Fed and rates in 2022

WoodsidePaul, thanks for the interesting analysis. Higher mortgage rates are already here. As of yesterday, conforming 30yr fixed averaged 4.7%.

The Fed and the market both think we’re headed for an inverted yield curve, FWIW. At this point, they’re hoping it won’t trigger a recession.

>> Now that Fed seems to have included "Income Inequality and Equitable" growth in their goals if not not in the main mandate, it will be very tricky to raise rates as the people will complain about the affordability of housing.

Somehow, I think low income households are more concerned with inflation. Food, fuel, rent. Gorging yourself on cheap money, cheering the resulting inflated asset valuations, and complaining when the punch bowl goes away are pass-times of the affluent.

WoodsidePaul, what made you go with XLE for your cash as opposed to a more generic / broader index?

I am not allowed to own individual stocks.

The broader market is overvalued. Too many companies without earnings. I mainly look at value. So many justify the market P/E via the low yields, but if you think bond yields are rising that means the valuations need to correct too.

Late 2020 Exxon took a non-cash charge when oil was negative. Looking at their quarterlies, it was obvious that the industry was trading at a 10 P/E once that charge rolled off the trailing 1-year. Furthermore, I follow oil inventories as part of my job and it was obviously going to be tight even before Ukraine. Also, I bought above a 4% dividend yield and it was clear to me the dividend was safe.

I am not allowed to own individual stocks.

The broader market is overvalued. Too many companies without earnings. I mainly look at value. So many justify the market P/E via the low yields, but if you think bond yields are rising that means the valuations need to correct too.

Late 2020 Exxon took a non-cash charge when oil was negative. Looking at their quarterlies, it was obvious that the industry was trading at a 10 P/E once that charge rolled off the trailing 1-year. Furthermore, I follow oil inventories as part of my job and it was obviously going to be tight even before Ukraine. Also, I bought above a 4% dividend yield and it was clear to me the dividend was safe.

I am not allowed to own individual stocks.

The broader market is overvalued. Too many companies without earnings. I mainly look at value. So many justify the market P/E via the low yields, but if you think bond yields are rising that means the valuations need to correct too.

Late 2020 Exxon took a non-cash charge when oil was negative. Looking at their quarterlies, it was obvious that the industry was trading at a 10 P/E once that charge rolled off the trailing 1-year. Furthermore, I follow oil inventories as part of my job and it was obviously going to be tight even before Ukraine. Also, I bought above a 4% dividend yield and it was clear to me the dividend was safe.

>> Now that Fed seems to have included "Income Inequality and Equitable" growth in their goals if not not in the main mandate, it will be very tricky to raise rates as the people will complain about the affordability of housing.

"Somehow, I think low income households are more concerned with inflation. Food, fuel, rent. Gorging yourself on cheap money, cheering the resulting inflated asset valuations, and complaining when the punch bowl goes away are pass-times of the affluent."

Nada, What you say is true in high home price area like NYC and Cali but there are many areas with house prices $300-600k with limited rental options. While the buyers are not low income statistically they are in $80-$150k household income range (middle income). They are the ones who will complain the loudest.

Thanks, WoodsidePaul. Seems like you are not one to engage in my aforementioned pastimes of the affluent.

@nada: "don’t think you can read anything from those top marginal tax rates. ".

There's a bit of apples/oranges comparison between the data we cited, as I provided the range, and the tax foundation provided average numbers, and I (and 300's link) was citing federal rates, while the other article accounts for all taxes. (I will assume Piketty, et.al are methodologically correct, -- I'm just saying we are using different reference points for our numbers). But see footnote 3, which parallels my original comment.:

"It is worth noting that, per the Piketty, Saez, and Zucman data, the tax rates of the top 0.1 and 0.01 percent of taxpayers have dropped substantially since the 1950s. The average tax rate on the 0.1 percent highest-income Americans was 50.6 percent in the 1950s, compared to 39.8 percent today. "

In both cases, there's the significant caveat of a) what range/type of income does that apply to (because it has varied) and b) as nada pointed out, the variety of tax reduction/aversion schemes has also significantly changed.

The only basis for my objection to paying 40% of my income in taxes is in where it goes (overseas via various methods).

>> Nada, What you say is true in high home price area like NYC and Cali but there are many areas with house prices $300-600k with limited rental options. While the buyers are not low income statistically they are in $80-$150k household income range (middle income). They are the ones who will complain the loudest.

30yr fixed rates were above 5% at the end of 2018 with FFR at 2.5%. It wasn’t the end of the world, and inflation was running at ~2%. If we’re tallying complaint levels for guiding Fed policy, complaints about 8% inflation are universal. Old people always complain the loudest, and I think they care a huge amount about inflation and very little about cheap money.

It wasnt the end of the world when mortgages were higher in 2018. According to FRED they never eclipsed 5% (but were close). Also, nationally housing rose 40% since then. Understanding the Manhattan market didnt see those gains because there was a strong sunbelt phenomenon and the city was a Covid loser relative to the burbs.

Ah, you're right about rates according to Freddie Mac data (as compiled by FRED). I had been looking at data from Optimal Blue (as compiled by FRED). Both conforming & jumbos slightly eclipsed 5% in 2018 according to that.

https://fred.stlouisfed.org/series/OBMMIJUMBO30YF
https://fred.stlouisfed.org/series/OBMMIC30YFLVLE80FGE740

In the 72 months between july 2014 to july 2020 the case shiller index rose 33.5%, a rate of 4.94% per annum. July 2020 saw 30-year rates below 3.25% for the first time ever. 17 months between July 2020 and December 2021 the index rose 27.3%, a rate of 18.6% per annum. The rates juiced the market and housing got way ahead of itself, beating inflation and incomes by a wide margin.

WP, it's possible that the increase in "housing" wasn't rate- but Pandemic-driven.

Remember that Case-Shiller measures the price of single-family homes in a metro area -- exactly the kind of housing that got popular as people panic-shifted out of their co-ops and condos (which are not included in the index).

It is a national index, so the urban to suburban shift is less pronounced nationally. For transactions to occur, buyers need to be willing and able to buy. I know that COVID caused willingness, but affordability indexes are about to go crazy in respect to ability to afford these housing prices. Again, a lot of the data is national and it is harder to get a bead on the NYC apartment market where mortgages may be less important. Towhat extent can Manhattan prices decouple from wider metro NY where prices is crazy and mortgages are common?

Just speculating here, but I felt that most of the people that left the cities to buy in the suburbs were renters. Perhaps they were on the fence, or their hands were forced to make a purchase in the suburbs where there's a lack of suitable rental inventory.

I would have thought it was both rate- and pandemic-driven.

As a data point, I looked up Case-Shiller in LA to compare their condo index (up 20%) against their single-family home index (up 30%). Both have similar amounts of LA migration baked in, so you could say that only 1/3rd of it was the pandemic-based shift to single family homes. You could argue that the rest of it was rate-driven. Or it could have been some other pandemic-driven reason beyond the shift to single-family homes. Whatever it was, WP’s “willing and able” idea still applies.

We just had a client lock at 3.5% 30-year fixed with no points, 120 days with free extensions. That was with Chase.

Not too shabby.

Nice

Actually it was Wells...

Get it while you can! A couple of data trackers are putting averages for 30yr jumbos at 4.15% and 4.56%:

https://www.mortgagenewsdaily.com/mortgage-rates/mnd#historic-mortgage-rates

https://www2.optimalblue.com/obmmi/

On the topic of Fed / rates / inflation, Ezra Klein did a long interview w/ Larry Summers recently. For those not aware, Summers has been talking about inflationary pressures for over a year, well ahead of most economists. The interview covers a lot on inflation and rates (in audio and transcript):

https://www.nytimes.com/2022/03/29/opinion/ezra-klein-podcast-lawrence-summers.html
https://www.nytimes.com/2022/03/29/opinion/ezra-klein-podcast-lawrence-summers.html?showTranscript=1

Summers expects it'll take much higher rates than the Fed / market is thinking, on the order of 4-5% over the next couple of years, in order to bring inflation back under control.

>> I don’t think we’re going to avoid and bring down the rate of inflation until we get to positive real interest rates. And I don’t think we’re going to get to positive real interest rates without, over the next couple of years, getting interest rates north of 4 percent. What happens to real interest rates depends both on what the Fed does and on what happens to inflation.

>> My sense of this is that given the likely paths of inflation, we’re likely to have a need for nominal interest rates, basic Fed interest rates, to rise to the 4 percent to 5 percent range over the next couple of years. If they don’t do that, I think we’ll get higher inflation. And then over time, it will be necessary for them to get to still higher levels and cause even greater dislocations.

I will give it a listen/read!

Larry Summers is interesting for getting a lot of heat on something where he turned out to be correct!!

However it is not clear in hindsight if being correct about inflation even mattered from a policy perspective.

Firstly it was a mix of fiscal & monetary policy in terms of stimulus & rates at play.

The alternative was to let a lot of businesses go under & sustained mass unemployment due to a once in 100 years pandemic. We still briefly got record unemployment and sustained fairly high unemployment, plus mass unrest and increased violence. We briefly hit 15% unemployment, from a last pre-pandemic print of 3.5%.. we have only just gotten back below 4% (2018-2019 level) since December.

Further, the inflation has been global, and much has been caused by temporary stoppages at factories/mines/etc, plus sustained supply chain delays and constraints. This is not something the Fed has control over. Maybe the Fed should have given Intel money to build more fabs domestically 10 years ago, so we wouldn't have all the semiconductor supply issues impacting other industries? haha.

Lastly the term "transitory" gets thrown around by inflation a lot, both by people in the industry and by the pundit class complaining the experts are all wrong. For the most part when economists have talked about "transitory" they are talking a timeframe measured at the 12-24 month level. A lot of the "its not transitory!!" hype has been complaints that it hasn't all gone away after a few months. In the long run we are all dead of course, so sure, we can agree its painful in realtime.

So it may be a situation of "yeah he was right, but we still shouldn't have done much differently"/

I don't think that's a fair assessment of Summers' record.

Two years ago when the pandemic started, he was certainly supportive of the fiscal and monetary support. It was only about a year ago when he started saying that the Fed should be on the lookout for build-up of inflationary pressures and, if they continue, reverse course. By summer 2021, the inflationary pressures were clear (to him, at the very least). Employment was already pacing toward 4.x% by the end of summer -- that's the lowest it got in 2007, BTW. Most economists agree that 4.x% is full employment, and anything lower will necessarily be accompanied by inflation. On the other side was Team Transitory -- the Fed, Krugman, etc. "Yes, all those numbers are true but this is transitory, it won't spread, so let's continue with 0% FFR while continuing to buy $120B/mo in Treasuries and mortgages even in the face 20% YoY home price increases."

In the end, Summers sure seems to have called it right so far. We have inflation across the board in non-transitory categories unrelated to the supply-chain issues related to goods -- wages, rents, services, etc. With the benefit of hindsight, Team Transitory (Fed, Krugman, etc.) have all publicly said they should have done it differently (in 2021, not 2020) just like Summers was saying.

Fundamentally -- and Summers explains this in the interview quite well -- Fed policy can only affect the demand side in 1-2 year timeframe. There is very little the Fed, or anyone else, can really do about supply on that horizon. If demand is low relative to supply, you can pump money (in various ways) to increase demand until it meets supply. That's 2020. If you pump too much, you create demand that exceed supply -- and supply cannot really catch up quickly. That's 2021. More demand chasing the same set of goods yield inflation. So in order to suppress inflation, you have to suppress demand, or at least stop stoking it with actions that result in negative real yields across 30 years. The Fed now thinks they can turn this thing around by having less negative real yields, or zero real yields. Summers thinks they let it run too far for too long in 2021, and now it'll take positive real yields (over short horizons anyways). Some pundits here think (via 1% rates against 3-5% inflation expectations on the 1-5 year horizons) will do the trick.

On the supply side, the only lever the Fed has applies to the long term (per Summers). Keep inflation slow and steady, with demand support, so that businesses can plan for the long term. If you let inflation run wild and gyrate willy-nilly, that makes it difficult for business to plan expenditures that will pay off several years in the future, and you hurt supply.

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Some pundits here think <> (via 1% rates against 3-5% inflation expectations on the 1-5 year horizons) will do the trick.

//correction//

Some pundits here think //even more negative yields// (via 1% rates against 3-5% inflation expectations on the 1-5 year horizons) will do the trick.

Leal Brainard decided to try to pop the real estate bubble singlehandedly today. I wonder if she was trying to preview what will be some very combative Fed minutes released this week. US 10-year govt bond holders lost a half a year of yield in the bond price action today (+15 bps yield). Mortgages will be reported above 5% this week (Freddie Mac 30-year rate).

It is interesting looking at buy vs rents now. Lets see how much Manhattan prices are impacted of if rents keep increasing so all of those $1.5 Million / $3k maintenance places go to $10k so the ratios make sense (doubtful).

An interesting theoretical debate here from the past year or so related to RE values in the face of inflation. Some viewed RE as a hedge, because rents and therefore RE values would increase, while inflation ran amuck. The Fed would not counter with higher rates and/or the increase in rates would not be a drag on RE prices. I guess we’ll now see if such theories have any legs.

Also interesting that no more than 8 months ago, I started a thread about what would happen to mortgages and RE values if/when the Fed stopped buying Treasuries/mortgages and raised Fed fund rates above 0%. A surprising number of people considered that an implausible situation for the foreseeable future. Yet here we are.

https://millersamuel.com/charts/manhattan-co-op-condo-average-sales-price-v-mortgage-rates/

Circling this topic back to Manhattan Real Estate: anyone have a guess how much maintenance payments would have to go up if these coops have to refi their underlying mortgages 2% higher? I am looking at ~$1.5 million 2-3 BR units with ~$3k monthlies and wonder how much of that is going to mortgage interest now that mortgage rates are nearly double. I appreciate that many buildings will not have to recast the rate for 5-10 years.

Here’s what 30yrs had to say on the topic last August:

https://streeteasy.com/talk/discussion/46917-new-purchases-arm-rate-expectations
A number of Coops have zero underlying. Then there's the last Coop I lived where my pro rata share was close to $300k. In the middle you've got buildings like 250 Mercer St where the average unit has about $125k. A 2% increase in the interest rate would necessitate about $200/month maintenance increase on top of whatever increase was needed due to operating increases, RET, etc. In an environment of downward pressure because of those same increasing interest rates I think that hit would not be inconsequential.

https://www.nytimes.com/2022/04/16/business/economy/housing-market-interest-rates-prices.html

The Sky-High Pandemic Housing Market Finds Gravity Does Exist

Mortgage costs have jumped as the Federal Reserve has raised rates. With higher rates come fewer offers.

This is an interesting observation from the article:

They are hoping prices will cool off, but while they wait rates, rents and the cost of everything else is going up.

Increases in the Fed’s policy rate, a tool that combats rising inflation, might even temporarily do the opposite in the current housing market: If first-time buyers find that climbing mortgage rates and home prices put owning a home out of reach, they may linger in apartments or single-family rentals for longer. That will pressure the rental market, where prices are already increasing rapidly.

Apart from making it harder for people to pay their bills, higher rent could also make it harder for the Fed to drive inflation lower. Rents are used to estimate housing costs overall in the Consumer Price Index and drive about a third of the inflation measure.

“If the Fed is looking for the housing market to help it cool inflation off, that’s the wrong place to look,” said Nela Richardson, chief economist of ADP Research Institute.

At the moment, the Fed has obviously shifted to an inflation-battling stance. Markets are now expecting 10-11 hikes through year-end (total). 10yr bonds are approaching 3%, fixed rate 30yr conforming is over 5%, and ARM resets in late 2022 to 2023 are expected to come in at 5-6%. Fed’s unwind of the $9T balance sheet, holding ~30% of all bonds & MBS, seems like it will happen, which may put further upward pressure on rates.

Question for people here: what does the rest of the decade look like w.r.t. rates? Obviously, no one really knows so it’s all just guesses. In the predecessor thread from last August, most people were in the ZIRP-forever camp. Do people think that we’ll revert to ZIRP in a couple of years after inflation has been dealt with? Will the new normal be rates at 2-3%? Or will rates settle higher, at 3-5%?

I'm more interested in what you think about that last paragraph nada, I don't really have clue.

Wondering what up to 11 rate hikes does to the stock market over the next 6 to 18 months?

Hmm, how about at some point in the next year or two a deflationary wave hits, and does part of the job for the fed?

Keith, I don’t really have a clue either but always happy to put out a guess.

I generally respect the opinion of the market, and the market expectation is for 2-3% interest rates going forward (with error bars, of course). My gut feel is that the era of ZIRP is over. A few factors came into play over the past couple of years.

One question that seems settled is that the seemingly infinite Fed / govt spigot does indeed eventually stoke demand to the point of inflation. I.e., ZIRP and $1.5T/yr bond buying in the face of 5% unemployment does not end well. The rates of the past couple of years were driven by such policies, IMO, and it’s pretty clear that you cannot have them in place forever. I don’t think the Fed will be eager to repeat that mistakes anytime soon. (To be clear, I’m not talking about putting them in place initially but rather not removing them earlier.)

On the demand side, I think we are going to see elevated demand this decade compared to the last. Part of it is pandemic-driven. After being locked down for a year or two, fearing for their lives, people have become eager to splash around money. YOLO has taken on new meaning. Spending habits tend to be sticky. Sure, if you don’t have the money you don’t have the money. But spending vs saving habits can shift fluidly. I also think people feel like ZIRP will be back soon enough, given the experience of the past decade, which can drive demand / spending. If you think you’ll be able to refinance at half the rate in a couple of years, then you might be inclined to make a purchase you would otherwise not make.

On the supply side, I think we are going to continue seeing constraints. The current supply chain issues will eventually abate, but the reduction in the labor force seems real. The pandemic has made many reassess their work/life balance, in favor of life. For better or worse, it is “work” that creates supply, not “life”.

@inonada - I think you have hit on something there re: work-life.

I know quite a few people who have looked at their work-life balance over the last 2 years and decided it’s time to “lean out”, to use a term in opposition to the Sheryl Sandberg “lean in” book. Whether this means exploring/improving their life/hobbies/connections outside work, taking a sabbatical, checking out of a high-stress job.. etc.

Also know a few people who got surprise outsize bonuses/raises & felt suddenly flush but without much to spend it on. My friends in this bucket have the nice problem of “what am I gonna do with this money”, since cars are a 6+ month wait list & marked up, houses/apartments are in short supply and obviously run up plus mortgage rates++ .. Those that didn’t pull the trigger by late 2020 ~ spring 2021 have decided to sit tight.

The irony of course is that for people at the high end, the food/energy price inflation doesn’t matter, and now that interest rates are going up.. they will benefit too as they have high savings.

I don’t know many who have decided after 2 years of pandemic that they need to buckle down and really aspire to climb that corporate ladder faster/stronger. Maybe it’s demographics as I am talking the 34-45 year old range, and pandemic created an early mid-life crisis for some.

Steve, For your friends with too much money - Have a kid or two in private school. In NYC it will burn $70k post tax per year per kid. And donate the rest of the excess to educational causes for K-5 poor kids.

300, I’ve said before that I wouldn’t send my kids to private school. But I find the following curious. I look at that figure, and as a “large” expense, it “only” adds up to $1M over the lifetime of a kid, the price of a typical Manhattan 1BR. People routinely dump multiples of that into Manhattan RE. Speaks to the debt-fueled mindset of era perhaps? The money to the school is spent, but the RE only costs interest, never the underlying capital.

Steve, I certainly get that sense from what is “out there”. Where I work, I don’t sense much of a shift other than a greater likelihood of reassessment. A number of people have been “what am I gonna do with this money” for a long, long time. For the most part, they just keep working because that’s what they (presumably) enjoy doing, and they made their peace with that long ago. One such person finally retired, partly due to age (“I enjoy the work, but is this what I want to continue doing for my last 30 years on earth or so I want to try something else?”) and partly due to circumstances (natural transition point for the business). But that’s the normal pace.

There were also examples of lean-in as a result of pandemic-forced introspection / mid-life crisis in some. “By this point in my life, I think I should have accomplished more. I need a change, to work harder, etc.”

This is not a high-stress environment, people enjoy the work, and there was always work-life balance. But in places that was missing, I am guessing there has been more of a shift.

>>The money to the school is spent, but the RE only costs interest, never the underlying capital.

You can look at that at $6k extra rent. Say people paying $10k per month for a decent 2 bedroom and now that rent is $16k. In terms of buying, there is a market asset price and people expect to at least preserve capital overtime for basic luxury apartments. Not sure what people's mindset is about returns when they buy $3k+ plus sq ft new development. I would think at least good 50% of them look at that as partially as an expense just like when they buy art-work which they do not have any intention to sell ever.

>> In terms of buying, there is a market asset price and people expect to at least preserve capital overtime for basic luxury apartments.

Sure, as I said, the time value of the capital is considered to be zero. $10K rent => spent. $6K private school => spent. Capital sunk decades with zero real return => capital preservation.

>> Not sure what people's mindset is about returns when they buy $3k+ plus sq ft new development. I would think at least good 50% of them look at that as partially as an expense just like when they buy art-work which they do not have any intention to sell ever.

Their mindset is probably not that different than their brethren buying $1.5K+ ppsf apts. In your mind, you seem to picture completely different human beings with totally different mindsets. The reality is that a 2x span in income / purchasing power only spans a 3x difference in the number of people at that income. Same set of people, only somewhat more rich.

Nada,
Figure 6 .
https://sgp.fas.org/crs/misc/R44705.pdf
I think you are going from less income than top 1% in Manhattan for $1200-1500 per sq ft apartment to higher income than top 0.1% (almost 4x increase in mean) for $3k per sqft plus new development. Wealth difference is higher than income multiples.

I am curious about data which is more specific to Manhattan showing Income/wealth and apartment value percentiles for say $1mm and above apartment value segment.

Means of “top X%” are not a great way to gain insight into income / wealth distributions because the top 10%, 1%, 0.1%, etc. all include (say) Bill Gates. These distributions follow a power-law tail, as observed by Pareto in the 19th century. An easier way to obtain the fit is from income thresholds. For example, using the fourth figure from:

https://www.chicagobooth.edu/review/never-mind-1-percent-lets-talk-about-001-percent

You have thresholds at:

1% => $0.4M
0.1% => $1.6M
0.01% => $7.5M

You can see a ~4x income vs. ~10X population relationship, which means ~2x income vs ~3x population. Ratio is close between 10% and 1% thresholds (2.5-3x) but obviously totally breaks down between 100% and 10% thresholds.

For Manhattan incomes, the best source I know is NYC income tax data:

https://a860-gpp.nyc.gov/downloads/m039k727z?locale=en

You can see, for example, 42K filers in the $0.5-1.0M bucket vs. 17K in the $1.0-2.0M bucket. That’s 2x income vs 2.5x population.

For apts, I think SE is your best resource.

To me, the right way for such an analysis is not so much a (say) $1M+ threshold. Below a certain square footage, people tend to want space over quality. E.g., it is the rare person who prefers to spend $2M on a 650 sq ft 1BR at $3000 ppsf over a 1300 sq ft 2-3BR at $1500 ppsf. So few people build / sell it. Once you get to (say) 2000-3000 sq ft, people spending double start preferring higher quality over more space.

So one way to look at this is availability of (say) $3-4M apts priced at $1250-$1750 ppsf, versus $6-8M apts priced at $2500-$3500 ppsf. Same sized apts, double the price. When I ran the search, I saw equal numbers of apts available in each search. Im guessing you can do the same with closed sales.

My main point being this. Income/wealth distributions run a vast range. A 2x difference in price is just not that much in the scale of things, to lead to wholehearted changes in the mindset of the population that falls into one bucket vs the one next to it.

Point taken on wealth vs income distributions. Lemme see if I can get data on the former…

That was easy. Looking at thresholds from the first table, it’s about the same:

https://economics.princeton.edu/working-papers/top-wealth-in-america-new-estimates-and-implications-for-taxing-the-rich/

5x wealth vs. 10x population, compared to 4x income vs. 10x population.

Nada, isn't the above (2016) data so old as to be useless? Pre-Trump tax breaks, pre-high-flying stock market, pre-Pandemic increased success of certain "walled garden" professions?

I doubt it, FP: it's a slow-moving process. The NYC data is from 2019, the most recent it's available. The 2016 version is available too, but I don't have the energy to run the precise numbers.

For example, here is the GINI index (a single-number measure of inequality on a scale of 0 to 100) for the US:

https://fred.stlouisfed.org/series/SIPOVGINIUSA

You can see that it increased from 40.0 to 41.5 between 1999 and 2019. I'm guessing it's crept up from there. To put that in perspective, globally across countries the index varies from mid-20's up to low-60's:

https://worldpopulationreview.com/country-rankings/gini-coefficient-by-country

I’m not even sure the Gini went up during the pandemic given the huge labor supply squeeze, minimum wage hikes, massive stimulus, child tax credits, etc that helped the lower/middle end of scale substantially as well. Look at retail& dining who are still short on labor and offering well above the newly hiked minimum wage with roles unfilled.

My doorman was just talking about buying a $50K german sedan so life can’t be too bad out there, lol.

Everything is sort of melting up still, if there was a lot of pain at the lower ends I think we would see softness in low end real estate / car pricing / less labor market tightness / etc that we still are not seeing.

When the music truly stops though, there is always disproportionate pain in the middle/low end.. and then we could see Gini spike.

Nada, Thank you for the link to the articles.

And rates keep grinding higher. 10-year Treasury 2.92%. 30-year fixed 5.25% (Mortgage News Daily).

Steve are you seriously comparing a $3k/family child tax credit to stock market gains (I'm using the S&P here) of 93% during the Pandemic?

fp - Please don’t cherry pick?
1) You are comparing the brief pandemic bottom to the top
Pre-pandemic Feb 2020 to now is more in the 30-40% gain in 2 years which is good but not unprecedented 2 year return?

2) Did I list CTC alone? No. There were other one-offs like multiple rounds of stimulus.
Plus rent/student loan moratoriums.
But most generally - employment is at nearly all time highs, with wages gaining like we haven’t seen in a long long time. Obviously a lot of this wage increase is catch up on previously suppressed wages - but that would mean the gini would be going down now, not up.

I didn’t even mention the paper gains that a lot of middle class homeowners presumably saw in the last 2 years on their primary residence.

“A rising tide lifts all boats” and all that..

When this all shakes out and the labor market tightens in 6-24 months or whatever, then we will probably see the pain & increased inequality.

I think a lot of public sector and other union contract renewals are going to be telling. Private sector 2022 a lot of people saw pretty much 10% baseline raises against an 8.5% inflation rate. Unions are going to want & deserve double-digit increases.. whether they get them or not will be indicative.

I’d go a step further and say -
Given the complete inability to get your hands on even an old used car without paying crazy markup.. suburban house price bumps, gaming console shortages..
Plus the insane YOLO trading in “meme stocks”, NFTs, crypto scams, by the younger cohorts via Robinhood & other apps etc across the board the last 12-18 months would indicate the average American is doing pretty alright financially, and also, quite bored.

It feels a lot more like 1999/2006 than 2001/2009 out there right now.

FP>> Steve are you seriously comparing a $3k/family child tax credit to stock market gains (I'm using the S&P here) of 93% during the Pandemic?

There is a difference between Gini on income vs. Gini on wealth. At first, I thought Gini on wealth would have increased because of the stock market, as you suggest. But then I thought:

1) Stocks gained 40% over the last 2 years. But even the top 0.01% are only ~50% in stocks. So that's a 20% gain in wealth at the top.

2) As Steve says, home prices bump the middle by a lot. In 2020, median net worth was ~$120K. Median home price was ~$330K. The 33% bump in home prices is a $105K gain. If the median person owns the median home, that's an 90% gain. The median person probably owns less than the median home. Let's call it a 40% gain? Point being, it's higher than 20%.

3) Someone at the 10th percentile had a net worth of $0K in 2020. Someone in the 20th percentile, $6.4K. Various stimulus, when combined with reduced pandemic spending, can boost that a lot percent-wise. Adding $3K on top of net worths that range from negative up to $6.4K for 80M people can move Gini a lot more than increasing the top 3M people by 20%.

Not saying inequality is not present, rather that if you are considering changes to wealth inequality you have to compare changes relative to existing wealth. Pro-rata changes in wealth lead to zero change in wealth inequality, even though the absolute changes are tilted toward the wealthy, just like the wealth.

Too many variables and not enough data on sensitivity to mortgage rate change and/or inflation rate change

NYT article catching onto the idea that rising rates create short-term pressure on inflation via rents:

https://www.nytimes.com/2022/07/11/business/economy/rent-inflation-interest-rates.html

Last time the US was in this situation of high inflation / rising rates in the 70’s & early 80’s, home prices figured into CPI directly. Cooling / reversal on home prices won’t be helpful this time around. The change in the CPI methodology likely made CPI less reactive to Fed rates because of this. For ~40 years we saw one side of this change, now we’ll see the other side I suppose.

Nada, You nailed the inflation report!!

I dunno what I nailed, but sheesh. Market is putting next Fed hike at 1% with 80% probability. Rent CPI sure isn’t slowing down at all:

https://fred.stlouisfed.org/series/CUUR0000SEHA#0

That component is extra-sticky because the calculation uses all rents being paid, not just new leases, and therefore incorporates rents from leases struck 1-2 years prior.

CPI also uses "Owners Equivalent Rent" which is a ludicrous calculation.

The choices seem to be:

A) OER
B) price * interest rate +
C) price +

Part of the problem with (B) is that as the Fed raises rates to counter inflation, that cost goes up and increases inflation. Tentative was part of the motivation of the switch to (A). But as we are seeing now, (A) has the same problem. We’ve actually been seeing it in the other direction for ~40 years (lower rates dampen rents), but no one really paid attention.

I figure (C) would provide the tightest link between Fed policy / rates and CPI. I wonder why that isn’t done. It would probably lead to more stability in inflation and home prices. Stability in home prices yields stability in home construction / supply. As it stands, increasing rates not only increases demand as measured by CPI (through rent pressure), but it also dampens supply via downward pressure on home prices (and therefore incentive to build). Long-term, it all smooths out, but just seems like a suboptimal way to wire such a major component of GDP & inflation. Generally, lower volatility / greater control lead to better economic growth, I would think.

Fed doesn't want to include asset prices in inflation. I think you are making a case that at least some weight should be given to Home Prices as some part of home prices does translate into rents but not all. Prime example will be NYC rents going up significantly last year where prices haven't.

>> Fed doesn't want to include asset prices in inflation.
What constitutes an asset? Most cars purchases are financed, just like most home purchases. Both provide value over many years, with the value decaying over time. In one case, CPI uses the purchase price entirely. In the other case, CPI uses the lease rate entirely. Why? I don't know the right answer to this, I'm just asking.

You might say that homes are assets because their prices are volatile. I'm guessing that has to do with the fact that it's not part of CPI. Make it CPI, and the volatility would come down because the Fed would respond to it, and the force of rate changes would be direct. Alternatively, switch car CPI to use lease payments and I bet you'll see car prices become volatile. That wouldn't be a great idea, because then automobile manufacturers would be exposed to boom & bust cycles in producing the same car from one year to the next. Why is this a good idea for home builders?

Cars depreciate despite routine maintenance and periodic repairs. Average car value after 10y is probably 20% range of new. Houses do not if routine maintenance and periodic repairs are done.

CPI was changed in 1983 to shift from home payments to Owner's Eqt Rent.
https://www.bls.gov/cpi/additional-resources/historical-changes.htm

How do they calculate "OER"?

@300 - agreed on cars but there been some very very weird pandemic wealth effects that probably did not get captured in some government stats

Basically the used car market went upside down and many cars actually appreciated or at least slowed depreciation. Enough so that even though you have financed the car for 4-6 years, the depreciation is slower than you pay down principal.. so even financed cars built equity.

Personally I'm about to trade in a 4 year old car for about 85% of what I paid for it new..

A lot of middle class 2 car households probably got a surprise 10-20k car equity bump in the last 2 years.

Steve, Indeed and once the supply chain problem with chips going into cars is resolved in the next 6-12 months, it will be back down to normal along with some other supply chain related issues (ex oil). But Fed wants unemployment uptick even thought they can't broadcast is too much politically.

Current rates from Wells Fargo:

Loan Type MI Type Interest Rate Discount Points APR
Jumbo 30-year Fixed 4.500% 1.000 4.597%
Jumbo 15-year Fixed 4.250% 1.000 4.418%
Jumbo 5-year/6-month ARM 4.125% 0.750 4.278%
Jumbo 7-year/6-month ARM 4.125% 0.875 4.274%
Jumbo 10-year/6-month ARM 4.250% 1.000 4.345%

Wow. Thank you posting that. I assume that you can get further discounts of 25bp plus if you have very good credit score or work for a big company who Wells offers special deals. 4.5% Jumbo is pretty good.

Or deposit money with them

So in NYC jumbo we went from 3% to 4.25/4.5%. Not a small increase but nothing as bad as headline non jumbo mortgage of 5.5%.

https://fred.stlouisfed.org/series/MORTGAGE30US

https://youtu.be/yVRIulNEwGE

So consistent for Jumbo around 4.5% from Citizens as per the above video. Most 2 bed room and above market is Jumbo in Manhattan and for condos in BK.