The case against a rate cut

I personally would rather see more normalized rates and agree artificially low rates perpetuate asset bubbles and wealth inequality. The last sentence is both and argument for and against - as govt debt levels get higher it leads to perpetual cycle of debt service driven debt, although when that becomes a problem is kind of hard to say.

 

WSJ wasn't exactly and advocate for high rates under Trump. Their soft reporting generally said "Trump wants to cut rates which some economists say might be bad"... or something like that, so its hard to take their analysis seriously.

 

Interesting article. The unprecedented era of zero rates absolutely had an outsized benefit on the financial industry. In particular, investment management firms.

I don’t buy the argument that came at the expense of the middle class. When they first cut rates to zero way back in 2008, there was no shortage of housing supply. Stating that the middle class didn’t benefit from the natural boost the rate cut gave to all equities would imply the middle class doesn’t have 401k’s. And the government wouldn’t have issued as much debt if rates were higher… Not buying that at all.

I actually think your argument in the last thread on this is stronger than this opinion piece. Rate cuts are the easiest way to revitalize an economy and everything looks pretty good now. Unemployment is 4.1% and who knows if that is “maximum employment”, which would be the part of the dual mandate that would warrant a rate cut.

You can make very good arguments for and against a cut. But all signs are that they are going to cut it.

 

land, labor, and material costs for housing are all increasing. the biggest cost factor to help with cost besides drastic reduction in average dwelling size is mortgage interest rates to overcome the housing shortage.

cost of gubmnt debt and pensions. more to interest, less to principle

 

I agree. I couldn’t afford to purchase my primary residence in Coral Gables even if rates drop down to zero. The pandemic literally caused it to double in value, which is great on paper but everything else also doubled so if I sold it I would just have to buy another equally overvalued house and double the size of my mortgage.

But increased housing supply and affordability is absolutely something we all need.

 

The interest rate today is about what we paid for our first house 25 years ago. Difference is, it was $90k back in 1999. Today, it's worth around $300k. It was a nice starter home, about 1,500 sq ft.

The argument for a rate cut is the need for more affordable housing. A .25% rate cut on a $300k loan is worth about $50/month. A .5% rate cut, about $100/month. Not huge, but could mean the difference for some of those living in a starter home today to be able to move, and for others to be able to buy the starter.

 

Employment and inflation are the dual mandates the Fed is supposed to base decisions on (which I’m guessing you know since you seem educated on this topic). They would almost have to at least make an argument that 4.1% is too high to justify cutting rates when inflation is above their 2% target. I think they have done a tremendous job managing our economy during the crazy time since the pandemic. I’ll support the decision either way (good thing is the Fed isn’t political so doesn’t need or care about my support). 25 bps isn’t going to really, really matter in the long run, but selfishly hope they cut rates.

 

I don’t want any rate cuts until this housing market corrects.

 

meanwhile, all federal wetland permits in Florida are in never ending limbo, billions of contracted sitework is not starting, new lots are not beign developed, builders are going to hit that wall in 6 - 12 months when that site work isn't done. All that is going to decrease available supply in 12 - 24 months and drive prices higher as the new supply that was in the pipeline is not stuck behind the ACOE plug.

not sure if you are tracking this or not but it is going to have major impacts in Florida. we are over two months post submittal and we do not know who our reviewer is going to be, only that it will be changing soon.

 

Yeah I agree. I have enough monetorist in me to believe fed regulates money supply for price stability. Ultimately long term creating money doesn’t create growth, it’s just more money chasing the same goods/services. Having said that it isn’t that simple and there are certainly timing and behavioral impacts involved.

 

Bad news from the industry..labor, land, material costs all up

 

Very interesting. I keep myself away from that news for my own sanity as I want my house to be a home more than an investment. Zero crime in my area and my kids can walk to an amazing elementary school. I figured some form of policy (in addition to all the NYC transplants post COVID) were driving the prices up.

 

If rates don't drop, rents for everything from office to storage to apartments will continue to increase. It doesn't just affect single family homes.

 

Increasing productivity drives the economy and lower rates drive investment that drive productivity. It is an interesting point that low rates drive bad investments and keeps unproductive businesses in operation longer though. Not sure on that one. My gut would be that the volume of investment that drive productivity exceeds those that just hang around too long.

And yes, investments typically make the rich richer if you dont have a systemic way to share the rewards. We do not.

 

Lower rates allow a developer to charge a customer/tenant less and still pass underwriting requirements. True some bad deals get financed at a 4.5 rate (2022), but many good projects are DOA at 8.5%. Especially when banks are requiring 1.3 loan coverage. 6.5 would be a great long-term commercial rate, IMO. Thats where I expect it to settle in a couple years. I think there's going to be some abysmal economic news around the time of the election. The bottom has fallen out of the used boat and rv market in the last couple months. It's coming.

 

But the money has to go somewhere. If people decide they dont need a home at high prices they'll spend it on something else juicing the economy. Americans arent saving money because stuff is expensive. They spend a bit more than they earn always and its just a matter of what to spend it on. That's why productivity improvement is important.

 

This hasn't impacted the market...yet...