What is going on with Real Estate and Interest rates? This is a question that many are asking right now, including myself. I started in the mortgage business while I was in college in the early 1980s, so I have seen a lot about the industry. My father was in the mortgage business before me so you could say I grew up in the business. I received my bachelor’s degree in economics and started full-time in the mortgage industry in 1986. Things have changed over the years in the business, but the core of the business has remained the same. When I started in the business there were no computers and everything that is now printed by a computer was hand typed and there were no fax machines or cell phones at that time either. From a technological standpoint, there have been many changes but the way we qualify a potential home buyer for a home loan has not changed. The Stock Market’s DOW Industrial average was around 2500 in the early 1980’s so things have changed there as we are over 38,000 today. I have observed many changes, some for the good and some not so good but overall up to this point in my life I can say the business cycles have been pretty consistent.
What I am seeing now is something I have never seen, nor did I think I would see in my lifetime. Like I said above the business cycles have been pretty consistent over the decades until now. With all the economic data I see and more importantly, what I am observing is happening right now is scary. I have always trusted the economic numbers that have been spoon-fed to us from the government until now. Yes, I have lost confidence in the system I helped create throughout the years. When the executive branch of our government stands in the public eye and lies directly to us I have to believe that everything that doesn’t fit their agenda is a lie and that is very sad for America. When I hear the powers at be say that Bidenomics is working and America is thriving I have to call B.S. We all know that things cost more than ever at the store, at the gas pump, and with housing so why is it that the powers at be say otherwise? I try my hardest not to get into politics on this blog but is has gotten to the point that I have to bring it into the conversation as this is why the Real Estate markets are sluggish and interest rates remain high.
My observations in the Real estate markets are that people want to buy but with prices so high and interest rates that are too high, they can’t buy. Inflation has made the cost of everything go up and the value of the dollar goes down. So, when prices of Real Estate should have gone down with higher interest rates and lower demand, we have seen Real Estate values stay the same and, in some markets, continue to go up. The reason for this is that inflation has caused the dollar to go down so much that housing prices have stayed the same which means that they have gone down as inflation has eaten away the buying power of consumers. To put in in other words as inflation makes the price of things increase it also devalues them in that fewer people can afford to buy them. What higher interest rates should have done without inflation is to cause fewer people to be able to afford housing thus slowing the demand and making sellers of real estate have to lower prices in order to sell. As we have observed with the higher interest rates over the last 2+ years Real Estate prices have not reduced as they should have or were intended to do. They have stayed steady or have gone up and this is due to the inflation or the devaluing of the dollar which is the same thing.
What is going on here, you ask? It is pretty simple from my standpoint, but I am not sure our education system is actually teaching these concepts for the younger generation to fully understand. To be clear, how the dollar devalues is simple economics. The government is spending more money than ever, thus putting more dollars into the world economy. When you have an oversupply of anything the value of that item will go down and that is what we are seeing with our US Dollar. The national debt has risen over the last 3 years from $30 trillion to north of $34 trillion consumer debt (Revolving debt credit cards) has risen to historic highs of over $1 trillion in the US alone. This means that every Citizen of the US bears the liability of government spending. When we send Billions and Billions of US dollars overseas this becomes a double whammy in that there more dollars are in circulation but no benefit to the American Citizen. Ironically a lot of the money the US is sending overseas is to protect the borders of other countries while our borders are wide open. This poses many problems for our economy, the most obvious problem is that as more dollars are pumped into circulation the value will continue to decline, thus inflation. You may have heard that” core inflation” has come down which we all know to be a lie, however, core inflation is the price of those goods that exclude energy (gas and fuel) and food prices which is what most middle-class Americans use the most. When your cost of living goes up so high that you can only afford food and housing you have lost wealth and wealth potential.
How do we get out of this cycle of lies and deception from those we used to trust to give us the truth and who are constantly lying to us? I would say vote them out and start over, however, deception, lies, and corruption have taken over the media, social media, and the voting booth. You see when the average citizen loses confidence in the voting system, we have lost our constitutional Republic. When you hear that the United States is a democracy it is not, it is a Constitutional Republic, that is the kind of rhetoric we are hearing that is either a lie or something they want you to believe. I am tired of people blindly believing everything they are told; we need some real changes quickly or our way of life we grew up with will be gone forever. We as a nation are as close to a tipping point as ever before in our history and my fear is that with spending for foreign wars, out-of-control illegal immigration, and corrupt leadership we are very close to something we all should fear. What we need to do is to come together to see what is happening right before our eyes and collectively do something about it. If we don’t stand united, we will fall divided.
To conclude, the Real Estate and Mortgage Markets are being drastically affected by the ridiculous monetary policies put forth by the current administration. With out-of-control spending outside of our own country, cutting oil production in our country, and starting foreign wars we stand to be in this type of crazy economy for a long time without some significant changes. My next big concern will be a crash of the stock market due to American companies not being able to profit like they have been able to in the past. We must also watch the emergence of the BRICS monetary system that Russia and China are spearheading this could cause further inflation by the devaluing of the dollar on the world stage and if the BRICS system replaces the US Dollar as the world’s reserve currency, then we have more problems than I can write here. This has not been covered in the media and is one of the biggest threats to the US Dollar in our lifetime. This could also be one of the underlying reasons it seems we are marching into World War 3 to prop up the dollar. To think how many people will die in a war so the US Dollar is protected when other moves could have been to avert this situation. This is a very pivotal time in our history, and it seems that our media is more concerned about who’s feelings are getting hurt rather than the hard-hitting stuff we all know is going on and we should be concerned about. So, if you are reading this I hope you understand the magnitude of what I have written and I pray it doesn’t get censored in our so-called free society.
PS
I fear we may have gone too far with out-of-control corruption to the point where the economy as a whole is suffering from incompetent leadership. If we don’t get immigration under control we will have too many people trying to get the same jobs and the same housing that American-born people need. As it is those same immigrants are getting government checks or taxpayer money to compete with natural Americans for housing, food, goods, and services not to mention that these people have not been investigated properly at the border so there may be bad people that could hurt Americans or damage property or worse we don’t know. This is causing a higher demand for housing and the longer it goes on the more it will hurt the American people. Crime is also rising in the cities where these migrants have gone and is getting worse every day.
FHA Loans were born during the great depression in 1933. The idea of the government insuring a Real Estate loan, at the time, was groundbreaking. In today’s world, we expect the government to step in and try to fix things when the economy is sluggish or depressed. In 1933 our government was far less a part of the ordinary citizen’s life and it did not financially take care of its citizens like they try to do today. So when the private sector was approached by the government to insure mortgages that were traditionally insured privately by large down payments was a groundbreaking concept. At the time Banks and Brokers were the only way to get a home loan and they required that a potential home buyer put 25-50% or more down to buy a home. So when the government said they would insure mortgages up to 95% of the value of the home, you can imagine how this changed the way Real Estate Loans were originated. It was designed to stimulate housing growth to get the country out of the grips of the Great Depression. It worked, along with a whole new age of people relying on the government to help them when things were tough. Out of the Great Depression, we also got a welfare system, unemployment insurance that the government collected from employers to help with displaced workers and a whole litany of other programs that expanded the scope of the Government. The Federal Housing Administration (FHA) was designed to be a short-term way to get the housing markets stimulated to get America out of the Depression. The program still exists today, and you can take full advantage of it and you can get a mortgage up to 96.5% of the purchase of a home.
Today FHA loans are still alive and well and are used still today to get people into homes with a small down payment. FHA loans are still viable loans for those who have a small amount of money to purchase a home. The way an FHA loan works is very similar to Conventional Loans in that a potential borrower must qualify for the loan with their income and a current credit score. When we say qualify there are several factors that a lender must review in order for a client to “qualify” for any loan. These factors are but not limited to having shown the ability to handle credit or in today’s world, have a credit score that meets the criteria of an FHA loan (550 or better). Generally speaking, FHA loans are more liberal when it comes to having a good credit score than that of its Conventional counterpart that requires a 640 score or better. If a borrower has a low credit score due to circumstances out of his or her control and has shown that they are trying to take care of it and that is the only factor with regards to their financial situation they generally can get approved for a FHA Loan. There are several other factors that must fall into line before that can happen, however. For instance, a borrower’s house payment combined with their monthly bills should not exceed 43% of their gross monthly income. This brings us to verifying income and what is required by FHA. First, a potential borrower must have a two-year history of working which could be multiple jobs or a combination of school and a job, and must be able to show that their income will be stable enough to maintain the mortgage payment. Next, a borrower has to be able to prove they have enough money for the 3.5% down payment. This money can come from savings or can be a gift from a relative a close family member or friend, or an approved Down Payment Assistance Program.
We talk about FHA loans being federally insured loans, but what exactly does that mean when you have to pay the mortgage insurance on an FHA loan? Simply put there are two payments to the insurance fund a borrower will have to make; One the upfront insurance is 1.75% of the loan amount (Sales Price minus the 3.5% down payment requirement) this is actually added to the loan so you don’t have to come out of pocket for this; Two the monthly payment of the mortgage insurance is a small percentage of the Loan amount every month. These insurance payments go into pools that are designed to protect the lender’s yield on the loan if there is a foreclosure. This insurance makes FHA loans more appealing to lenders and thus lenders have more flexible underwriting guidelines and can get more people into homes utilizing the FHA Loan.
Talking about flexible Underwriting guidelines your eyes probably just rolled to the back of your head as this may sound confusing. Not to worry I am here to help break it down to simple bullet points that you may not have heard of before. Being evaluated for loan approval seems daunting but that is why we have a team of folks to walk you through the whole process. Our highly qualified loan originators will walk you through the process. The Loan Officer will gather your pay stubs, tax returns, bank statements, and W2s and they will do the analysis for you. Your loan officer will check your credit, check your debt-to-income ratio, and make sure you have enough money verified to close the transaction. The loan officer’s job is to paint your financial picture with your financial information and present it to the underwriter, who will approve your loan. Our Loan Officers do this every day, multiple times, so they are experts at what it takes to get an FHA loan approved, so When you are looking for expert advice and guidance please let us walk you through this process.
The benefits of using an FHA Loan are:
Now that we have explored the history and the benefits of using an FHA loan you may ask: “How do I apply for an FHA Loan?” At MAE Capital Mortgage Inc., we have over 38 years of experience working with FHA loans, so we should be your logical choice, not to mention our interest rates are better than the rest. Simply click on this link and you can start the process or call us at 916-672-6130 and we can do it for you over the phone.
Here we are in the middle of 2023, had to believe. This year has been one of the slowest Real Estate Markets we have seen since 2009. We are experiencing record inflation for the 21st century of the like we have not seen since the early 1970s. This tells us that the cost of goods and services has risen faster than most people’s income streams have. What does this mean for Real Estate now and into the second half of 2023?
Based on the history of inflation you see the Stock markets go up due to the fact that the valuations of companies tend to go higher with inflation. We have seen this throughout history and this time is no exception. What you must be cautious of is when companies’ costs rise so high and the demand for those goods or services decreases thus income for those companies will also decline. After this companies will have to lay off salary-based employees to keep up with the rising costs and when this starts to happen you will see the economy fall into a recession or worse depression.
Inflation is such a killer of economies in many ways not just with the higher costs of goods and services but also with the availability of money with higher interest rates. Over the last year and a half now we have seen interest rates move from historic lows for 30-year fixed-rate mortgages from the 2%-3% range to now a 7%-8% range. What this has done is cut out a whole segment of the population’s ability to qualify for a new home loan. In California, we have starter home prices hovering around $500,000 on average for the state. What the higher interest rates have done is cut the people that could have qualified for this house. For example, the payment on a $500,000 house with 5% down at a 3% interest rate is $2002.62 principal and interest at 7.5% Interest rate the payment would be $3,321.27. At the 3% rate, an average borrower would have to make right about $7,000 a month to qualify for the mortgage. At 7.5% the borrower will have to show around $11,500 a month. This shows you the power of interest rates and buying power.
That said you would assume that Real Estate prices would have to come down to accommodate the higher interest rates. We saw this occur in some markets but not nearly enough to make up the difference. Today we see Real Estate prices staying relatively steady. The reason for this is interesting. Since so many people refinanced or purchased their homes with lower interest rates, they are reluctant to sell their homes as the can’t qualify for a move-up home, and in some cases, people couldn’t afford the house they are living in if they had to do it all over again. So, we are seeing people holding on to the lower interest rates and not selling their homes as they would have to qualify for a new home under the higher interest rates. With people not selling their homes, we are experiencing a supply shortage of homes on the market and with that low supply of available housing prices have remained steady even with the higher interest rates.
The next hammer to fall, unfortunately, is going to be employment layoffs. This is going to happen due to inflation and government spending that fuels inflation with an oversupply of money. In the second half of 2023, I see consumers holding on to their hard-earned money as the average consumer feels that something is going to happen, they just don’t know what. There are many factors that could fuel inflation, but the biggest unreported issue will be the worldwide devaluation of the dollar. When the world drops the US Dollar as the worldwide reserve currency, all the goods we buy from overseas will cost more and more. This is something that no generation of Americans has ever seen, the closest we got to this was the great depression. The way America got out of that was World War 2 by producing Ships, Planes, Autos, Guns, Ammunition, and such. The largest difference between then and now is that we produce very little in the US, we outsource to China and other countries. History tends to repeat itself, so shouldn’t be preparing for a war? If you are paying attention to the world and not preoccupied with all the social issues going on in our country, you will see how close we are to this prophecy coming true.
I don’t like to be negative, and I truly believe in America and the American way of life, however, I must be a realist with what I know and have seen with history. As the US Dollar becomes less valuable in the world markets this will cause further inflationary pressures on our economy. The only way out of this at this point is to figure out a way to re-set America’s debt to the Central Bank or get rid of the Central Reserve Banking system altogether and start with something new. How this could be done I would not know, but I do know it will be a very painful process to every American. With the BRICS nations and a new world reserve currency on the horizon, America is going to have to do something fast, very fast as that is supposed to launch in August of this year, and over half of the world’s nations have agreed to sign on this new asset-backed currency. Our central Bank is going to try and compete with this with a new Central Bank Digital Currency (CBDC). The problem with this is that even our own citizens don’t like the idea of this as Americans don’t like the idea of being watched or controlled in the name of some made-up government issue like climate control. For more on this please I urge you to do research on this as this CBDC is supposed to come out in July of 2023.
What will a CBDC do to interest rates, housing, and inflation? This is something that remains to be seen but rest assured it will be a rocky ride going into the end of the year. I always say if you can own Real Estate do so as Real Estate will have value. I believe that once people see the changes happening there will be a flight to quality investments like real estate. I will bet the Stock Markets will struggle, to say the least. Interest rates will be dependent on how much inflation we have as interest rates will rise as inflation rises. So, if you are looking for advice as to when to buy Real Estate my advice would be to buy as much as you can now, if you can find it, and hold those properties that you hold currently. Keep an eye on the world and what is going on, and research other sources other than your mainstream media that most of us have grown up on as we are not being told the truth to keep the masses under control for as long as they can. Not that one individual can do anything, but the power of the masses can make changes.
If you are in the Mortgage or Real Estate business currently you are experiencing slow times and you are working harder than ever. I am here to tell you that these slow times are all part of the business cycle that has been disrupted over the last 20 years or so. With all the disruptions to the economy over the last 20 years starting with the rise and fall of the sub-prime era of the early 2000s and the recession that followed the recovery and then the pandemic the U.S. economy has been put the challenge. The Real Estate Industry followed right along with the economic rollercoaster. Having seen the type of market we are in for the first 20 years of my career I almost feel comforted by the normal slowdown of the Real Estate industry after the boom we just came through. In the late 1900s, the cycle for booms and busts was on an almost predictable 10-year cycle, and normal slowdowns during the months of November, December, January, and February (the winter months) were predictable. The change began when we should have had a slowdown in the early 2000s instead the Government came out pushing the Community Reinvestment Act of 1977 in an effort to get low-income folks into housing. Thus, beginning the “Sub-Prime” era of lending with little or no oversight over lending and financial institutions. By 2008 the economy was pushed past the adjustment period it should have had and coupled with financial institutions failing made for a perfect storm.
We know what followed, the crash of 2008, and in a lot of ways it is still affecting the ways we do business in the aftermath of no oversight to the new age of total oversight. Fast forward to today, we are coming off one of the hottest real estate markets since the “Sub-Prime “ era where money was flowing, and this time money was flowing with low-interest rates. So, it is perfectly normal for the economy to take a deep breath. During these adjustment times or slowdowns, you will typically see a consolidation of Financial institutions and Real Estate firms it is a time for the well-positioned companies to gobble up the companies that couldn’t see the change coming. We are seeing both Realtors and Loan Originators depart the business for a steady paycheck. This is normal, and so will be a sagging stock market as the Real Estate Industry is one of the largest manufacturing sectors of our economy and drives so many other industries like construction, home improvement stores, home furnishings stores, and so on. Technology is also affected when the housing industry slows as fewer people are investing in new technology when the old tech is working fine for time being.
This economy is normal but if the politicians see it as problematic for their future, they will do stupid things to try and stimulate the economy. The biggest mistake the government has done over the last few years, pandemic and post-pandemic were to issue “Stimulus Checks”. Putting more money into the economy does 2 detrimental things to the economy down the road, it devalues the dollar and creates inflation. This is where we are at today. As a follower of the economy with a degree in economics, it is not too hard to see the effects of Government intervention in the economy. Unfortunately, there is another way the government can stimulate a sagging economy and I don’t want even to bring this up, however, in light of recent events it must be said. War is a way to stimulate an economy and to keep power.
Ukraine is going to be the war our government will get us into if “We the People” don’t stand up to it. The reasons for this conflict are crystal clear from my standpoint. One: The formation of BRICS (Brazil, Russia, India, and China) is the formation of those countries denouncing the US Dollar and creating a new currency built on a precious metals standard. Since its formation, Saudi Arabia, and South Africa have joined. This could very well mean the end of the US dollar’s dominance as a world reserve currency. Second, is the United Nations, the World Economic Forum, and the World Health Organization and its push for global governance where the BRICS nations are not on board with this agenda, and quite frankly we should not be involved either. Third: Oil and the flow of this resource or more so the control of the flow of oil is what is going to turn out to be a part of this global conflict. I am not a doomsday kind of person, so I am praying that I am terribly wrong and the world turns to peace and unity rather than conflict.
Not to ignore the elephant in the room, but I prefer to stay positive and to look at this time in our economy as a normal economy taking a breath after a very busy and robust time. Going back to the crash of 1929 and the Depression that followed the nation's economy has seen this speed up and slow down pretty consistently. At the beginning of 1941, we were still in the depression but the recovery was well underway, but the end of 1941 December 7th to be exact is when we were officially out of the depression, and in 1945 when the war ended the economy was in full swing and returning Veterans had jobs to come home to and homes where being built and an extreme pace. Things slowed a bit by the end of the 1940s and we entered into the Korean war and things pick up again. The 1950s were a time of peace and prosperity. In 1960-1961 there was a recession caused by the Federal Reserve raising interest rates, then recovery. Then in the early 1970s was another recession caused by “the oil crisis” which also caused the stock market to crash as well. Then we had recovery and in the early 1980s we had the “crisis with Iran” again over oil and there was a recession. Recovery then followed and in the early 1990s due to the stock market crash of 1989, we again were in a recession. The early 2000s had a slowdown but not as much as it should have spurred on by the ease of obtaining money and the creation of the "Subprime Mortgage" era. This led to 2008 which as we know was the worst recession since the 1930s. By 2011 we, as a nation were in recovery mode again. Then in early 2020, COVID threw the country into an economic lockdown to a degree our nation has never seen. To get us out of this recession the Federal Reserve lowered Interest rates to the lowest levels in history and so began the last housing boom. Now we are resting and if we let our economy follow the normal cycle, we should be out of this by the end of the year 2023 or the beginning of 2024.
Invest and buy real estate now while the economy is resting for if you think that interest rates will return to the historic lows of 2000-2021 you would be drastically wrong. We are close to the equilibrium point with higher mortgage interest rates the economy will do far worse any lower we will have higher inflation. It is all guesswork on Federal Reserve’s policy with interest rates and they hope they get it right with respect to inflation. As a Real Estate and Mortgage Professional all I can tell others out there is to stay the course or if you can’t get out and find a steady paycheck. Those that can weather the storm will end up at the top of the food chain when this comes back around and it will, it always has. You see people always need housing and money so those of us that stick it out will be there first when it comes back. So don’t despair get everything in place for the next housing boom and when it comes you will be ready. Those consumers looking for housing now will find what they want a price that they can afford with a payment they can afford.
We know the state of our economy is the worst it has been since the financial collapse of 2008. We know we are having record inflation with no end in sight, and we also know that interest rates are being raised to combat the high inflation with no end in sight. What we are not being told is how to fix this, which I find as odd as the answers are all right in front of us, but it seems like it is taboo to talk about the right way to fix things. We know that gas prices are the highest in history which affects the delivery costs of goods and services. So why is it so hard for our elected leaders to figure out how to solve this problem in these modern times?
We need to explore the reasons why we have record inflation, high gas prices, and high interest rates. We know that the Federal Reserve has only one tool to fight inflation, and that is to raise interest rates. But the big question is why is inflation so high? This can be answered by analyzing where the inflation is coming from and how to fix it. We know that over the last several years since the pandemic started, the government has shut down the economy and paid it’s citizens to basically stay home. All this extra money that has flooded into the economy has devalued the dollar and that has caused some inflation. We also know that Americans have been at the mercy of other countries to deliver goods, pharmaceuticals, computer chips, and oil. This dependency on foreign suppliers has been a challenge as other countries were also under shutdown orders and some far longer than the US. We have all heard about the “supply chain” issues, which is really the big issue that is not being addressed by our elected officials.
We know that when there is a low supply of goods with the same amount of people trying to get these goods that the price of the goods will rise and we have seen this occur in 2022. To compound this issue when the United States slows its domestic production of oil this causes a decrease in the domestic supply of oil and more dependency on foreign oil and when foreign suppliers of oil slow their delivery of oil to the U.S. prices have to go up to slow demand of oil that is not there. With oil prices going to the highest in history this dramatically affects the cost of diesel that is used by the trucking industry to deliver goods to stores for Americans. With higher delivery costs you see higher prices on the shelf for consumer goods and commercial goods. In addition, farmers will have higher costs to run their machines to get the seeds in the ground and when then harvest the food for Americans. Thus, high prices for food as a result of higher costs to produce and deliver our food. Higher fuel prices also affect the individual consumer’s monthly budget as with high gas prices Americans have less money to spend on other goods and services that have raised due to the above.
Knowing this you would think you would have heard more about fixing the underlying problems with the supply of oil, and foreign goods that we are dependent on. It seems all we hear about is how oil use is bad for “climate change” and the Government’s desire to fix this. Granted the Earth is going through changes, but it has been going through changes from the beginning of time. To think that mankind has any control over it is just stupid and is a good excuse for globalists to try and control the masses with control over our basic needs. The proof, for those that live in a city and rarely go out into the world, would be to look at the Grand Canyon and there you can see firsthand how that climate has been changing long before mankind was even present. But I digress for the purpose of proving my point about the control of the masses and this is exactly why Russia and China formed BRICS to stay independent of Globalist's agenda, a topic for others to debate, but the “supply chain” is dramatically affected by all of this.
The way to fix our current economic dilemma is multi-faceted but the overall idea is to focus on the supply side of the economy and not so much on the demand side. The reason for not focusing primarily on demand, like the current administration is, is simply because there will always be a certain amount of demand for basic goods and services, and we are currently really close to a basic demand market. You see the Federal Reserve trying to curve demand by raising interest rates only can go so far then the high interest rates kill the entire market as capital is not readily available for expansion or even normal business activities putting the whole economy into a recession or worse a depression. If the supply side of the economy was being addressed properly, we would see more investment into the expansion of US supplies and farmers. Yes, we must stop being as dependent on foreign goods and oil. We should bring computer chip manufacturing back to the US and we should bring manufacturing back to the US most importantly we need to open up new oil exploration and pipelines to deliver oil more efficiently. We need to look to Hydrogen (the most plentiful element on the planet) as an alternate fuel source and explore other technologies that will curve our oil dependency. Electric cars are good for the short term, but long term they create as much waste as fossil-fueled vehicles. Investing in America and American engineering will be the key moving forward and education of our youth must be paramount for the US to stay independent and take the indoctrination to a certain set of beliefs out of our education system and focus on productivity not emotions as emotions don’t pay the bills. If the supply side of the economy is not focused on the economy will continue to spiral out of control with higher and higher prices for everything.
As most of you know Mortgage interest rates have been rising at a speed at which most people alive today in the home buying market have never seen before. Some of us old timers have seen this before and it is very true that history repeats itself and we should all learn from it. We are going to explore why rates are moving up so rapidly and then we will look at the future and where rates are heading and why. When I say history repeats itself all you must look to is the early 1970s through the early 1980s and see how monetary policy was run. I was a kid in the early 1970s and remember the gas lines and high inflation and interest rates that topped out right around 20% for a 30-year fixed-rate mortgage. During this, the government also set the interest rates for FHA and VA loans and put ceilings on gas prices.
If this sounds familiar it should be as the government has been involved since the beginning of time with free markets and it has never really worked out. In the 1970’s President, Nixon put gas price ceilings in place in hopes to make gas prices go down or at least stabilize them. This failed miserably as when you try to put a ceiling or a cap on prices that de-incentivizes producers from producing. During this time the government was also spending and expanding the government and services the government felt would help the common American. Then to pay for all the spending they were forced to raise taxes across the board and the Federal Income tax rate got as high as 60%. So, Government spending caused inflation, and the taxing of the citizens meant less money the average worker could take home on every paycheck thus they did spend less, and the economy was basically stagnant. During this time the term “Stagflation” was coined meaning a stagnant economy with high inflation. If this sounds familiar, then open your eyes and look around with the Government spending Trillions of dollars on “COVID relief”, the Ukraine war, AKA money being sent to the United Nations. Then we have all heard about the 87,000 IRS Agents they are hiring to make sure they get their money from the average American after they raise taxes on all of us. This type of economics is called tax and spending or Keynesian Economics.
This is poor Monetary Policy from an economic point of view. I can say without one doubt in my mind that if Monetary Policy continues down this road then we are in for many years of high inflation and high-interest rates. The government has totally neglected the economic curve's supply side and focused only on the demand side. The evidence is seen at the gas pump, the grocery store, at the automaker's showrooms, and the list goes on. Current monetary policy is to raise interest rates with the hopes that with high-interest rates consumers will slow their demand for goods and services, which has held true, however, when staples like food, fuel, transportation (automobiles), and housing prices have risen due to normal demand interest rates can’t slow the basic demand for these goods. Couple the fact that we have just come out of an economy that was shut down for basically 2 years the supply of the goods consumers need has been diminished as there were fewer workers to build or produce these basic goods. Since this has caused a shortage in supply and with the same amount or more consumers going after the same amount of goods and services with the same or less ability to produce more goods due to lack of labor and now high-interest rates or a high cost of money to pay for these workers to produce a normal amount of goods you get supply side inflation. If you have heard of this before you are not wrong, Ronald Ragan was the first to look at the supply side of the economic curve and after that was addressed in the mid-1980s the economy was more manageable. Also, with more workers working the government was getting more tax dollars by taxing the workers less and having more workers paying lower rates but more workers paying those lower rates made the government more money. This is a concept that has been lost by our current Monetary Policies which are only looking at the demand side of the demand and supply curve.
I think you now have the knowledge to see where this is all going unless some drastic changes are made. The economy has no feelings and reacts only to what is given to it. I will say without a doubt in my mind that if the supply side of the global economic and American economic curve is not addressed soon interest rates have to continue to rise. The Federal Reserve or our Central Bank only has interest rates to fight inflation with they do not have the ability to address the supply side of the demand and supply curve and without the Government’s policies changing to address this we will continue to see high inflation and high-interest rates. The way out of all of this is to actually do the opposite of what is going on currently. I agree with the Federal Reserve in raising interest rates as inflation is high, however, high-interest rates will not curve the demand and it will only hurt the supply side of the curve as it is costing companies more to have workers with high taxes and high-interest rates. Until the Government addresses the supply side of the curve this will continue to spiral upward out of control, and I am truly convinced that our current government leaders do not understand this basic economic concept. In fact, they have gone so far the other way spending money to “protect the environment” they have basically stopped the expansion of oil production in the United States, and with a low supply of oil you get higher gas prices. Oil is not only used for our automobiles but our roads, plastics, fertilizer, and so many goods are produced from oil that people don’t even realize. The price of fuel is directly related to our food prices, as well, and people may not realize that it cost more to deliver the food on a truck, it also costs more for the fertilizer to grow the food. It also costs more for the farmers to till the fields and harvest the food as that is all done with fuel. We are nowhere close to using electric vehicles for all of this and then you have to ask the question, are we going to need fuel to power generators to make the electricity to power all the electric vehicles? I agree we should be more environmentally friendly, but not at the expense of our way of life, and our economy invest more time to come up with real solutions not a knee-jerk to some environmentalists. The real solution to clean power is Hydrogen as 2/3 of the Earth is covered in water and when you burn Hydrogen the byproduct is water, why we have not gone down this road baffles me, but I digress.
So, I will conclude this by saying if we stay on the current course the interest rates will be around 8% by the end of the year, and by the first quarter of 2023, we will have interest rates at or above 10%. You might think this is a crazy prediction but look at the history of this type of Monetary Policy and see what happened last time. I am not a Doom and Gloomer, I consider myself a realist and everything to this point under the current Monetary policy has not worked or has made things worse. If you read some of my earlier blog posts and the dates, I wrote them you will see I have been dead on. Remember the economy has no feelings it does what it is told to do, all you have to do is look to see what it is being told to do and you will come to the same conclusion I have. Unfortunately, I have no say in how the government creates its policies and if I did I fear I would be called an “Extremist” in my views. We will see sagging housing prices, but the rub will be that no one will be able to afford them with rates as high as they are headed without some income inflation to match the current inflation rate, however, if you make more income but are taxed at a higher rate your net income will have gone down. We live in a world with cause and effect and if the elected people can’t see the cause and effect of their policies then We the People pay the price. If you are a first-time home buyer don’t be discouraged by all this as there are only 2 things you should be concerned about and that is “What is my payment going to be and what is it going to cost me to get the house?” Once you own the home and you can make the payment then it should not matter to you what your rate is if you are comfortable making the payment. When the rates come down you can always refinance to a lower mortgage payment. So now is a great time to buy your first home, but it is now before the rates go even higher because they will be worse before they get better.