BuildersOutlook2022Issue4 - Page 7

ECONOMICOUTLOOK

2022Issue4 BuildersOutlook

ECONOMICOUTLOOK

7
Elliot Eisenberg Economic & Policy Blog
Elliot Eisenberg , Ph . D . is a nationally
acclaimed
economist
and
public
speaker
specializing
in
making
economics
fun ,
relevant
and
educational .
Payment Pain In March 2021 , the median house price was $ 326,350 and the interest rate on a 30-yr mortgage was 3.10 %. Assuming 20 % down , the monthly payment , excluding taxes and property insurance , was $ 1,115 / month . Today , the same house costs $ 375,300 , or 15 % more , and the interest on the same 30-yr mortgage is 5.00 %, 61.3 % more . As a result , the new mortgage payment is $ 1,612 / month , an increase of $ 497 / month ! The priced-out phenomenon is real .
the Fed to keep raising rates . Given that the Fed might raise the Fed funds rate as high as 3.25 % and maybe 4 %, and assuming the yield curve remains very flat , that suggests that mortgage rates should peak at 5.7 %, possibly 6 %.
Purchasing Predictability Historically , new home construction and auto sales were generally good indicators of the economic health of households . Now , less so . With supply-chains a mess , input prices up dramatically , and labor in short supply , lower-priced product is not much being made , and sales are now more
indicative of which firms have better supply-chain control . This loss of insight is most unfortunate as housing and cars are quite interest rate sensitive .
Fed Funk Fed Chair Powell points out that in 1965 , 1984 , and 1994 , the Fed raised rates and a recession didn ’ t ensue . However , in all those cases the Fed was preemptive and was trying to prevent inflation from rising . Now they need to push inflation down , way down , a much harder task . To wit , the Fed has never raised rates enough to lower inflation absent a recession . Will this time be different ?
Energy Excise While there ’ s talk of temporarily eliminating the national gasoline tax , which has been 18.4 cents since 1993 , don ’ t do it . With the average price of gas now $ 4.25 / gallon , the savings would only reduce gasoline prices to a still hefty $ 4.066 / gallon . Worse , it encourages consumption , drains the Highway Trust Fund , and reimposing the tax will be difficult if gas remains expensive . Lastly , will consumers really see all the savings ?
Beijing Battles Chinese exports are softening , real estate is sinking , the stock market is tanking , the Central Bank is easing policy , and 45 cities with 373 million persons , representing 40 % of GDP , are living under full or partial lockdown , up from 23 cities and 193 million people a week ago . Consumer spending is declining and the regime has announced the first Covid deaths in eons . Xi ’ s 5.5 % GDP growth target is laughable .
Lease Losses While most office buildings have not experienced large increases in vacancies due to the longterm nature of leases , this year leases for 243 million square feet come due , 11 % of all US office space ; the most ever in a year . The current vacancy rate is a post-pandemic high of 12.2 %, up from 9.6 % in 2019 . Inquiries by potential tenants are down 50 % from prepandemic levels and rising rates don ’ t help .
Rate Rise With the 10-year Treasury at 2.8 %, based on historical relationships , a 30-year conventional mortgage should have a rate of 4.5 %, however , it ’ s now over 5 %! I suspect that this is because investors expect