If housing costs are cooling why a rate hike?

[DLgal]

The flip side of interest rate hikes is that my Money Market account interest as increased from 030% to 0.47%. The savings account haven't yet though, they are still at 0.30%.

Ally is up to 1.25%. Move your money.

 

[CaptainAmerica]

Groceries and gas are high because prices are being set high, not because demand is outrageous.

That's not how it works. Gas stations and grocery stores are price takers, not price makers. I know everyone likes to beat up on "big oil," but Exxon doesn't run the corner gas station in your neighborhood. Gas stations are owned by individual entrepreneurs, most of them immigrants.

 

[DLgal]

As I understand it, the housing prices are cooling BECAUSE of the rate hike. That's the entire purpose of rate hikes...to make borrowing money more expensive so that people slow down on "investment" buying. When money is cheap to borrow, everyone wants a piece of the pie and prices climb as demand climbs. These rate hikes are intended to slow down this kind of frenzied buying and bring housing prices back down to realistic levels.

 

[CaptainAmerica]

Check out deadweight loss in relation to monopoly and such.

Gas stations are the opposite of of a monopoly. The vast majority of them are locally-owned small businesses and there are millions of them, including hundreds in every city and dozens in every decent-sized town. Setting aside the impact of taxation, because taxation always distorts a market, gas is pretty dang close to perfect equilibrium.

As I understand it, the housing prices are cooling BECAUSE of the rate hike. That's the entire purpose of rate hikes...to make borrowing money more expensive so that people slow down on "investment" buying. When money is cheap to borrow, everyone wants a piece of the pie and prices climb as demand climbs. These rate hikes are intended to slow down this kind of frenzied buying and bring housing prices back down to realistic levels.

Yup. From a homebuyer's perspective, the "price" of the home is not the $500,000 or whatever the stated price is, the "price" is their monthly mortgage payment. If a buyer knows they can afford a $2,000 payment, it doesn't matter much to them whether it's a $500,000 loan at 2.5% interest or a $375,000 loan at 5% interest.

 

[mikehn]

Consumer spending is the biggest contributor to economic activity. As long as people have jobs, they are going to spend money. Interest rates are going to have to go much higher to change the jobs imbalance. I have a realtor friend who says she used to get 20 offers on a property, now she only gets 10 offers on a property. Where I live, people are still partying like its 1999.

 

[CaptainAmerica]

Where I live, people are still partying like its 1999.

Consumer spending stays hot as the labor market cools. Then comes the consumer debt bubble. Then the crash.

Should be lit.

 

[Colleen27]

The flip side of interest rate hikes is that my Money Market account interest as increased from 030% to 0.47%. The savings account haven't yet though, they are still at 0.30%.

This still just blows my mind. I found an old passbook from my childhood savings account that was getting 5%!

That's not how it works. Gas stations and grocery stores are price takers, not price makers. I know everyone likes to beat up on "big oil," but Exxon doesn't run the corner gas station in your neighborhood. Gas stations are owned by individual entrepreneurs, most of them immigrants.

Okay, but who is blaming the gas stations or grocery stores? I think we all understand that they're just a middleman and not the big dogs who are making record-setting profits on the current high prices. A big part of the inflation we're seeing right now has to do with industry consolidation that gives producers immense pricing power. A ton of locally-owed gas stations is nothing more than an illusion of choice when they're all supplied by the same one or two sources.

 

[CaptainAmerica]

Okay, but who is blaming the gas stations or grocery stores? I think we all understand that they're just a middleman and not the big dogs who are making record-setting profits on the current high prices. A big part of the inflation we're seeing right now has to do with industry consolidation that gives producers immense pricing power. A ton of locally-owed gas stations is nothing more than an illusion of choice when they're all supplied by the same one or two sources.

The current state of the petroleum supply chain is the direct product of federal regulation.

I have respect for environmental-types who want us to get off of fossil fuels and transition to a "green" future. I have zero respect for fake-environmental politicians who claim they want us to get off fossil fuels and transition to a green future but then cry when gas gets expensive. Climate regulation is a direct impediment to cheap, abundant fuel.

- Reasonable position: I want a green transition and will tolerate the price shocks that will happen along the way to get there.
- Reasonable position: I don't want a green transition, I want cheap, abundant fossil fuels and I want them today.
- Unreasonable fake politician position: I want a green transition but dammit gas better not get above $2.00 during my administration or the evil energy companies are to blame!

 

[MillauFr]

The current state of the petroleum supply chain is the direct product of federal regulation.

What about the impact of investment firms like Engine No 1? I would argue that these types of firms will ultimately be more influential on large oil producers than federal regulations.

 

[Colleen27]

The current state of the petroleum supply chain is the direct product of federal regulation.

I have respect for environmental-types who want us to get off of fossil fuels and transition to a "green" future. I have zero respect for fake-environmental politicians who claim they want us to get off fossil fuels and transition to a green future but then cry when gas gets expensive. Climate regulation is a direct impediment to cheap, abundant fuel.

- Reasonable position: I want a green transition and will tolerate the price shocks that will happen along the way to get there.
- Reasonable position: I don't want a green transition, I want cheap, abundant fossil fuels and I want them today.
- Unreasonable fake politician position: I want a green transition but dammit gas better not get above $2.00 during my administration or the evil energy companies are to blame!

I would disagree to an extent with your first statement, because the it really is a global issue and one that illustrates rather well the limitations of any one government's regulatory power over international corporations and global industries. But I 100% agree with the rest of your post. I hate high gas prices for a lot of mostly frivolous reasons - I'm a roadtripper and I drive a Jeep, so I'm no paragon of efficiency - but I also think that low prices are a big part of why we lack the infrastructure that makes not driving a more viable choice in much of the rest of the developed world and that's not going to change without some pain. And I realize we can't have it both ways. We can't demand low gas prices and then lament lack of investment in transit, rail, renewables, etc.

 

[GreatLakes]

People concentrate on the mortgage rates when the Fed makes these changes but mortgage rates are only one of many products impacted by changes to Federal Funds rate. If you want to simplify a complex situation down into the easiest to digest concept raising the rates discourages discretionary debt financing and encourages savings. Instead of making a purchase and paying a higher rate I can save and receive a higher return.

Personally I think we will need to be in a true recession to curb this inflation but that is just one person's opinion.

 

[mrodgers]

Housing and iPhones are two very different commodities, with much different intensities of demand. Not a useful comparison. People need a place to live, so a person cannot just decline to get housing and remain homeless while vainly waiting for the market to respond. The market will never notice what one person does or doesn't do, anyway, so an individual trying to make a point that way is wasting his or her time.

Also, very many people don't pay full price for their iPhones. I bought both mine and my son's last year for half price because I bought them where I get my cell phone service. Yes, I had to continue my service contract to get the deal, but I'd have to pay for cell service somewhere at the same rates anyway. Undoubtedly a huge proportion of phone customers buy theirs the same way.

You can chose not to have McMansions. Everything is enormous any more, and everyone acts entitled to be living in extravagance. It's still society's fault. No need for 2800-4000 sq foot enormity. That's part of the elevated housing costs. There aren't any regular sized homes any more.

 

[disneychrista]

Ally is up to 1.25%. Move your money.

Thanks! I’ll have to look into doing that.

 

[DLgal]

You can chose not to have McMansions. Everything is enormous any more, and everyone acts entitled to be living in extravagance. It's still society's fault. No need for 2800-4000 sq foot enormity. That's part of the elevated housing costs. There aren't any regular sized homes any more.

Yes there are. But they are also insanely expensive. Homes in my area are selling for an average of $700/sq ft. A modest 1500 sq ft CONDO can't be found for under a million dollars.

 

[Colleen27]

You can chose not to have McMansions. Everything is enormous any more, and everyone acts entitled to be living in extravagance. It's still society's fault. No need for 2800-4000 sq foot enormity. That's part of the elevated housing costs. There aren't any regular sized homes any more.

That is part of the problem - most new construction has been larger and higher-end for decades now, and in a lot of areas, zoning really doesn't allow for what used to be thought of as starter homes. But there are still a lot of older, smaller homes out there and the prices on those has gone through the roof too because there's more demand for entry-level housing than there is supply.

 

[Christine]

Didn’t Joe Biden just blame gas station owners for the high price of gas a couple weeks ago? After blaming Putin, oil companies, etc, etc.

Maybe for gouging and taking advantage? Some are unfortunately.

 

[Colleen27]

Didn’t Joe Biden just blame gas station owners for the high price of gas a couple weeks ago? After blaming Putin, oil companies, etc, etc.

Not that I've heard but I've been out of touch... between a month in Europe and a week of camping for the county fair, I've heard blessedly little about American politics this summer.

 

[Colleen27]

Maybe for gouging and taking advantage? Some are unfortunately.

Yeah, I suppose that would be a fair complaint in places. A single company owns about 2/3 of the gas stations in my immediate area and we're paying a full 50-70¢ more per gallon than at stations 20-30 miles in either direction where there's more competition. But they know they've got us over a proverbial barrel, no pun intended; we'd spend as much as we saved if we made a special trip for cheaper gas, so all we can do is try to remember to fill up elsewhere if/when our errands or commute take us out of town.

ETA: for context, national average gas prices have come down 61¢ in the last month according to AAA and the state average has dropped 67¢. Our local price has come down a whopping 10¢ in that time.

 

[longboard55]

Oil is down, steel is down, lumber is down, corn is down, gold is down, wheat is down, the dollar has never been stronger. Inflation should start to go down.

 

[penn19]

Not that I've heard but I've been out of touch... between a month in Europe and a week of camping for the county fair, I've heard blessedly little about American politics this summer.

He called on the gas station owners to lower their prices. Today. That was a few weeks ago.