July 30, 2023
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On this episode of Suze School, Suze explains what the change in the Fed Funds Rate means for you.
Robert, Suze & Music: It's Sunday, July 30th, 2023, Suze. Are you ready for today's podcast? Oh, you bet I am because I'm unstoppable (music in).
Suze: Welcome everybody to the Women and Money podcast as well as everybody smart enough to listen, Suze O here.
Suze: So a little bit ago, KT came in and said, do you need me to help you? You look like you're stuck. And I said, why do I look like I'm stuck? Just, well, you're just kind of sitting there. And I said, yeah, I'm sitting here because I'm thinking about what topic should I talk about today?
Suze: She said, well, I can help you. I said, can you just not help me so that I can decide what topic I want to talk about today? And she said, so what are you thinking about? I said, well, I was thinking about before you came in and interrupted me, KT about the increase in the fed funds rate that happened last Wednesday. And with that, she said, ok, I can't help you with that and she just left. So, that's what we're gonna talk about. Do you know that one year ago, the FED funds rate was at 1.75%
Suze: today. It is at 5.5% and possibly can even go higher. So why should you care about that? Why am I doing a podcast on that? And how does it affect you?
Suze: So take out your Suze notebooks for today, Suze School is going to be about the FED funds rate and how that affects mortgage rates and therefore what that does for the projection for the housing market for the rest of the year of 2023.
Suze: So now I know I know I've explained it before, but just in case you forgot or you missed that podcast, here's what you need to understand.
Suze: The fed funds rate is the rate that banks essentially charge to lend money to each other on an overnight basis.
Suze: So you have to be wondering like why financial institutions like banks need to lend money to each other just for a night.
Suze: And the answer to that question is because all financial institutions that take deposits, you know, usually they're known as depository institutions such as Bank Credit Union, so on and so forth. They have to keep by law everybody, a certain percentage of their customers money on reserve. So if you want money or whatever they have
Suze: it to give to you, you go to the ATMs whatever it is, it has to be a certain percentage, I don't think the percentage is big enough, but it has to be a certain percentage of all the money that they have
Suze: and they need to keep that money in reserve. But here's what's interesting, the money that the banks or other depository institutions that they keep in reserve, they are not allowed to earn money on that money so they can't earn interest on the money that they keep in reserve. Why does this matter?
Suze: It matters? Because since they're not making any money on that money, they keep that amount as close to the reserve requirement as possible.
Suze: Not a penny more. In most cases, with the hopes that they never go under the amount required. But if they find that they are, what do they do, then they lend money to each other for the night simply to meet the reserve requirements that are required of them. Did that make sense to you?
Suze: But when the feds raise the rates that these banks need to pay each other for overnight money,
Suze: what that does is this the higher the fed funds rate, the more expensive it is for these financial institutions to borrow from each other to meet the reserves. So when this happens, believe it or not, it tends to lower the supply of money that's in the economy
Suze: which then increases short term interest rates. And all of this, by the way is supposed to help keep inflation going lower and lower. And they lower interest rates, by the way, they do the exact opposite when inflation is low, which is why years ago, the fed funds rate was essentially at nil
Suze: now. Maybe that confused you, maybe it didn't, but you just need to know that's what the fed funds rate is and why there's always so much hubbub about what is the fed going to do.
Suze: But all of this, as you know, has totally done what it just doesn't increase the amount of money that the banks have to pay one another to lend money to each other for the night. It also has increased the interest rates that you pay on credit cards, mortgages, home equity lines of credit,
Suze: as well as the interest rate that the banks, credit unions, et cetera pay you on your savings, your money market accounts, certificates of deposits, treasuries and things like that.
Suze: But the real question at hand for this Suze School today
Suze: is how does this affect what's happening when it comes to real estate prices and what is going to happen to real estate prices for the rest of 2023? Now you may remember that at the end of 2022
Suze: home value started to go down
Suze: but then that quickly reversed and now they are going higher again. Many of you keep asking me how is it possible, Suze, that homes can continue to increase in value when mortgage rates are at 7 7.5% and could possibly go higher.
Suze: What all of you have to understand is that the main reason that housing prices are continuing to go up is simply because of the lack of inventory
Suze: and why do we have lack of inventory? Well, that one actually is simple. Do you know that 92% of Americans who have a mortgage,
Suze: their mortgage is below 6%.
Suze: 61% of those people have a mortgage, that's below 4%
Suze: and 23% have a mortgage that is below 3%. Who in their right mind wants to sell a house with a mortgage that's currently under 6,4 or 3%
Suze: simply to buy another home
Suze: where they need a mortgage that will be at 7% or more. Would you want to do that?
Suze: Chances are the only reason that you would want to sell a home now and buy another
Suze: is that you had made enough money on the home that you currently have. So that when you buy another, maybe you're downsizing as you know, I want all of you to do as you get older, but you're downsizing and just gonna pay cash for it.
Suze: That's what a lot of you are doing. But for those people, a lot of people, the majority of people
Suze: when they sell a home and they buy another home,
Suze: they need to finance it. So not many people want to do that and that is why since there is no inventory because the majority of people who currently own homes, they're living in them, they don't want to sell it because of the new mortgage rate that they will have to pay.
Suze: But that is also why new construction, new home sales
Suze: are so over the top because as all these home builders are building more and more and more homes, more and more condos, whatever it may be, they are available for all of you to just simply purchase
Suze: because you can't purchase anything else other than in most cases, brand new homes, knowing all of that. Then the question really becomes what is going to happen to the price of real estate in 2023? Because a lot of you are wondering, should I wait till I buy, should I wait till I sell? What should I do? And when you have a question like that,
Suze: then one has to go to the very top expert in my opinion in the United States when it comes to projecting what is going to happen with real estate mortgage rates and all of that. And there is one person that has called it over the years more correct than anybody else. And his name is Barry Habib
Suze: of MBS Highways. Who again, in my opinion is really one of the most brilliant people out there when it comes to this and calling it right?
Suze: So when Barry was asked that question
Suze: what he said is
Suze: he is projecting that for the year 2023
Suze: that real estate will still appreciate about 5.8%. So that's not so bad. Everybody. Now, obviously, if you're looking at this as an investment, I don't know, you can get close to 5, 5.5% or whatever in dividend, paying stocks, you can get close to that. Absolutely. In certificates of deposits, you may get really close to that
Suze: in treasuries, especially longer term ones shortly here. But there are many ways that you could get 5.8% because remember with real estate, even though you may see real estate appreciate by 5.8% there are costs to owning real estate.
Suze: You have property taxes, you have maintenance, you have utilities. And one thing that you all have to keep in mind is
Suze: insurance on that piece of real estate. Now, I don't know about you, but I did a podcast on this quite a while ago and I was saying it is not enough everybody for you, if you're going to buy a piece of real estate and take out a mortgage to just figure out can you afford the mortgage payment? That is not enough. It's not just the mortgage payment,
Suze: it has to be the property taxes, it has to be maintenance on that property. But now more than ever before, it has to be, what is it going to cost you to insure
Suze: that property. The other day, KT was looking at the bills and she said, Suze, am I seeing this? Right? And I said, what are you seeing? She said to insure our condo in Florida with flood insurance, everything it has gone up now to $25,000 a year.
Suze: That's like an extra $2000 a month. What happened to when insurance was like $2500 a year? Everybody
Suze: and good luck even being able to find at least in Florida an insurance company that will insure you little by little because of the climate, disasters that are out there, whether they are hurricanes, tornadoes, floods, you name it.
Suze: The insurance companies don't want to insure homes anymore. It was almost impossible for me to find an insurance company that would insure my boat.
Suze: It is crazy. So you have to figure that in with, does it make sense more seriously when you own a home in particular areas because of the cost simply to maintain the home, repair the home and insure the home and take a mortgage out on the home?
Suze: Regardless of what your decision is. The projection still is approximately a 5.8% appreciation on real estate on homes this year that does not include commercial real estate. We are talking about homes. Ok.
Suze: So then the next question really is
Suze: what happens when the Feds finally decide
Suze: that in fact,
Suze: inflation is under control
Suze: and now they can start bringing the fed funds rate back down again.
Suze: And when the fed funds rate comes back down again, the interest rates that you are charged on everything also goes down. It's not just that simple because the truth of the matter is that mortgage rates on homes are created with mortgage backed securities and all these other things. And it's a very complicated formula as to how they figure it out.
Suze: But what you should really know is that in normal situations and this is not normal, by the way,
Suze: a mortgage rate is usually one in three quarters percent to 2%
Suze: above what the 10-year Treasury note happens to be. So in normal times, if the 10 year Treasury note was at 4%
Suze: you could estimate that mortgage rates were going to be at five and three quarters percent or 6%
Suze: today. What's happened is that mortgage rates are at 3% approximately above what the 10 year Treasury is. And there are many reasons for that just so, you know, but that's essentially right now how it is working.
Suze: So if interest rates start to go down because the Feds have started to lower the fed funds rate, then the question has to be asked and answered. When that happens, will real estate prices go down? And again, Barry Habib answers and he says he does not think so.
Suze: He thinks that if the Feds bring inflation down and the interest rates go down and eventually mortgage rates go down, that that could keep the prices of homes up there as well. So either way you look at it, it seems like real estate prices are here to stay for a while yet. I don't know what would bring them down to tell you the truth besides a recession.
Suze: And it is totally possible even though everybody now is saying that we're not gonna go into recession. But if they keep raising the fed funds rate, you never ever know what can happen. So as I would always tell you, you plan for the worst and you hope for the best and when you do that, no matter what happens,
Suze: then you are absolutely ok.
Suze: One other thing that I just want to talk about because I said I would tell all of you this when the time was coming,
Suze: is that right now? When it just comes to treasuries and bonds, do you remember the lesson of me teaching you that when a bond has a long maturity,
Suze: that when interest rates go down, then the bond price of that particular bond, the longer the maturity, the price goes up further
Suze: than if it were a short term maturity. So when interest rates do start to go down, if they ever do
Suze: right, the price of a long term bond, 30 years will go up higher than a 20 year bond, the price of a 20 year bond will go up higher than the price of a 10 year note, which will go up higher than the price of a seven year note or a five year note or a two year note.
Suze: So the longer out you go, if interest rates go down,
Suze: the higher the price of that bond will go.
Suze: Therefore, I just want you to know that I'm starting to invest in 30 year treasury bonds with money that I absolutely know I am not going to need. So right now I'm getting a little bit over 4% for that money.
Suze: I am not putting a lot of money into it. I'm starting to stage into it just so I can see where are interest rates going to go.
Suze: If I'm wrong in and interest rates go higher, then I'll put in more money
Suze: and I'll stage into it.
Suze: But with that money, worst case scenario is it's safe and sound and I'm making without any risk at all, 4% maybe 4.5% one day. But if interest rates go down to 3% or so,
Suze: the price of that 30 year treasury is going to go up significantly and my return will not be 4%. It will be a whole lot higher than that. If at that point in time, I decide I want to sell the bond.
Suze: So I told you, I would tell you when I would start to do that, many of you may feel more comfortable in 10 year treasury notes or a 20 year treasury bond because you don't want to go out further, but I'm going out for 30 years because that is where the largest price appreciation will be eventually
Suze: when interest rates if ever start to go down. So that's what I'm doing. And I told you that I would tell you that for those of you, however, who are still wanting to invest and you're looking to invest for shorter terms, you don't want to go out that long.
Suze: I'm telling you you should all still be looking at the 12 or 18 month certificate of deposits at Alliant Credit Union. Look at them, the rates are going to change on August 1st. So go and look, go to my alliant dot com
Suze: and check that out and see what the rates are going to be and see if they interest you. But I still would be going out a little bit longer than three months or six months. I think it is worth it to go longer and lock those rates in.
Suze: Ok. Now, that was your Suze School for today. As always, there's only one thing that I want you to do every single day and that is for you to say the following today. Wherever I go, I will create a more peaceful, joyful and loving world.
Suze: And as always, if you do so, I promise you you will be unstoppable. See you Thursday, everybody with Miss Travis herself. Bye bye now.
Music: Music (out).
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Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.