Economic DiscussionEconomySHJ Blog

Inside the Economy: The Market, Housing and Jobs

By January 24, 2024No Comments

This week on “Inside the Economy”, we continue to evaluate the flood of new data. Inflation is still trending lower, and the job market continues to be close to full employment. Will the Fed engineer a soft landing? Mortgage rates are also trending lower; however, housing inventory remains at all-time lows. When will things change? Tune in to learn more!

Key Takeaways:

        • Oil prices back near $75 a barrel
        • Mortgage rates hovering around 6.5%
        • 10-year above 4%

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

I’m Larry Howes. Thanks for joining me!

Last time I talked about how the US economy is really not going to hell in a handbasket. There’s a lot of activity going on and this round I am going to be a little more specific because there have been some questions on the housing market, the job market and the markets as a whole. Is it all about lowering rates? You know, whatever it is.

But a quick look at the numbers suggests the inflation problem, which was caused solely by the stimulus money that was put in the system for COVID, which I will still tell you was a good idea at the time. It’s $4 trillion and you knew we were going to toss inflation into the system because there’s more money running around.

Well, that’s what we had to fix. We didn’t have substantive problems anywhere else. Housing market was okay. You know the rest. But where we are now is we’re in the latter stages of beating the inflation issue. CPI is coming down, the core numbers are down, we’re rapidly approaching, and there’s a little more of that here a little later on.

But what we have is a rapidly resolving situation that brought this all on. And the normal sequence of events that you get when you raise the cost of money, housing problems, job losses, lowering corporate profits, and then something of a recovery. Very little of that has happened. And I think it’s a mistake to anticipate that the Federal Reserve is going to lower rates until they have a lot more evidence that these things have happened to slow spending and spending is everything in the US economy. Spending has not slowed. Unemployment is not up. It’s still at 3.7. The initial unemployment claims are down again. Employment is stabilized. Interest rates are starting to come out of the inversion.

Remember, the inversion is when you could get a better return on a six month treasury than you can on a 30 year treasury. That’s an inversion. They’re trying to normalize the yield curve on bonds, the 30 years coming up. So you’re getting paid to invest for 30 years. They just haven’t lowered rates yet to get the three month and the two year down where it belongs, which is in the high twos. That’s not a reason to lower rates. You don’t do it to anticipate or help the market out. And the mortgage market had a great fanfare about, gee, we got the lowest mortgage rates in a year.

Well, we don’t. But in the last couple of weeks it did drop from 6.62 to 6.60. Where we are now is housing never really had to go through a correction. Prices were coming up. Yes, and they’re still going up and they’ve stabilized up, but sales are down. And you’d think that that would pull the price down. No evidence of that yet, no slowing in the housing market. Sales are down because there’s not a lot of inventory. And the generation Z, I think it’s generation Z. The people that are most likely to be first time home buyers can’t afford it. Most of them can’t afford it.

So it’s an affordability issue, not a price issue or a bubble issue. In fact, you look at the relative quality, you’d think, oh boy, there must be all kinds of housing debt out there like we had in 2008, which is pretty much where this chart comes from. But no, the amount of mortgage debt that we have is stabilizing. It’s returning to where it was.

And one of the difference is the relative credit quality of all of these mortgages is very high. I’ve seen some of the tranches of this debt and it’s great looking stuff. It’s going to be valuable, meaning the price is going to go up, the yield is going to go down. That’s just what’s happening in the market. There’s not a correction going on. There’s kind of a quality. Push it up and keep it up going on. Not what the Fed wants.

Core PCE, a big number if you play with the calculation a little bit. And instead of annualizing it, you just break it down into six months. The core is below two already. It’s corrected in hurry. Fed has done a good job. They’ve sold their assets, they raised rates, they’ve done a good job. It doesn’t mean the party is over and everything will go back to fat, dumb and happy after this. They just need to get down to a reasonable number and their target rate is two, and then fix some of these other things part time for economic reasons. Way down new lows, that’s DoorDash and a few other places because people had a lot of gig economies. It’s way down.

They need jobs now. They don’t buy houses, they rent apartments. They went through a big cycle of very expensive rents, and that’s kind of normalizing. But these people have to work and they can’t do it part time.

Unfortunately, a lot of them have kind of noticed that their income has stabilized. It’s kind of peaked. Federal minimum wage is up, and if you collect tips in Colorado, the minimum wage is up. Even $20 an hour is not going to keep you active in the greater Denver or even on the eastern side of the Colorado. You need more.

And unfortunately, those people have not felt that yet. They will. When spring comes around or they try and do a little summer vacation or gasoline comes up a little tiny bit, they’re going to feel it hard. Spending is not slowed. This is where consumer credit is up around 5 trillion. Not a bad number. It’s not a bubble. It’s not horrible. It’s just no evidence that consumers are slowing. Fed wants them to slow.

There is some evidence that a lot of obvious costs, credit card charges if you don’t pay your card off, auto loans, that kind of stuff, they’re way up and they’ve come up after income is stabilized. Again the wage and hour side is yet to really feel it. Like I’ve mentioned before, they’re going to start to feel it in the summertime and it’s going to be a big thing around the presidential election and the rest of the elections.

Naturally, they’ll point their finger at the current administration and Mr. Biden will be blamed for things that, well, he has absolutely no control of. There is some showing slowing mortgage payments, auto payments, student loans don’t have a problem. There’s being some more forgiven. And if you look on the Sally Mae homework side of things, the money that the president just recently forgave, that debt, well, that wasn’t ever going to be collected anyway. Sort of the quality of the borrowers, but everybody else, it’s slowing down a little bit, getting a little slower, but it’s not substantive enough for the Fed to actually lower rates.

I’ve mentioned before that the Fed really has no business lowering rates until probably the end of the year. Those that have anticipated the Fed is going to lower, oh, here in March, I think you’re kidding yourself. There’s no reason to do it. There’s no rationale. It’s not getting them what they want because the whole economy hasn’t slowed yet.

Markets have done great. Wow, gee, they might lower rates here in March, zip, up goes the market. Earnings aren’t really there yet, even though they’ve stagnated and certainly haven’t fallen. They’re good. They’re still good in all of these indices. But the earnings really haven’t started growing yet, and yet the market’s doing great and everybody’s happy. It’s not what the Fed wants either.

And the other side of the coin here, yes, we’ve got a few fiscal management issues with Congress right now, and that’s not going to go away in the foreseeable future. So the budget deficit is going to be a big chunk. So they come and say, gee, the Fed needs to sell more bonds to cover its expenses. And I’ll remind you that the federal government doesn’t need to sell anything to pay its bills. It’s all a matter of what Congress authorizes or not.

A lot of this new issuance is, one, the Fed going to work on normalizing their own yield curve, which is one of the things they do all the time. And two, there’s a lot of cash in the system. A lot of cash in the system. 11, 12 trillion dollars in the system. That’s looking for short term. Gee, you can get four and a half in a three month treasury. I want one of those. And buying it so treasury is gracious enough to sell it to us.

Okay. Well, I don’t anticipate the Federal Reserve going to lower rates for a while. They shouldn’t. The stock and bond market are going to probably do pretty well. Good days, bad days, mostly good days. The drama’s over. A lot of the mystery is over. We’re not fat, dumb and happy yet. But don’t think that the rest of the issues, housing, unemployment – unemployment’s should be at four and a half, not 3.7. We need initial unemployment claims, 285 not. And the Fed is going to see that before they start lowering rates. Not bad news. That’s just the way we see it right now.

Well, thanks for joining me. As always send questions along to and I’ll see you next time!

Leave a Reply