All Things Economic

Interesting follow on to the mortgage discussion earlier. I receive a weekly blog from an economist employed by Washington Federal, a regional bank I have a minor business banking relationship with. It's interesting enough to be a regular read for me. This week among other things he outlined the percentage that the average weekly earner needs to lay out for mortgage to afford the median priced home in all 50 states (based on a 30 year fixed mortgage at the current average rate of 3.73% according to Bloomberg). This is only the mortgage P&I cost by the way and does not include insurance or property taxes that a bank would normally include in underwriting. His conclusion: There are only twenty states in which the percentage is 30% or less of income.

This would have been more revealing if the wage figure had been Median rather than average, and family rather than wage earner income.

I'd really like to see a non-revenue generating carbon tax. One that doesn't put any cost on the economy but puts a cost on carbon. My thought would be to calculate a carbon cost at either the energy level or on an input cost for imported goods and materials. The revenue would be returned as a flat rate tax credit to every tax payer.

This approach would not be perfect for at least three reasons. First, the cost added to energy and sucked out of circulation would not necessarily all come back into the economy. But I would argue that the tax credit approach is likely to be stimulative in the same way that pay roll tax cuts are. Many people receiving them will spend rather than save the credit. Second, some people who do not pay income taxes would still pay the tax. I would argue that these people are probably receiving subsidies from taxpayers already that outweigh the taxes they pay. Third, this approach does not take into account people's existing habits. I would argue that it could not only encourage people to change their habits, it could essentially encourage people to become carbon entrepreneurs. The more you economize on carbon footprint, the less tax you end up paying, which means, given a flat credit amount, the more you come out ahead.

In any case, and as the discussion on energy sources both here and in the weather thread point out, for the individual homeowner there is no price associated with the carbon pollution of the type of system they are considering. Not at the consumer level anyway.

"is a good decade past its pull date and was shit to begin with."

True enough.

If it is one thing about Americans, which is very evident on the fora, is that everyone wants their rights, but very few people want the responsibilities that go along with those rights.

I am as clueless about how to change that, except in my own family, as anyone else on here...

The energy question is an interesting one. We are finishing a new home build. Location is the Atlanta area.

We looked at geothermal, and the numbers were not as favorable as we had hoped. We are putting in a large solar array, as well as a backup NG fueled generator (our new place is as far as possible from the substation, meaning that we will be the last to get hooked back up when the power goes out).

By far the most important decisions/investments for us were (a) placing the lower level substantially underground. Plenty of light comes in from clerestory windows into the living spaces on the lower level, but the mechanical and storage spaces are all basically underground; (b) investing in high-grade thermal windows; and (c) paying for the extra foam insulation well beyond code. We still have no power turned on yet but it's fairly startling to see how comfortable the interior spaces are even without HVAC.

It makes sense to look at insulation, heat generation/energy efficiencies from appliances, etc. Irrespective of preference for coal, wood, electric, gas, nuclear or whatever, optimizing the engineering makes sense.

"Everyone wants to eat candy all the time..."

Which, hey, I kinda get, but the candy they're getting with the high fluff equity markets, crap interest rates in quality bonds, and unanticipated consequences in wealth distribution is a good decade past its pull date and was shit to begin with.

I unintentionally hijacked the "How's the weather" topic so figured this might be a better place to discuss energy costs. Once I mentioned I was still burning coal, it got into a discussion of energy costs, which is definitely more economic related. Environmental costs can play into that as well.

In NH, we have about a 5 month heating season and about 2-3 weeks where we need (want) AC, so my heating costs are a much larger portion of our energy costs. I pay about $1200/season for coal, and that usually gives me excess heat from a source that doesn't rely on electricity (in the event power goes out).

Currently I'm sitting in my kitchen and it's 17F and windy and snowing out and I had to open the door to our Great Room (unheated 3.5 season space) to try to get the downstairs half of the house nearest the stove under 80F. This is pretty typical in the winter for us.

I mentioned that I use about 200 gals of oil/month in the heating season *without the coal stove), and when I bought the coal stove over 10 years ago, the price of heating oil was around $4/gal as I recall. At the time, I paid about $1000 for a seasons worth of coal to be delivered and this year it was closer to $1200, over 10 years later. With the coal stove, I burn less oil in the heating season than I do the rest of the year. My hot water is tankless off my oil burner.

Coal demand has dropped a lot so the price has stayed fairly stable. The increase in costs probably have more to do with transportation than anything else. If I lived in Pa, the same coal would be closer to half what I pay here in NH. As I mentioned in the weather topic, I am well aware of why people burned coal back in the day, and why I still do.

I live near a Waste Management transfer station and am able to re-bag and bring the coal ash there, for now.

Everyone wants to eat candy all the time...

"However, If I was going to suggest a way to actively INCREASE wealth disparity in the country, I could not think of a simpler or more effective way to do it than to engage in exactly the sort of policies the Fed has followed over the last 20 years."

Longer than that. This is Bill Clinton, in his first term, upon discovering who really held the hammer: “You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of fucking bond traders?”

It's essentially the same then and now, although bond traders have been somewhat eclipsed by NASDAQ traders.

Speaking of the Fed blowing bubbles, there was an interesting piece by a financial news pundit in my news feed this morning. He was blathering about the recent market volatility and where it might go. He used the term "Fed put" for the action the Fed might take in response to a significant drop in the value of the market indices(what someone like me might call a "much needed correction" , a "Reality check", or "A hell of a lot better than an all out crash". Anyway, his point was that every time the Fed has tried to reign in the market lately and caused more than a ten percent drop (the traditional definition of a correction) they have reversed course out of fear of consumer spending fall out and collateral economic damage. His expectation was that the fed might start to raise rates, or merely continue to talk about it but, if the market drops a few more percent over the current near correction zone it's in now, he would expect the Fed to reverse itself and effectively make the equivalent of a massive "Put" bet on the market, thereby bringing it back up. His assertion was they had done exactly this at literally every correction since 2009. I took him at his word on that.

What I find interesting about this is that Jerome Powell just sailed to re-appointment with a party in power that has, for better or worse - not getting into the politics of it here - done a lot of hand wringing over the increasing wealth disparity in the country. Is that fair to say? They have also explored some fairly strong ideas to change that, notably including a massively complex and radically new "wealth tax". However, If I was going to suggest a way to actively INCREASE wealth disparity in the country, I could not think of a simpler or more effective way to do it than to engage in exactly the sort of policies the Fed has followed over the last 20 years.

@VA

I recall mortgage interest rates around 20% during the Carter Administration, but I wasn't exactly in the market in those days, except for pot and girls.

@SC

I think the underwriting standards have actually come back after the "great recession" but I absolutely think the current bubble is due to low interest rates. If you had one of those books you would note, for example if you buy a median home in the North Seattle area (around a staggering cool $1 million according to Zillow) with 20% down your mortgage would be $800,000. At 2.9% interest and 30 year amortization your monthly payments would be $3,330 and traditional underwriting principles suggesting total home costs of 30% of your income, and further considering our high property tases and probably PMI, you would need income of north of $140,000 to qualify. That's about 25% over the current median family income in Seattle. Now consider the same mortgage with a historical average rate of 8.0%. The $5,870 monthly payments would require an income over $240,000 to qualify. Simply stated there are a not that high a percentage of people in that area who find a way to afford such a mortgage. The price would have to give. Not really that big a deal in general given that same median home was worth a little over half as much six years ago.

I do believe there is a bubble and I think the Fed blew this bubble.

I remember those books too. I dont remember the interest rate ranges, but they had amortization schedules out to 50 years. Consulted one to estimate our first house in 1998.

Current, I remember them books all too well. LOL.. One thing that has always interested me is how masses of people can demand something be done without first considering the short and long term consequences of the actions they are demanding be taken. A good portion of our economic issues today stem from all the sub prime lending that was done to create the housing boom. We now sit on a housing bubble that could pop at any moment. This is why there is great importance in letting a little air out of it in order to keep it somewhat stable.

I bought a duplex in 1984 and seem to remember the mortgage interest rate being around 14% for our initial mortgage. It wasn't bad buying that high because it held the property value down a bit, and your mortgage only got more affordable as you got yearly raises and you refinanced at lower rates.

@SC

I bought my first house in 1987. 10.375 percent. Thirty year fixed. I couldn't believe my good fortune. I had a good laugh a few years ago when my former wife asked me to clean a few boxes of books out of her garage. I found a copy of a "Barron's mortgage tables" from the eighties. For anyone under 45 reading this, these were dense books about four inches wide, nine inches high and maybe an inch thick. On the right axis of a page they would have dollar amounts. $1,000, $5,000, $10,000. Then increments of $10,000 to $100,000. Then increments of $100,000 to $1 million. Across the top they would have mortgage terms. Three, five, ten, fifteen, twenty five and thirty year. The whole book consisted of repeated four page groupings of the same thing at mortgage rates increasing in increments of an eighth of a point. So you could figure out what your payment for any loan amount would be by simply adding several entries. That is for a $156,000 mortgage you would add the entries for $100,000, $50,000, $5,000 and $1,000. Obviously these went the way of the Dodo bird when the spreadsheet was invented.

What cracked me up was that the lowest mortgage rate covered by the book was 8.0%. The highest was 22.0. Interestingly 8% happens to be the number that Freddie Mac states as the average rate since they started keeping records. Granted, that wasn't until 1971.

And it's official...the FOMC gave their verdict. If you missed it here's a synopsis of the last several meetings:

"All right Junior. Put away the game console and do your homework.

Did you hear what I said?

Knock that off or there will be consequences!

I'm going to count to three. One...two...three........three and a half...

Did you hear what I said Buster? You're gonna get it!"

The S & P 500 is up 1.78% this morning. Can officially kicked down the road.

And to answer your post TBR, I would have expected something more like what we're seeing: 6-8%, or far worse. This country is drowning in nearly free money and debt.

Another aspect to consider was the interest rates in the 1980's. When we bought our first home in the mid 80s we had an interest rate closer to 10%. Our current rate is 1.9%. this allows for the housing market to increase prices and keep the average payment the same. As for the Fed's I think we will se a .25% rate increase to test the waters. this may be pulled back if needed, but overall I think some rate increase will ultimately settle things back where they should be. All of this sub-prime lending is what got us where we are in the first place. with a .25 even as much as a .5% rate increase I think will have a positive influence on the market.

Interest rates had gone down substantially by the time I bought my first house, but the mortgage was still in the 10+% rate. Inflation has been so flat for so long it's as if any inflation at all is some sort of societal affront, including to the Fed, which I kind of remember being a little more laissez-faire when it came to managing rates in inflationary and deflationary cycles. Okay, a lot more. Since I've been kind of baffled at how they've managed in a low inflation/high hot air in the markets climate, I'm not going to predict anything.

"I always thought trying to buy a median house with minimum wage was a flawed concept anyway, but it's widely reported."

Oddly enough, that's been the expectation of the few recent college interns or graduates that I've hired, none of whom lasted. They felt they should be making enough money for Starbucks every morning, Netflix on weekdays, clubbing on the weekend, car note and own a home all at the same time on an entry-level salary. They also didn't understand the concepts of retail, cost, gross profit, and net profit which undoubtedly relates to their unrealistic expectations.

"Should interest rates go up, housing prices will be forced to go down as the size of the mortgage will need to be reduced to fit the available spending of the buyer"

I don't expect to ever see that happen. Either they'll buy a smaller, older, uglier, more rural (etc.) home, or they'll continue to rent/couch-surf/whatever until they can afford what they want.

I always thought trying to buy a median house with minimum wage was a flawed concept anyway, but it's widely reported.

"massive inflation"

It all depends on what you consider massive. The last twenty years has resulted in the re-definition of a lot of terms that we thought were set in stone not too long ago.

6% unemployment used to be the target. Now that is considered high.

Annual inflation was over 10% from 1979 to 1981. People would stroke out if we had that kind of inflation now. 2020, the last full year on record, was 1.23%.

I would argue that both things are directly related. Should interest rates go up, housing prices will be forced to go down as the size of the mortgage will need to be reduced to fit the available spending of the buyer. Unless of course underwriting standards are abandoned as they were in the first decade of this century. And we all know where that led.

Similarly, rates of return on any income producing asset will inevitably increase with interest rates given the alternative of holding cash. If rates of return increase, valuations have to decrease. They have to, mathematically. It doesn't matter whether you're talking about bonds, commercial real estate assets, or stocks. Of course the latter can appear to defy gravity for a time simply based on the perception of fools.

So the fundamental question is: Is inflation transitory? I would frankly be surprised if it isn't here for quite some time. But then, I have been consistently baffled why it took over 15 years of massively stimulative policy for inflation to arrive in the first place. First interest rates near zero. Then "quantitative easing" (dumping money into the economy by bloating the Federal Reserve's balance sheet first with government bonds, then high quality corporate debt, and then what amount to junk bonds). Finally, we saw massive infusions of direct federal stimulus in response to Covid. After the better part of twenty years of the government and the quasi-governmental Fed throwing gasoline on a smoldering fire, should we really be surprised if the traditional reaction (i.e. massive inflation) actually occurs? I would not be.

The problem with medians is that they are, well, medians.

The house I spent my teenage years in was bought by my mother and step-father for $60,000 in 1970. He made, coincidentally, $60,000 that year.

My mom sold it in 1995 for $285,000.

The people that bought it from her sold on 5/6/21 for $1,076,000, $100,000 over asking price.

This is something many people leave out of their memes.

They say that minimum wage in 1980 was $3.10, and the median home price was $47,200, so a median home was 15,200 hours. By 2020 this had changed to 46,800 hours.

But that $36,000 mortgage cost $544, or 175 minimum wages, a month in P&I. Today's $270,000 mortgage costs $1,290, or 178 minimum wages a month.

I'm not suggesting that that covers all bases; just that the millennial bitching about low home prices in the past are completely unaware of the realities of mortgages at the time.

On the stock market...

What the market looks for is certainty. So if the Fed says stay the course, no interest rate hikes, the market will go up.

If the Fed says interest rate hikes, that kinda already priced in given the last weeks roller coaster, and the market will go up.

I'm in the camp that inflation will ease as the supply chain issues get sorted out. Last year was an outlier, so if you average the two years, inflation is in the 4% range? Another factor in the supply chain issues is that people's buying habits have changed. People are buying more things and fewer services, and the supply chain has not caught up.

We have had very low inflation for a very long time. Having been an adult in the latter half of the 1970's, most people don't really know what inflation is. it goes up a half a percent, and everyone freaks out. It was not so long ago that we had 18% mortgages...

The other issue with inflation is wages. Wages are up, and that is a good thing.