The Federal Reserve’s Plan To Combat Inflation By Raising Interest Rates Carries The Risk of A Recession

A woman shops for chicken at a supermarket in Santa Monica, California, on September 13.Apu Gomes/AFP via Getty Images 

The last year of inflation has disproportionately hurt low-income and nonwhite families — those with the least flexibility in their monthly budgets to absorb higher prices. Now those same groups could be hurt by economic policymakers’ plan to tackle inflation through interest rate hikes, and in potentially longer-lasting ways.

Last month, leaders at the Federal Reserve predicted that, given their plans to continue raising rates, unemployment would rise from 3.7 percent (or 6 million people) to 4.4 percent by the end of 2023. In plain terms, this means an additional 1.2 million people would lose their jobs over the 15-month period. “I wish there was a painless way to do that,” Federal Reserve Chair Jay Powell had said. “There isn’t.”

Other financial analysts projected even higher unemployment to result. Bank of America predicted unemployment would reach 5.6 percent by the end of 2023, translating to 3.2 million more people out of their jobs. Researchers at the International Monetary Fund (IMF) said in September that unemployment may need to reach as high as 7.5 percent to curb inflation, which would mean roughly 6 million people losing work.

The Federal Reserve raises interest rates to slow down consumption across the economy: As the cost of borrowing rises, the hope is that people buy fewer things, and prices stop spiraling higher. The latest data shows inflation still up roughly 8 percent compared to a year ago, and recent reporting in the New York Times suggests Fed leaders may even raise rates more aggressively into 2023 than they had previously envisioned.

The question is whether the Federal Reserve will be able to hit the brakes when they decide they’ve done enough — or whether it will be too late, and the economy will be hurtling downhill toward a recession that the Fed created but can’t control.

“One thing that’s a very open debate and a very important subtext to all the fights is the question of whether the Fed can actually increase unemployment just a little,” said Mike Konczal, the director of Macroeconomic Analysis at the Roosevelt Institute, a left-leaning think tank. “And with every million who lose their jobs, it’s that much harder to reintegrate them [into the labor force] later on.”

Stabilizing the economy, Konczal said, is like mending a garment. “You can pull at the threads, but if it tears you can’t just push it all back,” he said. “That’s certainly what keeps me very nervous, that the Fed is so worried it underreacted last year [to inflation] that now it might overreact.”

Some economic experts and journalists are asking if the current pain of inflation outweighs the suffering of a potential recession, and if there are less blunt tools the federal government could be leveraging instead.

“To have a smaller paycheck due to inflation, is that really worse than having no paycheck at all?” Today, Explained host Noel King asked Minneapolis Fed President Neel Kashkari last week. “There’s not an easy answer,” Kashkari acknowledged, ultimately arguing that unemployment affects fewer people than inflation, and it’s easier for the government to target assistance to those who might be hurt.

But higher unemployment and recessions don’t just affect those who lose their jobs, and the assumption that the government would be willing or even able to provide targeted assistance to those pushed out of the labor market beyond the maximum six months of traditional (and relatively meager) unemployment benefits seems highly uncertain, given how Democrats’ more generous pandemic stimulus policies have been blamed for contributing to inflation in the first place.

Experts say the country still lacks the infrastructure to deliver more targeted aid, and with Democrats barely even mounting a defense of their pandemic assistance, whether there’s political oxygen — let alone technological capacity — to help those in a recession remains unclear.

On top of all this, if rate hikes do push millions more people out of work, those who would likely bear the biggest brunt of that job loss and take the longest to recover are the same groups suffering most now from inflation: low-income workers, workers with less education, and people of color.

Missing a “soft landing” means millions more people could lose their jobs

The workers who are most vulnerable to near-term layoffs work in construction and mortgage lending, and sell products like TVs and cars. These are so-called “interest-sensitive” industries, particularly responsive to changes in interest rates and borrowing costs. The next hit would be those working in firms that are particularly exposed to financial speculation — like traders and tech companies built around equity valuation.

The Federal Reserve’s goal is to achieve a so-called “soft landing” — meaning they want to lower inflation without throwing the economy into a recession.

Earlier this year Powell, the Fed chair, explained their goal was to make it harder for people to switch jobs, since job-switching and the fierce competition to hire workers were driving up wages. In this scenario, maybe a business eyeing higher interest rates would post fewer new jobs or decide not to fill vacant roles.

Maybe an employee would see the hiring landscape as less friendly and decide to stay put. “The idea is there’s a whole lot of activity happening that we don’t see by just looking at the unemployment rate,” said Konczal, of the Roosevelt Institute. “So in this scenario, where it becomes harder to switch to new jobs, the economy still cools without unemployment going up.”

Konczal says there’s some evidence that Powell’s “soft landing” argument has been bearing out over the past two months — the number of new job openings has slowed, as have the number of workers voluntarily switching to take another job. Wage data expected at the end of October should provide a clearer picture of where things stand.

But many experts are pessimistic that inflation can really come down without driving up unemployment, and say that if the Federal Reserve wants to see a genuine drop in prices it will have to force layoffs in less “interest-sensitive” industries, even if that increases the risk of a recession. Fewer people simply work in interest-sensitive fields like manufacturing than they did decades ago.

“That’s where face-to-face services like hospitality start to take the hit,” said Josh Bivens, the research director at the left-leaning Economic Policy Institute. “Recessions can have big multiplier effects. Layoffs typically start in construction and then radiate onward, and things can get pretty bad if you have a big spiral.”

It’s harder for less educated, low-income, and nonwhite people to find work after layoffs

While some policymakers are trying to figure out if they could reduce inflation while keeping unemployment around 4 or 5 percent, other economists are sounding the alarm on what even this optimistic aggregate figure obscures — the unemployment rate for Black people is generally double that of white people, and for Hispanic people it’s typically 1.5 times the rate.

In one recent study, researchers found that lowering interest rates disproportionately helped the employment prospects for Black workers, women, and those without a high school diploma. It makes sense — if employers are facing increased competition for labor, they may be less likely to discriminate in the hiring process. Relatedly, over the past year, workers with criminal records and workers with disabilities were more in demand than they have been, as employers struggled to fill vacancies.

“It’s just a truism that when bad things happen in an economy, it’s the marginalized people, the people with less power, who are hurt fastest and most,” said Wendy Edelberg, the director of the Hamilton Project, an economics division within the Brookings Institution. “That should be fiscal policymakers’ laser focus, at all times but particularly in a downturn.”

The government is less likely to offer aid to workers who lose their jobs

When the pandemic hit, and millions lost their jobs or had their working hours reduced, the federal government responded with an array of financial policies to ease the pain such as expanded unemployment benefits, three rounds of stimulus checks, rental assistance, monthly cash deposits for parents with kids, hundreds of billions for state and local governments, and subsidies for businesses — big and small.

The investments kept millions out of poverty and evictions below historic averages, and are credited generally with helping the economy rebound much faster than following past downturns, and more quickly than other nations that had less robust stimulus policies.

But now Republicans have latched onto that federal aid as one of the top reasons inflation is at its highest point in four decades. They blame the Biden administration for putting too much money in people’s pockets, allowing them to spend too much and drive up prices. Some argue the American Rescue Plan was simply too big, or not targeted enough to those who really needed help. Economists disagree over how much the pandemic policies are to blame but Democrats, notably, are not touting their investments on the campaign trail, as voters cite inflation as a top election concern.

Republicans are expected to win control of the House, and Republican Leader Kevin McCarthy has for months attacked Democrats’ Covid policies for driving inflation. This raises the question: If the economy does spiral and workers lose their jobs or their workable hours, what kind of assistance might they expect to receive in that scenario?

“It’s one of the reasons I’m so worried about the Fed potentially overshooting, that we just won’t do that much to help people since we’re told that helping people too generously is what got us into this mess,” said Bivens of the Economic Policy Institute. “I think that’s wrong, but I’m still totally worried about this dynamic.” Bivens also warned that if Republicans control Congress, it might be in their interest to prolong economic hardship ahead of the next presidential election.

“If the Fed slips the economy into recession, what kinds of tools and political capital will be available? That’s a real concern that we aren’t talking about and aren’t being honest with ourselves,” said Mark Paul, an economist at Rutgers who has argued raising rates is the wrong response to the inflation crisis. “In the pandemic, policymakers reacted in a far better way than they have in our lifetime, where, rather than the economy taking 10 years to get to pre-Covid levels, it essentially took 1.5 years. The narrative now is that the government overshot, but the question is what were the other options and what would those have led to?”

Edelberg of the Hamilton Project said if there is a downturn, she hopes we can get “targeted relief” to those most in crisis, so that it only has modest effects on inflation. “We should do that with eyes wide open — knowing it will boost aggregate demand a little bit and that will be okay because a policy should have more than one objective,” she said.

Edelberg acknowledged the country isn’t exactly positioned to distribute targeted relief — the nation’s unemployment insurance system remains in need of serious upgrades. “We should be improving the system so we can find the people who need to get the money, so we don’t need to do things like send checks to everyone,” she said. “We do not have that infrastructure now because we haven’t really valued it.”

Slow wage growth affects even those who keep their jobs

It took 10 years after the Great Recession for wages to finally start rising, long after unemployment had gone back down. Part of this was fueled by state and local minimum wage increases, but part of it, experts believe, was due to a finally tightening economy.

Workers have enjoyed increased power over the past two years amid the even tighter post-pandemic labor market. Wages have gone up, especially for workers at the lower end of the income spectrum, and especially among those who switched their jobs. In 2021, wages grew by 4.5 percent on average, the fastest rate in almost four decades.

Now that we’re finally seeing broad-based gains in the economy, progressive economists warn that aggressive Fed policy could make those raises disappear. One major risk of a recession is slowed wage growth, which can impact everyone, not just those who lose their jobs. Even modest economic downturns can significantly reduce the chance of employers handing out raises.

The Federal Reserve has been explicit that its goal is to reach 2 percent inflation — meaning prices would continue to rise in that scenario, just hopefully more slowly and predictably. But if wages are not also rising, then families will still feel worse off and struggle to afford basic necessities.

“This wage growth angle is, by far, the most important reason why just looking at the rise of unemployment in a recession is a radical understatement of how many workers are adversely affected by recessions,” Bivens wrote in July.

One big fear for inflation watchers is the risk of a so-called “wage spiral” — a scenario where wage increases cause price increases, which in turn cause more wage increases. The concern isn’t baseless; wage spirals have happened before, most notably in the US in the 1970s, but it’s certainly not an inevitability. The labor movement was also much stronger four decades ago — over a third were unionized compared to 6 percent of private sector workers today — giving workers the kind of bargaining power they simply lack now.

Fears of a wage spiral have been dissipating somewhat. Wage growth is still higher than pre-Covid levels but has been slowing down this year. Earlier this month, researchers with the IMF concluded that wage spiral risks “appear contained” for now.

What else could be done?

Some economists and writers have warned that raising interest rates further is unlikely to curb some of the root causes of inflation — such as the war in Ukraine and factory shutdowns — and that inflation would come down next year regardless as supply chains get back on track.Others say more attention should be on things like investigating corporations for raising their prices far beyond the cost increases for raw materials.

The House Subcommittee on Economic and Consumer Policy held a hearing on these concerns in late September, and three Democratic lawmakers introduced a bill in May that would seek to ban price gouging during market disruptions. Dean Baker, an economist at the Center for Economic and Policy Research, pointed to what he called “an extraordinary increase in profit shares in a relatively short period” — rising from 23.9 percent in 2019 to 26 percent in the second quarter of this year.

Some centrist and conservative analysts have framed higher unemployment and a possible recession as simply a necessary if regrettable stage in the life cycle of an economy, almost like a biological reset. “The Fed’s rate hikes will hurt,” said the right-leaning Washington Post editorial board. “That’s unavoidable.”

But “the idea that severe recessions are necessary is absolutely not true,” said Konczal. “That’s the whole point of having a Federal Reserve and macroeconomics. And the idea that recessions are somehow regenerative and healing to the economy is also wrong.”

Whether one needs higher-than-expected unemployment or lower-than-existing GDP to bring down inflation is not really clear. “People are not sure if that’s true,” said Konczal. “It’s a small sample size, and we have only so many economies that you can test.”

Others have argued that fiscal policy — as opposed to the Federal Reserve’s monetary policy — demands more attention to combat inflation. (Fiscal policy refers to a government’s decision to tax and spend, whereas monetary policy is about a central bank’s control over the flow of money and credit.) Fiscal policy can be more targeted, but it can also be difficult to pass through the legislative process, and take far longer to have an economic effect.

For example, Rep. Ro Khanna (D-CA) has called for a “production agenda” that would involve new investments in child care, housing, and community college to bring down prices and train Americans to work. These strategies, if successful, would take years however to trickle out. Sen. Elizabeth Warren (D-MA) similarly argued this past summer that Congress investing in child care would help bring more parents into the workforce, which could counteract inflation, though pouring more money into child care amid a worker shortage, conversely, could also worsen it.

In August, Rep. Jamaal Bowman (D-NY) introduced a bill that would place price controls on utilities, food, and housing, bolster the scope of the White House supply chain disruption task force, and authorize better data collection on corporate profiteering. (Price controls are controversial, and led to soaring prices after they were lifted in the 1970s.)

Paul, the Rutgers economist, helped advise Bowman on his bill and told Vox that he believes the Federal Reserve is not taking seriously its dual congressional mandate for both price stability and maximum employment. “Right now the Fed seems to be focused on price stability at all costs,” Paul said. “Full employment be damned.”

Source: The Federal Reserve’s plan to combat inflation by raising interest rates carries the risk of a recession – Vox

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Why Are So Many Real Estate Investors Going Bankrupt

They started investing in real estate 30 years ago… with so much hope for their future. A rental house here, a duplex there… and soon they had a rental portfolio anyone would be proud of. They actively managed their properties and worked to make sure they were operating at peak efficiency. Several years ago both the husband and wife retired from their day jobs and eased into retirement – funded by their rental income and social security.

This year they are filing bankruptcy and losing a majority of their properties to foreclosure.

This is not some made-up example… this is the story of one of my best friend’s parents, and they are not alone. In fact, 95% of the properties I’ve purchased have been foreclosures purchased from landlords who have failed and lost their properties in a foreclosure. Most of them, I would guess, will never again get into real estate investing. They worked hard for years to build a financial future for themselves, only to see it come tragically crashing down around them – dashing any hopes for lasting wealth creation.

This begs the question: why?

If real estate is as good of an investment as we all (on BiggerPockets) make it out to be… why do so many real estate investors fail? Perhaps more importantly: how do I avoid this possibility in my own life? This is the question that has been swimming around my mind for some time now. Each week on theBiggerPockets Podcast I ask our guest “what is it that sets apart successful investors from those who fail?”

I’m intrigued by this idea and scared that I may end up the same way. After all, as Mark Cuban famously said “everyone is a genius in a bull market.” Is that what real estate is? Do some people simply get lucky, and others not so? What are some of the trends that lead to this failure… and what are some trends that can minimize this risk?

I thought I’d take the opportunity to hammer out my thoughts here and get your feedback as well. Definitely jump into the comments below and let’s talk. Too Much Risk? Let’s talk about the elephant in the room first: risk. Risk in inherent in every investment there is. After all, you know the phrase, “more risk, more reward.”

However, there is obviously a tipping point where the risk becomes too great, as my friend’s parents discovered. Perhaps it’s over-leveraging properties by obtaining too many “low down” deals or maybe it’s trying to buy too many, too fast. Maybe it’s constantly refinancing the properties, pulling out all equity and investing it in more and more deals. Whatever the reason for their bankruptcy, it’s clear that the risk became too great and they lost.

As rock ‘n roller Nick Cave sang, “if you’re gonna dine with them cannibals; Sooner or later, darling, you’re gonna get eaten . . .” So how should someone prevent this? Avoid risk altogether? Only invest in 100% safe deals? Of course not. Risk is required for entrepreneurs, but learning to navigate that risk will define your success.

Like a team of white-water rafters braving the wild waves, you can’t always see what the future will hold, where the rocks hide just below the surface, or where the next waterfall will be. However, by having the right people in the boat with you, keeping an eye out for potential dangers, working to avoid the problem areas, and wearing the proper life-saving jacket, you can avoid a premature death. I would caution anyone reading this post, including myself, to think of risk as a dangerous, but powerful tool. Never forget that this tool cuts both ways.

Not Enough Education

Far too many people jump into buying real estate before understanding what they are doing. They simply decide that real estate is the right path, and they start buying properties. There is a big difference between being busy and being effective, and this is the case with a lot of real estate investors; they believe that because they are buying properties they are going to succeed. Never mind the fact that they bought the wrong property in the wrong area with the wrong financing.

The solution to this problem is proper education. I’m not talking about the “Get Rich Quick” late-night TV kind of education. I’m talking about taking the time needed to build an educational foundation that can support your investing future. At BiggerPockets, our mission is to help you build this foundation through a variety of methods, like the Forums, the Podcast, the Blog, and more.

Furthermore, I encourage you to continue your education through books, meetups, and other low-cost sources. You don’t need to spend tens of thousands of dollars to gain an education. Information has been democratized, so you simply need to reach out and grab it. No one can do it for you!

Not Enough Analysis?

When I first began investing in real estate I thought I knew what I was doing… but I made some big mistakes because I didn’t do a careful enough analysis. Had I continued on that path, I would have been in the same boat my friend’s parents are in. You see, so many people buy properties without doing the right math. As I often say, “without the right math going into an investment, you’ll never get the right profit coming out of it.

The future is impossible to know, but with a solid analysis – it’s much easier to predict. It’s for this reason that I began to invest a lot of time and effort into building an in-depth spreadsheet that I could run all my potential deals through. Soon after, we took that spreadsheet, added a ton of new features, cleaned it up, and turned it into the BiggerPockets Property Analysis Calculators that hundreds of people are using every week to analyze their potential deals.

It’s my hope that this tool will save tens of thousands of investors from making the same mistakes that millions of others have made. No matter how you do your math, just make sure you are doing it – and doing it right.

Are You Working ON Your Business or IN Your Business?
Is real estate your investment or your hobby? I believe one of the greatest reasons investors fail is because they don’t treat their business like a business.

They never develop systems to help them as they grow.
They treat their tenants like friends.
They don’t create clear policies for finding good tenants.
They simply approach their investing like a church picnic, and it shows.

If you want to avoid failing, treat your business the same way a CEO would look at a business, because that is what it is. Monitor your business’ health, hire the right people to do the right jobs, and continually find ways to improve your bottom line and create a longer-lasting business.

Let’s Sum Up

There are a variety of reasons that a real estate investor may fail. However, in my limited time on this planet, I’ve seen the above four mistakes played out time and time again in the lives of those who have failed in their investments. It breaks my heart to see someone so excited for what real estate could do – only to lose it all in a foreclosure or bankruptcy. Don’t be that person.

If you want to avoid losing all the hard work you are putting in (or the hard work you are about to,) pay attention to the four points in this article: Understand that risk is a powerful but dangerous tool, so tread cautiously, Build a solid educational foundation for yourself before getting in too deep, Don’t skimp on the math, Always understand the numbers for any property you buy,  Work ON your business, not in it & Treat your investments like the business that it is.

By Brandon Turner

Source: Why Are So Many Real Estate Investors Going Bankrupt? | The Motley Fool

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Critics by Arielle O’Shea

Real estate investment platforms connect real estate developers to investors who want to finance projects, either through debt or equity. Investors hope to receive monthly or quarterly distributions in exchange for taking on a significant amount of risk and paying a fee to the platform. Like many real estate investments, these are speculative and illiquid — you can’t easily unload them the way you can trade a stock.

The rub is that you may need money to make money. Many of these platforms are open only to accredited investors, defined by the Securities and Exchange Commission as people who’ve earned income of more than $200,000 ($300,000 with a spouse) in each of the last two years or have a net worth of $1 million or more, not including a primary residence. Alternatives for those who can’t meet that requirement include Fundrise and RealtyMogul.

Tiffany Alexy didn’t intend to become a real estate investor when she bought her first rental property at age 21. Then a college senior in Raleigh, North Carolina, she planned to attend grad school locally and figured buying would be better than renting. “I went on Craigslist and found a four-bedroom, four-bathroom condo that was set up student-housing style. I bought it, lived in one bedroom and rented out the other three,” Alexy says.

The setup covered all of her expenses and brought in an extra $100 per month in cash — far from chump change for a grad student, and enough that Alexy caught the real estate bug. Alexy entered the market using a strategy sometimes called house hacking, a term coined by BiggerPockets, an online resource for real estate investors. It essentially means you’re occupying your investment property, either by renting out rooms, as Alexy did, or by renting out units in a multi-unit building.

David Meyer, vice president of data and analytics at the site, says house hacking lets investors buy a property with up to four units and still qualify for a residential loan. Of course, you can also buy and rent out an entire investment property. Find one with combined expenses lower than the amount you can charge in rent. And if you don’t want to be the person who shows up with a toolbelt to fix a leak — or even the person who calls that person — you’ll also need to pay a property manager.

“If you manage it yourself, you’ll learn a lot about the industry, and if you buy future properties you’ll go into it with more experience,” says Meyer. This is HGTV come to life: You invest in an underpriced home in need of a little love, renovate it as inexpensively as possible and then resell it for a profit. Called house flipping, the strategy is a wee bit harder than it looks on TV. It’s also more expensive than it used to be, given the current higher cost of building materials and mortgage interest rates. Many house flippers aim to pay for the homes in cash.

“There is a bigger element of risk, because so much of the math behind flipping requires a very accurate estimate of how much repairs are going to cost, which is not an easy thing to do,” says Meyer. His suggestion: Find an experienced partner. “Maybe you have capital or time to contribute, but you find a contractor who is good at estimating expenses or managing the project,” he says.

The other risk of flipping is that the longer you hold the property, the less money you make because you may be paying a mortgage without bringing in any income. You can lower that risk by living in the house as you fix it up. This works as long as most of the updates are cosmetic and you don’t mind a little dust.

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GDP Again Flashes Recession Warning Sign: Economy Shrank 0.6% Last Quarter As Experts Warn ‘Worse To Come’

The U.S. economy shrank for a second quarter in a row this year, a second estimate from the Bureau of Economic Analysis confirmed Thursday—once again signaling the start of a technical recession even as economists predict signs of a slowdown will only grow in the coming quarters, likely prompting the government to officially declare the economy has entered a recession.

The U.S. economy shrank at an annual rate of 0.6% in the second quarter despite average expectations originally calling for a 0.3% increase—marking the second consecutive quarter of negative gross domestic product growth and thereby signaling the economy has entered a technical recession, the Bureau of Economic Analysis reported in a second estimate released Thursday.

The figure was worse than the 0.5% decline economists were expecting, but ticked up from the 0.9% decline estimated last month.The government blamed the worse-than-expected figure on declines in residential investments (or home buying), federal government spending and business inventories, but said an uptick in exports and spending helped economic activity improve from last quarter’s decline of 1.6%.

According to one working definition, a recession comprises two consecutive quarters of negative GDP growth, says Wells Fargo senior economist Tim Quinlan—but it’s not the official one: Instead, the definitive call is up to the National Bureau of Economic Research, which defines a recession as “a significant decline in economic activity” lasting “more than a few months.”

Quinlan points out four of the six factors the NBER relies on to declare a recession—production, income, employment and spending—continued to signal expansion through May, but he notes production appears to be “losing steam” and income gains are struggling to keep up with inflation, all while unemployment claims rise and consumers start spending less.

Like other economists, Quinlan isn’t convinced economic indicators last quarter were indicative of a current recession, but he warns the economy is slowing and “it is starting to feel like [entering one] is only a matter of time.”

“We do not think the economy is in recession at present, but if our forecast is correct, this is not so much of a head fake as it is a harbinger of worse to come,” says Quinlan, who argues the negative GDP growth in the first half of the year isn’t likely a function of weak underlying demand but instead due to “one-off” volatile factors such as net exports and inventories. “We expect the loud wailing of an actual recession to begin early next year,” he adds.

The government will update its estimate, based on more complete data, for a third and final time in September.

Though economist projections continued to call for a return to growth in the second quarter, the Federal Reserve Bank of Atlanta’s GDPNow model in July began signaling the start of a technical recession, pushing its GDP forecast into negative territory after economic data showed consumer spending dropped in May. “The model’s long-run track record is excellent,” say DataTrek analysts Nicholas Colas and Jessica Rabe, pointing out its average error has been just 0.3 points since the Atlanta Fed started running it in 2011.

Ahead of the GDP print, the model projected the economy shrank 1.2% last quarter. It now projects the economy will grow 1.4% in the third quarter. The Fed’s withdrawal of pandemic stimulus measures and interest rate hikes this year have fueled concerns of impending recession. In July, Bank of America economists warned clients that prolonged inflation and the resulting interest rate hikes have unleashed a “worrying deterioration” in the economy, and particularly in the once-booming housing market.

“The Fed has become more committed to using its tools to help restore price stability, with a willingness to accept at least some pain in the process,” they said, predicting the economy will fall into recession over the next year.

I’m a senior reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill

Source: GDP Again Flashes Recession Warning Sign: Economy Shrank 0.6% Last Quarter As Experts Warn ‘Worse To Come’

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Why Some Housing Markets Seem To Be Cooling Down While Others Heat Up

Burned by a hot housing market, some frustrated home buyers may have hoped that sky-high listing prices are finally coming down to earth. Well, they are – sort of. It just depends on where you live.

To better understand the housing affordability situation, Fortune magazine reached out to Moody’s Analytics to get access to its latest proprietary housing analysis. Researchers at the financial intelligence firm calculated how home prices are likely to shift in 414 regional housing markets between the fourth quarter of 2022 and the fourth quarter of 2024.

Among the nation’s 414 largest housing markets, the Moody’s Analytics forecast model predicts that 210 markets are on the verge of seeing home prices decline over the coming two years and 204 markets are poised to see home prices rise over the coming two years.

The prospect of a big drop in house prices is becoming more and more likely as home sellers give in to the mounting pressure on affordability posed by June’s rapid mortgage rate hike.

Nationwide, home prices increased 18.3% year over year in June 2022, compared with June 2021, marking the 125th consecutive month of year-over-year increases, according to CoreLogic, a data analytics provider. Though annual appreciation was still strong, it slowed from the previous month for the second consecutive month, reflecting reduced buyer demand in part due to higher mortgage rates and worries about a slowing economy.

Lawrence Yun, chief economist at the National Association of Realtors, points out that the housing markets that have experienced price gains may find themselves at a pivotal moment.

“What I can say is that those markets that boomed were driven by strong local job creations and from new residents moving into those regions, including as retirees,” he said. “So, for places like Phoenix, Tampa and Boise, you may or may not see any meaningful price decline. They could also be primed for even more price gains.”

Yun added, “I cannot say, given such an extraordinary price growth in a short duration. But even if there were to be a price decline in these markets, it would not do any local economic damage given the strong housing wealth conditions of many local homeowners who had purchased many years ago. Even some renters may want to jump back into buying if there was a price decline.”

He said he would be more concerned about housing markets being able to weather the storm where job growth is not occurring and where they are losing remote workers to other locations.

“For white-collar workers earning high salaries, remote work is a huge financial boon,” said Redfin senior economist Sheharyar Bokhari. “It enables them to move from a tech center like San Francisco to a more affordable part of the country like Boise or Salt Lake City, get more home for their money and save some for a rainy day. It can have the opposite effect on locals in those destinations–especially renters–who are watching from the sidelines as home prices skyrocket while their income stays mostly the same.”

“Partly because of soaring home prices, Phoenix and Miami have some of the highest inflation rates in the country,” added Bokhari. “That will eventually diminish the financial advantage of moving to these places for out-of-towners. High inflation also cuts into budgets for locals, who are spending more on things like food and fuel and saving less for an eventual down payment.”

Home prices shot up over twice as fast as home buyer incomes in Boise, Idaho, rising 53% to $485,000 from December 2019 to December 2021, according to a Redfin analysis of mortgage data. Prices rose 48% in Austin, Texas and Cape Coral, Florida.

While local incomes rose and home prices skyrocketed in 2021, housing markets in many of those pandemic boomtowns are faltering as high mortgage rates and unsustainable price growth tame demand.

Redfin reports that Boise, Austin, Cape Coral, Phoenix, North Port, Florida and Tacoma, Washington are among the 20 housing markets that cooled the fastest in the first half of 2022. And Boise, Cape Coral, North Port, West Palm Beach, Miami, Stockton, California and Salt Lake City are among the 25 housing markets most susceptible to home-price declines if the U.S. enters a recession. But although they are susceptible to a recession-driven downturn, these places are unlikely to see housing market crashes because home buyers there have relatively high incomes.

“People are still moving in from California and they still have enough money to buy nice homes in desirable neighborhoods, sometimes with all cash,” said Austin Redfin agent Gabriel Recio. “But the days of homes selling for 25% over asking price with multiple offers are over. Buyers are no longer as eager now that mortgage rates are up and there’s buzz in the air about the slowing housing market. Local buyers–and even buyers coming from out of town–now have a chance to take their time and buy a home at asking price or even under asking price.”

Selma Hepp, interim lead of the Office of the Chief Economist at CoreLogic, sees the markets that Moody’s model predicts will experience the biggest drop in house prices as the same markets that CoreLogic’s market condition indicators model shows as exceedingly overvalued. “These markets have seen considerable home price appreciation over what local income suggests would be affordable,” said Hepp. “Thus, pulling of home buyer demand, due to higher rates and perception of overvaluation, as more new construction becomes available may lead to price discounts and resultant price declines.

Also, these markets have seen considerable in-migration from other states, mostly in the Northeast, and Baby Boomers retiring. Those incoming buyers may now look at other locations where they perceive prices as more affordable, which would dampen demand and may lead to some price discounting on the part of builders.”

Mortgage rates may be historically low, but so is home buyer morale these days, says George Ratiu, Realtor.com’s manager of economic research. He said the big issue at the moment is that real estate markets are moving through a reset transition, away from the chaotic pace of 2020-2021, following a sharp increase in mortgage rates in the first half of 2022, which compounded home prices breaking new records.

“The rising costs of borrowing have created an affordability ceiling for many buyers, who are finding that their incomes are no longer sufficient to cover much higher potential mortgage payments,” said Ratiu. “As a result, with demand cooling considerably, the number of homes for sale are sitting longer on the market and motivated homeowners are resorting to price cuts to close deals.”

In June, Realtor.com’s inventory data showed that about 15% of listed homes showed price reductions, double the share from last year. These trends are particularly visible in metropolitan areas that have seen an influx of residents and capital over the past couple of years, especially in the Sun Belt. Markets like Austin, Texas; Raleigh, North Carolina; Phoenix; the Lakeland-Winter Haven metro area in Florida; and Stockton, California are posting some of the highest gains in the number of homes for sale with price cuts.

Ratiu said, “Many of these markets experienced strong price appreciation during the pandemic, but with inflation eating away at most people’s incomes, the ability to keep paying more has disappeared. As wages fall behind prices, and with rates significantly higher than a year ago, we can expect these markets to continue to see adjustments in sales and prices through the remainder of 2022 and into next year.”

Susan Wachter, the Albert Sussman professor of real estate and professor of finance at the Wharton School of the University of Pennsylvania, said Moody’s prediction of price declines points to overpriced housing markets based on income.

“That is how these markets differ,” she explained. “Some of the markets are supply constrained. Some like those in parts of Florida are less so. It is reasonable to expect that markets with elevated prices based on historical ratios will be at risk in a growth slowdown. What is not addressed here, is what happens after income growth slows or declines, that is, in recovery. What is missing in this calculus is the identification of amenity-rich supply constrained markets where price rises will likely pick up in the aftermath of a recession. With long-term income increases, these markets are destined to be hot again.”

I am an award-winning journalist and former real estate editor at the Chicago Tribune, where I was cited for excellence for my work in launching and editing real estate

Source: Why Some Housing Markets Seem To Be Cooling Down While Others Heat Up

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Trading Commissions May Return If the SEC Makes Big Stock-Trading Changes

The Securities and Exchange Commission is aiming to shake up the mechanics of US stock trading in the wake of last year’s meme-stock frenzy, and some experts in the markets say changes could lead to a shift back to retail investors paying commissions to make trades.

SEC Chairman Gary Gensler in a speech this week outlined six areas of market structure where rules could be updated to foster greater efficiencies, particularly for retail investors. Gensler is proposing the agency consider sending retail stock orders to auctions under which trading firms would compete to execute the transactions to ensure investors receive the best prices.

Such a move could alter the payment for order flow system, or PFOF, under which brokerage firms including Robinhood, TDAmeritrade, and E-Trade are compensated for sending customers’ orders to market makers rather than sending them directly to an exchange. Among the biggest market makers are Citadel Securities and Virtu Financial. PFOF supports zero-commission trading at online brokers that serve amateur investors.

A significant PFOF change “may reset the entire playing field and cost individual investors more money because we’ll have to go back to some sort of commission model,” Sean Bonner, CEO of Guild Financial, a self-direct investment app that focuses on active and retired members of the military, told Insider. Guild, an early-stage business, doesn’t use the payment for order flow system.

“I can guarantee you that commission model will be much higher than the rebates paying the payment for order flow — much higher, by a factor of 10s to 100s,” said Bonner, who has more than 20 years of experience on Wall Street from floor trading to working as a mutual fund manager. “Retail investors are saving billions of dollars a year on the current payment for order flow model.”

Major wholesalers such as Citadel, Virtu, G1X and Two Sigma provided $6.1 billion in price improvements in 2020 and 2021 combined, said BrokerChooser, based on its analysis. Zero-commission trading in recent years has fueled a boom in activity among individual investors who no longer had to pay their brokers as much as $6.95 for each trade.

Proposed changes to shake up rules in the US stock market was met with criticism from Robinhood’s chief legal officer Dan Gallagher this week. “It is a really good climate for retail, so to go in and muck with it right now, to me, is a little worrisome,” Gallagher said at a conference in New York, according to The Wall Street Journal. Retail traders are benefitting from zero-commission transactions and fast execution of trades, he said.

Following last year’s meme-stock frenzy, Gensler last year asked the SEC to review rules related to equity-market structure, including payment for order flow. PFOF is banned in some countries. Gensler isn’t proposing a ban but such a move would make it “almost inevitable” that retail investors return to a commission-based system, Kerim Derhalli, founder and CEO of investment app Invstr, told Insider.

“I don’t think anyone is going to be willing to provide brokerage services on their own without having some form of revenue associated with it,” he said. The Invstr app has 3 million users worldwide and the company doesn’t use the PFOF system. “If we return to a commission structure then you could argue that might discourage people from trading as frequently as they have been trading. You could, on the other hand, argue that if people start trading less, and investing more, they’ll be better off,” over the long term, he said.

“What would seem to be a simple solution would be [for Gensler] to say, ‘We’re going to make PFOF illegal and … retail trading needs to go through the exchange where it’s transparent and the prices are transparent and people can have confidence in the system,” said Derhalli. Bonner at Guild said overall he sees a ban on PFOF hurting retailer traders. “To be honest, a lot of brokers would hope that they get rid of this payment for order flow model and get back to charging for commissions because there’s a lot more revenue for the brokers in that.”

Gary Gensler is trying to level the playing field for small investors. He’s expected to outline a proposal for new rules to help them – possibly in a speech later today. The idea is to make sure those investors get the best deal when buying or selling stocks. When you make a trade, you may go through a broker. Some are paid to send their orders to wholesalers – who may not give you the best price.

Dennis Kelleher of the investor advocacy group Better Markets said the SEC is thinking about creating auctions. “Which should drive down the cost for retail investors and therefore give them the best price available,” he said. But the plumbing of trading is complicated. And if you divert the flow of buy and sell orders, some small investors could get hurt. Jaret Seiberg with the investment bank Cowen said those deals between brokers and wholesalers paved the way for free trading.

“If you start dismantling the system it’s not clear that you’re going to be able to still provide free access to trading,” he said. Investors advocates said at least with a commission you know what you’re paying upfront. There’s plenty of time for this debate. Any new rules would have to go through a long, public process.

Source: Trading Commissions May Return If the SEC Makes Big Stock-Trading Changes

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