September 19, 2023 – The Fed Is Costing the Feds Money

Economic Commentary

The Fed Is Costing the Feds Money. We had a pretty sharp upturn in rates in August. Since then, interest rates have remained elevated. It was a bit unexpected because most market analysts were predicting rates to ease a bit in the second half of the year. This was not the way to start out the second half of the year if we expect rates to fall. Of course, the economy being so resilient in the face of rate increases by the Federal Reserve was a surprise as well. A stronger than expected economy has the markets expecting rates to stay higher for a longer period of time.

Another factor contributing to higher rates which is directly attributable to the Fed is the US government borrowing so much money. Pandemic spending and the pandemic recession have contributed to soaring government deficits, which must be financed. Exacerbating the problem is the fact that every time the Fed raises rates, it has become more expensive to finance the deficit. And that higher cost creates more deficits. In 2023, interest on our debt is approaching 15% of total federal spending – or close to three-quarters of a trillion dollars.

Thus, higher rates are not only costing consumers more money, but the government as well. And they are contributing to higher rates in a classic “catch-22.” The Fed is meeting today, and they will decide whether to raise rates yet again. We are quite sure they are aware of the math we just presented. We don’t think this factor will cause the Fed to hold rates steady from here, but many analysts believe that another pause may be justified. Of course, what they say about the future of interest rates is what really will move the markets when they make their announcement tomorrow.

Weekly Interest Rate Overview

The Markets. Rates rose again last week as the economy continues to show strength. Retail sales growth exceeded expectations and core inflation rates were slightly higher than forecasted as well. For the week ending September 14, 30-year rates rose to 7.18% from 7.12% the week before. In addition, 15-year loans decreased one tick to 6.51%. A year ago, 30-year fixed rates averaged 6.02%, a bit more than 1.0% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates inched back up this week and remain anchored north of seven percent. The reacceleration of inflation and strength in the economy is keeping mortgage rates elevated.”  Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

City centers are struggling to fill the gap left by commuters who now come into the office a few days a week, if at all. These workers were patrons of downtown businesses, from restaurants to dry cleaners. Without them, offices are desolate and businesses are shuttering. To save these downtowns, cities are trying to turn unused office space into housing. San Francisco officials are making efforts to adjust current building codes and get rid of extra fees for office-to-residential projects. In Washington, D.C., the mayor wants to put more money into a tax relief program for office conversions. Even cities like New York, where many companies have offices, vacancy is becoming a problem. Office vacancy in Manhattan was 15% recently, according to real estate investment firm CBRE. “The commute has crushed a lot of people’s willingness to trudge into the office every day,” said Jason Alderman, the head of real estate giant Hines’ New York office. He said Hines’ buildings within a half-mile of the major transit hubs Grand Central and Penn Station have higher occupancy rates than others. But, he added, “buildings that are catering to people — making it exciting to come back to the office or easy to come back to the office — are winning.” As demand for other office buildings decreases, Hines is considering office-to-apartment conversion projects. Alderman said the company is actively bidding on properties. Converting an office building into a residential space can be difficult, and that’s when the building already has the right structure to work with. A lot of buildings don’t — they’re too wide, or have the wrong kind of windows, which makes conversion more expensive. But politics may be a greater factor in a project’s success. Even as cities try to entice developers to turn office buildings into apartments, they’ve also installed obstacles. In New York, strict zoning rules already impact which buildings — and in some cases, how many floors — can be converted into housing. Rezoning a property for residential use can be timely and costly. Alderman said approval also requires support from politicians, who often add requirements for affordable housing a developer may be unable to afford. Source: NPR

Throughout the U.S., homeownership has been a big part of the classic American dream, and deemed the pinnacle of success to many. But for a great deal of Americans, saving up for their first home can take a long time, especially in today’s volatile housing market. A survey from Shane Co.’s The Loupe revealed American homeowners rent for an average of five years before purchasing a home, as 37% of respondents intentionally delayed their homebuying journey due to affordability, being intimidated by the homebuying process, or other personal reasons. While Americans are likely to have to rent longer before pulling the trigger on purchasing their first home, it gives people time to save up for a down payment. The study found the top reason Americans delayed purchasing a home was a lack of funding, as nearly 50% of respondents cited affordability as a primary cause for delaying their homebuying process. Some 33.09% cited that the process was too overwhelming, followed by uncertainty in where they wanted to live (25.43%). An estimated 20.99% of Americans feel homeownership is too stressful, while 20% said they waited until they got into a long-term relationship to purchase a home. More than 17% said they simply did not want to commit to one place, stopping their home search altogether. Source: MReport

A recent Axios/Ipsos polling on retirement finds that about one in five Americans believe they will never retire. Financial worries are the main reasons people feel they can’t retire. When it comes to how Americans finance retirement, few feel Social Security will cover most of their expenses. Instead, most Americans—both retired and those who aren’t—look to retirement accounts to finance this life stage. Interestingly, majorities of retired Americans lean on pensions in their retirement, while few Americans who aren’t retired plan to do the same. Likewise, many Americans report never talking to friends, family, or a financial planner about saving for retirement. Most Americans feel that the point of working hard is to enjoy retirement and spend time with friends and family. Majorities of retirees say it’s easier to take care of their mental, emotional, and physical health after retirement, while fewer people who aren’t retired agree. Most Americans who are retired say they feel better than ever now that they’ve retired. Among the people who don’t think they’ll ever retire, a decisive majority (70%) say that they won’t ever retire because they can’t or won’t be able to afford to retire, versus 19% of people who just don’t want to retire (an additional 10% picked ‘other’ as a response). Source: Ipsos