Love, Money + Real Estate #012
Spring Showers Bring Me Flowers - and a Recession?
Greetings, and welcome to April.
The Recession drumbeat got a little louder this week:
This week, the yield curve inverted briefly. The bond market burped and for a moment (not even a day) long-term interest rates were lower than short-term rates, which apparently bends something in the universe. For the past 60+ years, that movement has accurately predicted a near(er) term recession.
Inflation is causing problems everywhere.
The core personal consumption expenditures price index increased 6.4% from a year ago, the largest increase in nearly 40 years. PCE increase 5.4% once you strip out food and fuel.
Euro zone inflation increased 7.5%, another record
Bloomberg estimates that Americans will pay a $5,200 “inflation tax” this year, as prices continue to rise. While Americans are getting higher pay, food and fuel inflation will cost them more.
Meanwhile, Russia is apparently facing a deep recession that will only get deeper. Inflation reached 15.6%, the highest since 2015. Hard to feel sorry about this self-inflicted pain. But the world is so interconnected that Russia’s pain is already being reflected to the far corners of the globe, on all of us.
And while the price of oil fell, it’s still well over $100/barrel. President Biden opening up the strategic reserves may help lower prices at the pump temporarily, but Putin is putting the screws to Europe, demanding payment in rubles. According to Bloomberg, every time the price of a barrel of oil rose 50% or more above trend, a recession followed.
I’m just a financial journalist, but after 25+ years of reporting, it’s hard to imagine how we don’t have a recession after everything that’s gone on in the past 12 years, let alone the last two. The question on my mind isn’t if we’re having one. It’s how big, bad, and long will it be?
Consider: For more than a decade, governments across the world have kept interest rates near zero (while actual interest rates are less than zero) to pull their economies back from the Great Recession and now the Pandemic.
(Notations are mine.) If you look back since the 1950s, interest rates have never been as low as they have since the Great Recession. And for the short period of time the Federal Reserve Bank raised the federal funds rate (2016-19), it caused a slowdown in real estate and new construction which, to some estimates, set back construction significantly (and helped create today’s housing shortage).
Recessions are called in arrears, after GDP shrinks for two quarters. But, it was clear that a recession began just after the pandemic threw 50 million Americans out of work. Are we in another one now and don’t know it?
Welcome to National Financial Literacy Month and Money $mart Week
Every April, the national focus turns to money and how you can spend less, save more and get smarter about investing and building the kind of financial future you want.
Twenty years ago, in 2002, the Federal Reserve Bank of Chicago hosted the first Money$martWeek. At the time, I was working for WGN-TV as a money reporter. The news director for the station, Carol Fowler, went to a lunch at the Fed and dumped a huge pile of materials on my desk.
“You’re the money reporter,” she said. “Let’s see what you can come up with for coverage.”
We ended up doing a special segment every day that week, and every year following, until I left the station in 2006.
Back then, Money$martWeek was only in Chicago. Then, it went regional. Now, it’s national. And, it’s success underpins so much of what has been developed in the fintech industry.
Of which, I’m proud to say, I’m a part: Best Money Moves is my financial wellness company focusing on personalizing the financial benefits you receive in order to help you lower your level of financial stress. If your employees are asking for financial wellness, please reach out. We can help.
This year, I’ll be giving a Money$martWeek talk for YWCA Metropolitan Chicago on April 14th. I’ll provide details and a sign-up link in my next newsletter.
Will I ever be able to buy a home?
Millennials and GenZs are lamenting their inability to buy a home. Not just now, but ever.
Charlie Munger, the 98-year old partner of Warren Buffet, understands their angst and agrees that the path to riches is treacherous for today’s younger generation.
Munger said that successfully navigating the investment world has gotten a lot harder over the past few decades. He also noted that costs of living in many parts of the U.S. are significantly higher than they’ve ever been, even accounting for inflation.
“It’s going to be way harder for the group that’s graduated from college now ... to get rich and stay rich.”
He gave the cost of a home in California as an example. In 1980, the cost of a median home in California was $80,000 ($275,000 in today’s dollars, accounting for inflation). Today, however, the median price of a home in California is $800,000.
To buy a home for $800,000 means you have a down payment of anywhere from $22,857 (3.5%, for an FHA loan, which 23% of first-time buyers use) to $160,000 (20%) in cash. Then, you have to qualify for the loan and have extra cash in reserves. Most first-time buyers put down around 7% of the purchase price, which means financing the rest.
If you’re financing a $750,000 loan at 2.6%, you’ll pay $3,008 per month (not including taxes). If interest rates are at 4.6%, which they are now, it’ll cost you $3,852 per month. You’ll also pay private mortgage insurance or FHA’s version. And, taxes and insurance. You’ll need an income somewhere north of $200,000 per year to afford it and even with that rarified income, you may feel strapped.
About Mortgage Interest Rates…
And, this may be the place to note that mortgage interest rates hit nearly 5% last week. They’re about 4.7% now, which is 2% more than a year ago. Combine that with skyrocketing housing prices, and buying a home this year will cost you 40% more than last year.
More Real Estate News
So, in addition to getting closer to a Recession, are we in a housing bubble? In a paper published this week, the Federal Reserve of Dallas says it is seeing real-time signs of a housing bubble.
While admitting that the underlying causes of a possible housing bubble are different from those that caused the housing crisis, they’re concerned that housing prices exceed what the economic fundamentals justify:
Price-to-income levels are rising, but are not yet “exuberant.” In other words, people are starting to pay more than they should (or can afford comfortable?) for their homes.
Housing prices have escalated far beyond where they should based on rent. “The theoretical benchmark is the fundamental value of housing based on the sum of discounted future rents.” According to the paper, “The gap between the actual price-to-rent ratio and its fundamental-based level in the U.S. has grown rapidly during the pandemic—comparable to the run-up of the last housing boom—and started showing signs of exuberance in 2021. The exuberance statistic confirms that recent increases are far from ordinary.”
What’s causing this? Low interest rates, perhaps. But the FRD says drivers include pandemic-related U.S. fiscal stimulus programs, COVID-19-related supply-chain disruptions and associated policy responses.
Oh, and FOMO - fear of missing out. Because if housing prices only ever go in one direction, and we’re still missing 5+ million of them (according to the National Association of Realtors), there won’t be enough housing to go around.
Still, you’ve got to be worried when the Federal Reserve uses the word “exuberance” more than 5 times in the same chart. (Thankfully, we’re not talking about irrational exuberance….yet.)
Since writing about unaffordable rent, we’ve been inundated with questions about what to do if you can’t afford your rent. Unfortunately, I think we’re in for more. Here’s what we’re writing about across all our websites this week.
I Don’t Have a Lease and Can’t Afford the Rent
First-time Buyer Homes out of Reach
What is a Good Amount of Condo Reserves? I’m told an answer that every buyer can tap into is coming on the market in a few weeks. Watch this space for a product review.
And, given that it’s now April and your taxes are due soon, here’s a primer on Real Estate Property Taxes.
Inheriting a Property in Pennsylvania
Sell the Farm or Lease the Land?
Special Assessment Insurance Coverage
Read Your Condo Docs Before You Buy
Your Home Inspector Missed Something…
From Best Money Moves
Closing the Gender Retirement Gap: How Financial Wellness Can Help
The Top 12 Workplace Trends of 2022
And, be sure to watch our latest: WEBINAR: 2022 Workplace Trends
On a Personal Note…
April showers bring May flowers, but what happens when you’re inundated in March? I guess that’s where Costco, Trader Joe’s or your local florist come into play. My sister has sown her seeds in her temporary greenhouse, but I enjoy having some color on my counter. These colors remind me that Spring is well on the way and soon my garden will showcase the same.
Wishing you some warm, sunny days, and a few showers (only at night).
Terrific message, thank you