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Inside the Economy: The Consumer & Housing

By August 23, 2023No Comments

This week on “Inside the Economy”, we continue to wade through the summer doldrums. The consumer is still spending and enjoying historically elevated home equity values. As the Fed continues to raise rates, yields across the board also rise. Mortgages continue to climb, and longer-term treasury yields slip higher. How long until inflation and the cost of money normalize? Tune in to learn about this and more!

Key Takeaways:

      • Bond yields continue to rise
      • Oil prices slide below $80 per barrel
      • Mortgage rates inched up above 7%

Full Transcript:
Welcome to another edition of Inside the Economy!

I’m Larry Howes. Thanks for joining me. I want to take a brief look at the consumer and housing this time. Frankly, there’s not a lot going on economically. The Federal Reserve is in Jackson Hole having another meeting, and they will very likely add another quarter to the interest rates here at the end of the month.

So the markets and everyone is just sort of waiting. Quick look at the numbers. We now have mortgages officially in the sevens. Well, they say low sevens. They’re all medium and high sevens. The Fed might be happy with that. I know they’ve been targeting since they started this interest rate environment. They were targeting eight. They may be happy in the sevens.

The rest of the yield curve is up. Yields are up. It is. And I’ll describe later, for a bond guy like me, a very rich environment. Oil is okay. You’d think there’d be higher unemployment? No. Inflation is curbed and we won’t see a lot of real inflation. Like right here is like 3.2. The core number which everybody follows has sort of got an arithmetic problem right now.

We won’t have new core numbers or more accurate core numbers until October. That’s okay. Inflation is easing. This is basically a suggestion that food and energy and some commodities are coming way down, services are not. And the light blue down there on the bottom, well, that’s shelter.

The growth of the inflation has slowed and has kind of plateaued, but it’s still inflating. A lot of that is rents, not necessarily home prices. Here’s what the consumer is paying for down there in the bottom, well, that’s mortgage rates. 30-year mortgage, we’re in the low sevens. The top, those that have credit card balances, well, they’re up there 20%, even though that’s probably a little conservative.

Most of the credit cards, if you look at the columns, are 26 to 36. But here is the cost of carrying financing. It is up. That’s clearly the intention of the Fed to keep them up. Affordability in housing. And this is from the Bank of Atlanta, Federal Reserve Bank of Atlanta. So, when it’s down low, that means it’s not affordable. That’s simply the way they do their numbers, but it’s not very affordable.

Now, housing hasn’t really slowed, as we all know, and the affordability is way down in some parts that’s due to the wage an hour input on the income side. Other parts are in a rising interest rate environment. It hits the algorithm that runs the affordability like this. So no evidence yet.

The housing market has slowed and said a year ago that one of the first things we have to look at is what’s going on in the housing market to see how the rising rates have impacted it. Well, it’s not much. Here you look for environment where there’d be a lot more institutional buyers, and in this case down there in the bottom. Those are what are known as investors, those that buy single family homes to rent them out. That has not changed in nearly a decade. Up there on the top are people that buy homes to live in them that’s seasonally adjusted a little bit over a couple of years, but that hasn’t changed much.

The only real information here is that we’re short about 90,000 sales that would have ordinarily happened in this environment in a normal real estate market. And a lot of that is due to lack of inventory. Affordability algorithm isn’t there, but people have money to do it. They’re just not selling out of what they have.

The homeowner’s equity side, it’s huge. The number is about 14 trillion now from where we were in 2008 and 2009 when the market unraveled, it’s come way up, and consumers have not been using their home equity lines of credit as an ATM machine. They’ve kind of changed that.

The HELOC balances are kind of okay. There’s nothing dramatic and the actual number of them out there is down. This is Bank of America, and as I’ve told you before, they got a real good idea what kind of money their credit card holders have and if they have a bank account, and if they have a savings account and starting in 2019, which is zero on this scale, basically. Granted, I know the savings number was up, the COVID stimulus money was in there, all of that sort of stuff.

We’ve worked through all of that and these people still basically have twice the amount of money they had. And this is a percentage; it’s not a dollar amount. Twice the money they had in 2019. Well, they had it and they’ve probably had a shift in thinking. We’ve seen that before.

This is sort of the important part for a bond guy like me. This has been the trend of the ten year down to close to zero interest rates. We’ve been through that enough. It’s broken out of it. This for a bond guy is what’s known as a rich environment. And it is a rich environment. If you run a big institutional fund or have some money that absolutely has to be there, you can lock in four plus percent for ten years. That’s good.

There’s a lot of people out there buying them right now. The trend is, yeah, we’re going to get a little bit more and yeah, the yields are going to go up a little bit more. But that fixed income side of thing is getting attractive. Here’s just the last couple of weeks the stock market was moving along just fine, thinking the interest rates are going to go down here shortly. Don’t believe that. There’s no reason to believe that.

Everyone knows in my opinion, the Federal Reserve has done a great job in this environment and they’re very unlikely to start doing things that are dumb now and lowering rates now would be dumb, we got to slow things more.

The point is, the equity people have done a little bit, and since they didn’t raise the rates, they sold out equities, there on the left buying money markets. And by the way, the scale here is billions. Yeah, last week it was 30 billion, no problem. Into money markets. And when you read about all the treasury or the Fed, whoever it is has to sell Treasuries, and that’s always a big misnomer.

Well, in some respects it’s for this, because people are buying money markets and they need more Treasuries in the system. Okay, we’re going to get a quarter point increase soon. There isn’t any other drama. The equity market got a little bit ahead of itself. I think they’re going to simmer down. I don’t anticipate rates cooling in 2023. So more later when we get a little more data.

As always, I’m happy to deal with the questions. Send them along to and I’ll get right on it. Thanks for joining me!

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