This week on “Inside the Economy”, we look at wages and housing. Wage and salary growth has moved back to pre-pandemic levels, with the highest income households seeing the slowest growth, alongside declining job openings numbers. With virtually all rent measures currently on the rise, home prices have also continued to rise despite the recent increase in mortgage rates. Tune in to learn about this and more!
Key Takeaways:
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- Headline inflation hovers around 3
- Oil back above $80
- Unemployment rate at 3.8
- 30 year mortgages above 7.15%
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Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
Going to talk about wages and salaries and housing as we are slowly approaching the end of this increasing rate environment, which is kind of where we are. Interestingly enough, you look at all the numbers from a year ago and there’s not a lot changed. Initial unemployment claims are pretty much the same. Rates have gone up, yields have gone up. We know that. We’ve endured it the last twelve months.
They say that unemployment spiked to 3.8. I love that term, spiked from 3.5 and it’s pretty much where it was a year ago. A lot of things are where they were a year ago and a lot of things that you would have assumed would have changed dramatically, like the price of houses and that kind of stuff have changed dramatically, not necessarily in the direction you want.
Where we are is wages are adjusting to their purchasing power now and I don’t want to get into a long discussion on that, but if you got a household that makes more than 125,000, this is from bank of America, you are down now with parity. You are living with your purchasing power of the money you have now.
You’re going to live with the price of houses as they are, rents as they are, and other things. We’ll get to that in a second. But if you’re on the wage and hour side of things, households under 50,000, 125,000, which is the other two lines here, their numbers are still a little bit up.
Just to make a simplistic example, if minimum wage, let’s call it $17.50 and you go buy a McDonald’s and say we’re starting at $18 an hour, well, that’s a little inflation in that wage. Even though the $18 an hour isn’t enough in this town, there’s still a little bit of inflation on the wage and hour side. Just not everybody else.
That’s sort of a thing with United Auto Workers and a few others that are looking at their purchasing power right now and going well, okay, it wasn’t as glorious as it once was. More corrections in the job opening market. Thankfully, a lot of these indications of look at all the jobs that are open and five, six, seven duplicates of the same job, they’re kind of cleaning that up.
They are getting back down to the point where, well, there are some job openings, there are some job openings in some places and none in others, which is kind of the way it should be. That number is correcting down and jobs just aren’t rolling out and available to everybody. Rents have gone up and they know that and they haven’t come down. They have adjusted a teeny tiny bit. That was a more seasonal adjustment.
But if you are looking for a nice apartment, it’s going to be expensive and it’s not going to be necessarily cheaper. Now this came about when we were dealing with COVID there seemed to be on the surface, a lot of new the greatest thing in economic terms is new house formation. Boy, new house formations. They’re great new houses, new cars, washing machines, all kinds of things. New houses. That’s almost as good as a highway project which reverberates through the economy.
But it wasn’t a lot of real new house formation. It was people moving home. And around here, a lot of people have moved home, rebuilt the room or put the office above the garage or whatever it is they do. That’s kind of over.
The new house formation in technical terms, meaning new houses and new multifamily units is slowing. The only homes that are selling right now are the new ones because they’re giving good deals on the financing side, not on the price side. Just like you look at a new car, they’ll do something on the financing side, but the price is still up there.
That’s what we’re living in now. That’s where the market is going. If you have a reasonably affluent home over 125,000, you’re a reasonably affluent price of homes. Yeah, it went up, corrected a little bit, not much. This is 2022 and 2023, those prices are going to stay there. You’d think that when I had this conversation two years ago, gee, rates are going to go up. That means the prices are going to come down. No, rates went up, prices went up.
If there is a trend going forward here with these rates and hopefully with mortgages, it’s that the rates will come down a little bit and mortgages will come out of where are we today. Reasonable mortgage 7.8 will come down a little bit. The Fed is targeting mortgages in the fives. And you’d think, well, if the rates come down, then the prices will go up. If you’re logical, I don’t think it’s likely that if the rates come down, the prices will come down too. So this is probably a good price.
If you’re in that financial category where you can be one of the homeowners, one of the 65% of the people that are homeowners, well, you’re going to pay the price.
The stock market, especially the S&P 500, a little bit of the Dow, a little bit of the Nasdaq, they kind of had this little rally here. I think it’s premature. I think it’s not justified by earnings where they are.
They will be justified by earnings. And we’ve talked many times as the transition in US manufacturing is changing, more automation, more all kinds of things more onshoring, we’ll see those numbers. Well, we’ll really see those earnings numbers. Maybe the first quarter next year, more likely this time next year once everything gets on the line.
Market’s a little ahead of itself. But I don’t expect a major correction. What I do expect is September 20 when the Fed meets, we’ll go from the cost of money at five and a quarter to a cost of money at five and a half. I think that’s in the bag.
Whether that’s the last one, it doesn’t really matter. We get closer to being the last one every time, they’re close to being done. But I firmly believe, reading the notes and a few other things, that they’re not going to be in a big hurry to lower them. And when they do start lowering them, it’s not going to be back to zero. That’s just not happening anymore.
And kind of on a final note, been a couple of questions about what’s going on in education, you know, the money looks a little thin. What’s happened to all these international students, which are very lucrative to the college side of things?
Well, we lost a fair amount of Chinese students when the issues started and COVID came into play. Now, the students from China and India combined are more than the rest of the world combined. They understand how important it is to try and get into a US college in hopes of getting a US job more so than getting a job back in the homeland. And these are very attractive students for colleges. They pay their freight, they focus, they do well. They help things move along. So the higher education part is struggling to adjust to the new environment. But the international students, they’re moving along, and they’re starting to get more and more from around the world.
Okay, we’re at the end of the summer doldrums. Congress is back, so we’re going to start talking about, oh, shutting down again or who impeaches who. I’m sorry, it’s going to start already. It was great in August.
The rest of the economy is higher. Interest rates here before September’s out. Don’t worry about it. Markets should slow down a little bit. I don’t think it’ll have a big correction. Mortgages, I’d say there’s a fair chance by the end of September that we’ll be in the 8’s, which is kind of where we should be.
Remember, Federal Reserve wants inflation down to two. It’s basically at four now. Went up a little tiny bit, but it’s basically at four. 2% inflation gives you cost of money at three instead of five and a quarter, which is where it is now. And mortgages in the fives middle high fives, where they should be, I don’t think that’ll bring the price down. I think that’ll make the market economically a little more competitive than it is right now.
So, as always, if you have any questions, send them along to info@shjwealthadvisors.com and I’ll be happy to deal with it.
Well, thanks for joining me, and I’ll see you next time!
