Interest Rates Are Going UP?!?
Interest Rates Are Going Up?
When it comes to interest rates… We have had it pretty good recently… I know what you are thinking, is this guy crazy?
But interest rate stability is a great thing and to me means that we have had it pretty good! I mean look at that graph! We peaked out in the third week of October last year… But since then there have been some ups and downs… It’s pretty level.
Yes… Don’t get me wrong, when you look at rates from a 5 year period… The current interest rate environment sucks… But what if I told you that the tea leaves are showing that interest rates are going up this Fall? With one of the top lenders in the country projecting an interest rate environment in the 8% range!
Real quick, my name is Jeff Chubb and I am a recovering investment banker turned real estate agent that has sold more than 1,000 houses. If you are new to the channel then I appreciate you considering subscribing and if you are thinking about buying or selling a home… Then you should definitely reach out!
So what tea leaves are we talking about… Well we don’t have to go far to look at some recent news that puts the Federal Reserve in a real tough position.
It all starts… and kind of ends with the economy and its strength. People thought the economy was starting to slow signs of slowing down which meant that inflation would subside and the FED could take a continued breather… or even consider cutting rates.
Durable goods unexpectedly soaring doesn’t help with that argument. It actually kills that argument. Experts expected durable good orders to FALL by .9% in May. However they ended up being up by 1.7%... That’s a 2.6% swing from the expectation. That is a BIG move.
And to make matters worse… That is the third straight month of Month over Month growth and it has now pushed year over year growth to 7.3%.
So durable good orders are up… Which means businesses and consumers are still spending like drunken sailors which means that inflation isn’t going anywhere.
This is not the bad news that the FED was hoping for.
Then there was the US New Homes Sales data… Again, expectations were that New Home Sales would be down by 1.2% in May. But they skyrocketed to being up by 12.2% month over month.
This is the third straight month of month over month gains and this is just crazy… but this month's data now sends New Home Sales up 20% year over year.
I thought we were told that the increasing interest rates were going to collapse the real estate market, especially the new home sales and it’s builders.
I guess the builders missed that memo as housing starts jumped 21.7% month over month in May. This 1.631 million housing starts was the highest number since April of 2022.
That is a worry for the FED, but the real thing that most likely made them shake their heads in disbelief was that U.S Home prices surged in April. All 20 cities in the Case Shiller index saw prices increase. They were expected to go up by .4% month over month, but ended up going up by .91%. Now if you have watched a video before… You know that Month over Month real estate pricing data is dumb. It’s the year over year that matters because real estate pricing follows trends.
Prices going up for housing is not what the FED was looking for in order to tame inflation.
But here is the key to it all… And why interest rates need to continue to go up and will go up this Fall… It all revolves around the money supply in our economy.
Our money supply would need to decrease by $4 trillion dollars or 22 percent in order to return to normal levels. The irresponsibility of COVID money printing is still in our economy. Inflation isn’t going anywhere. And the only tool the government and the FED has to decrease money supply is increasing interest rates. Period.
And they have been making some headway. Negative money supply growth has now happened for two months in a row. And this is the largest contraction we have seen since the great depression.
A 10% drop puts a small dent in this issue… But at the end of the day, it’s only a dent.
The FEDs actions are working. Banks are less enthusiastic about making loans. But that credit crunch is mostly affecting small businesses and middle class households.
So here is the question. Is the FED serious about inflation and getting this number down to 2% and are willing to cause a more serious recession. If so, then they have a lot more work to do and interest rates are going up this Fall.
If they are not serious about it and are willing to sacrifice higher inflation rates for a smaller recessionary dip, then maybe they will stay just where they are.
Personally, I think there is a middle ground. They are going to be serious, but then the political headwinds are going to be too much and they will flinch… It is an election year next year afterall. This means rates going up in the Fall and then some market stimulation in the Spring.
I just don’t believe the FED truly acts independently.
But there is a good chance that those 30 year fixed rate mortgages that people are calling high right now… Could look like a bargain just three to four months from now.
Until next time.