We Gotta Get Out of This Place
The 1965 hit song by the Animals “We Gotta Get Out of This Place” is the theme to this week’s economic opinion. The song talks about the desire for a better life and escaping the hum drum working class existence. Prices were rising at that time faster than wages and the economy was in the midst of a 10-month long recession. The Republicans, Richard Nixon, were blaming the democrats for increased spending and tax cuts (not a political statement but just showing the parallels). Unemployment rose above 7%. FED funds had risen from .50% in 1961 to over 4% by 1965.
Sounds eerily familiar, doesn’t it??? Unemployment is beginning to rise; wages are not keeping pace with rising prices…especially in the housing market and we have a Federal Reserve looking for a 12-month average for inflation to fall to 2% before they begin to cut rates which I have explained before is pretty much not mathematically possible in the next 6 to 12 months. However…we are beginning to hear that some FED members are now beginning to look at a broader set of data like rising unemployment, falling retail sales, consumer debt rising to all-time highs, credit delinquency rising and maybe inflation moving to more manageable levels. The Federal Reserve has had a history of over doing things and their “soft landing” objective may not be achievable once again unless they start looking at the overall economic picture and not just trying to get inflation down to 2% on a 12-month average basis.
The logical answer is to start cutting rates sooner rather than later based on the total MACRO economic data before we do find ourselves deep in a recession. The American consumer has pushed their credit cards, non-mortgage and or auto debt to levels we have not seen in our lifetimes as they continue to spend money they don’t have giving us an artificial picture of our retail sales numbers. We saw retail sales decline this past month. Is this beginning of consumers maxing out their credit cards??? While the FED cutting rates will not solve the issue of the overextended average citizen, cutting rates will certainly help them make those payments a little easier and not drive them to bankruptcy. Cutting rates will also help the affordability in housing. A drop from our current 7% levels to 6% will save someone on a $500,000 30-year fixed rate mortgage over $300 per month. A drop of just 1% in mortgage rates will help many who have benefitted from the rapid rise in equity in their homes over the past 5 years to possibly use that equity to refinance and payoff their current debt that they are paying over 20% in interest every month. The savings from paying off consumer debt and moving it to a 30-year fixed rate mortgage could save thousands of dollars in just a one-year time frame and hopefully they will have learned from their past mistake and not repeat the process that got them into financial trouble.
The answer is simple…given the overall macro-economic data…admit you (Federal Reserve) were wrong, and your 2% goal is not achievable and that the overall economic data points to easing rates sooner rather than later. While I am pretty much sure we will not hit my 6-rate cut mark this year (even though it should have happened)…I still think 3 cuts may still be in the cards…It will certainly get our economy back on its feet.
Remember… the BEST RATE… IS A LOCKED RATE… with a float down… ask me about our program that allows you to lock your rate and then float down if rates move lower.
Make sure you (or your buyer) get pre-approved before looking at homes so we can determine if you are looking in the correct price range and have you armed to submit an offer with a pre-approval letter!
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Blog post date: Thursday, May 16, 2024