is always one of those issues where people that have to rent or working families can only pay this much and not more. There’s a lot of places in the country that have hit that. Kansas City is having a big issue of that so on and so forth. Rents are not going to continue to grow in most of the marketplaces like they have been.
Here’s the stock market, the S&P 500, the Nasdaq, they’re all down. The market is in a recession. The market is close to being at the bottom. It’s not at the bottom yet but it’s in its recession the chances are the S&P 500 and the Nasdaq and those will recover long before the rest of this cycle is resolved. After November 2nd, you just don’t know what sort of optimism might creep into the marketplace. If institutions and the algorithms and a lot of individual investors feel well, the Fed is very close to being done, okay. US industries in pretty good shape, inventories are okay so on and so forth. Well, we’re going to go back in. Some of that has started already.
If the Fed does 75 basis points, 3 quarters of a percent November 2nd. Optimism is going to come into the market. We don’t know whether there’s going to be a big piece of the recovery in all of these markets in the fourth quarter, or maybe the first quarter. It’s going to depend if they meaning the Federal Reserve says, oh, we’re going to go to 5. I hope not. We’ll know a lot more because they’ll be very close to being over by the time, we get 4. That could be November 2nd.
US manufacturing they’re doing fine. There’s been some onshoring. There’s been reasonable spending. A lot of this is inventory buildup. A lot of the psychology of just in time or, hey, we’re going to wait to see how many of these Christmas toys get bought because I’ll get them here by Friday. No. Manufacturers are having inventories, stores are having inventories. They want to make sure they have it or they might never have it. The supply chain issues between the railroads. We’ll get to that in a second. Trucks so on and so forth is not over. They are still adjusting on their side of the wage issue and finding drivers finding people is still something of a problem.
The drought in the US, the Midwest, the wheat harvest, a number of other things is sort of reflective in the cost of shipping on the Mississippi. The water in the Mississippi is down. There’re some boats heavily ladened with a mediocre wheat harvest that can’t get by. Prices are way up. We thought we had a settlement for the perspective train strike that kind of went down the other day. They finally figured out it probably wasn’t what they wanted and the fact that the Mississippi slowed down so much is looking at. Well, maybe the trains will be an alternative to shipping all this wheat.
It’s very likely that the US will export the smallest amount of wheat ever this year. It’s not that we don’t have it. We kind of have it. Food contracts just like oil contracts, most of them are done in dollars. They’re important. They do it in dollars. And the strength of the dollar is just whacking the rest of the world. This is everybody. This is China, Japan, the Euro, Britain, everybody compared to the dollar. They’re all down. It’s very hard for them to buy food with dollars, because it takes a lot more of their currency to go into dollars and this is only going to get worse. The higher the Fed goes, the stronger the dollar is going to be and the rest of the world is just going to have to suffer with it. It’s going to be hard for them to make bond payments. I mean, the list goes on and on and on.
When they finally mention, oh yeah, the US is in recession even though you can quote me that we probably are now anyway and have been for a while. The recession the world is going to have to deal with will be longer and worse. In some respects, it’s because of the dollar. In some respects, is most of them aren’t doing a great job at dealing with their inflation. Once again you can be glad the Federal Reserve is doing what it is. And the Fed hasn’t really even started taking money out of the system specifically that $4 trillion dollars we put in the system for COVID. That has to come out. That might take a decade. I hope it doesn’t take that long. But that needs to come out of the system as part of this inflation battle.
Okay, enough for now. Happy to deal with questions. That’s an info@SHJWealthAdvisors.com, and thanks for joining me.