Economics 101 questions

[carrotsmakemefat]

This may be “stupid” to ask but I really don’t understand some of what is talked about in the news. Is anyone here an Economist? Know where I can find accurate information that isn’t politically motivated ?

Let’s take housing as an example. Interest rates go up and have little by little over the last year.
What is the economic reason or benefit to doing this ? What’s the long-term goal ?

Is it to reduce lending ? Avoid price increases like we’ve been seeing in the market ?

Another topic : the general rate increases by the Fed Reserve - what does that impact directly ?

[konapoppy]

Yes, they are trying to get supply and demand closer together. By raising rates, they can slow down the insane housing prices and cool the market.

[konapoppy]

Oh as for direct impact, the cost to borrow money is going up. So as long as you aren’t buying a house (or have an ARM), buying a car, or carrying a credit card balance, you shouldn’t be impacted much. Oh - and also hopefully you aren’t retiring in the near future.

There may be more layoffs (which we are starting to see), but hard to predict the magnitude. Industries where prices are regulated or commodities may be more impacted, as the cost of goods has gone up (due to limited supply) without being able to correspondingly raise prices significantly. Because the stock market isn’t as strong, the money companies earn on their own cash investments is decreasing. That will also lead to efforts to look for efficiencies.

Hopefully supply picks up soon and the fed can take their foot off the break. It’s just really hard to tell right now.

[rubytue]

Interest rates going up also encourage less spending, because you make more saving the money.

[carrotsmakemefat]

Oct 1, 2022 16:46:21 GMT -5 konapoppy said:

Oh as for direct impact, the cost to borrow money is going up. So as long as you aren’t buying a house (or have an ARM), buying a car, or carrying a credit card balance, you shouldn’t be impacted much. Oh - and also hopefully you aren’t retiring in the near future.

There may be more layoffs (which we are starting to see), but hard to predict the magnitude. Industries where prices are regulated or commodities may be more impacted, as the cost of goods has gone up (due to limited supply) without being able to correspondingly raise prices significantly. Because the stock market isn’t as strong, the money companies earn on their own cash investments is decreasing. That will also lead to efforts to look for efficiencies.

Hopefully supply picks up soon and the fed can take their foot off the break. It’s just really hard to tell right now.

A lot of this makes sense. In the example of lending money for cars, houses, etc - what are the benefits of big government to raise the rates ? I get wanting to cool down the market, but surely government wins by (I assume) making more money off of loans. And ideally the money made off loans goes to something good like …. Paying debt so congress doesn’t have to raise the debt ceiling again?

Or is that money somehow helping out with inflated prices around the country ?

[carrotsmakemefat]

Oct 1, 2022 16:55:06 GMT -5 rubytue said:

Interest rates going up also encourage less spending, because you make more saving the money.

To give a little context to my skepticism, I’m in a few FB groups for new construction homes and still follow the market closely. You know what the trend is? “Oh, the lender messed up by not locking me into a lower rate. but I’ll do an ARM and that way I can afford the home!”

I admittedly don’t know much about ARMS on the front end (if you get a lower rate initially? Pay interest only?) But DAMN … NO NO NO. We don’t need to channel 2008 again.

That is the solution I am seeing in random groups. Oh the rates went up so I’m going to work around it. La de da.

[konapoppy]

Oct 1, 2022 17:47:58 GMT -5 carrotsmakemefat said:

Oct 1, 2022 16:46:21 GMT -5 konapoppy said:

Oh as for direct impact, the cost to borrow money is going up. So as long as you aren’t buying a house (or have an ARM), buying a car, or carrying a credit card balance, you shouldn’t be impacted much. Oh - and also hopefully you aren’t retiring in the near future.

There may be more layoffs (which we are starting to see), but hard to predict the magnitude. Industries where prices are regulated or commodities may be more impacted, as the cost of goods has gone up (due to limited supply) without being able to correspondingly raise prices significantly. Because the stock market isn’t as strong, the money companies earn on their own cash investments is decreasing. That will also lead to efforts to look for efficiencies.

Hopefully supply picks up soon and the fed can take their foot off the break. It’s just really hard to tell right now.

A lot of this makes sense. In the example of lending money for cars, houses, etc - what are the benefits of big government to raise the rates ? I get wanting to cool down the market, but surely government wins by (I assume) making more money off of loans. And ideally the money made off loans goes to something good like …. Paying debt so congress doesn’t have to raise the debt ceiling again?

Or is that money somehow helping out with inflated prices around the country ?

A little inflation is good. A lot is bad. Because the prices aren’t real or affordable. That can spiral to driving everything up until the dollar’s worth isn’t as strong. For example - if costs increase, employees demand higher salaries. Then the cost of the goods the companies are making also increases due to the increased labor cost. It feeds on itself. If you think of it as just everything is more expensive (labor, housing, food) without any real change to the value of the actual item, it is just a beast that keeps getting out of control. And that’s not good for the government or for foreign trading.

I might be missing something - it has been a long time since I taught microeconomics- but this is somewhat the gist.

[Velar Fricative]

I understand the mechanics of this, but I’m questioning how we are expecting supply to catch up with demand WRT to housing when supply is just so bad (both due to people staying put and not enough homes being built) and will take potentially years to catch up.

[konapoppy]

Oct 1, 2022 20:17:23 GMT -5 Velar Fricative said:

I understand the mechanics of this, but I’m questioning how we are expecting supply to catch up with demand WRT to housing when supply is just so bad (both due to people staying put and not enough homes being built) and will take potentially years to catch up.

www.cnbc.com/amp/2022/09/09/housing-market-confusion-whats-happening-next.html

This article is interesting because it talks about new home builds slowing because of lack of demand, but I would have thought that supply chain and availability of both building materials and skilled labor would have played a role, as well as NIMBYism for high density housing. I think we have a few folks in that industry on the board- hopefully they will chime in.

[jlt19]

Oct 1, 2022 17:47:58 GMT -5 carrotsmakemefat said:

Oct 1, 2022 16:46:21 GMT -5 konapoppy said:

Oh as for direct impact, the cost to borrow money is going up. So as long as you aren’t buying a house (or have an ARM), buying a car, or carrying a credit card balance, you shouldn’t be impacted much. Oh - and also hopefully you aren’t retiring in the near future.

There may be more layoffs (which we are starting to see), but hard to predict the magnitude. Industries where prices are regulated or commodities may be more impacted, as the cost of goods has gone up (due to limited supply) without being able to correspondingly raise prices significantly. Because the stock market isn’t as strong, the money companies earn on their own cash investments is decreasing. That will also lead to efforts to look for efficiencies.

Hopefully supply picks up soon and the fed can take their foot off the break. It’s just really hard to tell right now.

A lot of this makes sense. In the example of lending money for cars, houses, etc - what are the benefits of big government to raise the rates ? I get wanting to cool down the market, but surely government wins by (I assume) making more money off of loans. And ideally the money made off loans goes to something good like …. Paying debt so congress doesn’t have to raise the debt ceiling again?

Or is that money somehow helping out with inflated prices around the country ?

The Federal Reserve is not the government. I mean, it is, but it’s not. It’s just the governing bank of the US. So every other bank’s rates are based off of it.

Due to low supply, low unemployment, historically low interest rates, and people having excess money to spend “post” Covid, prices were increasing too much too fast (high inflation). Not just housing, everything.

So the Fed attempts to slow the inflation by raising interest rates. The idea is that people will start to save some of the money instead of spending it all. That way supply can “catch up” and prices can settle.

The other side of this hill though, is that if rates get too high too fast, people will no longer borrow to buy things or will save instead of spend. Companies profits will decrease, so the markets will go down. This then leads to more people pulling out of the “volatile” market for a safe 2%+ at a bank and a potential recession.

Basically they sat on the low/0% rate for too long and now it’s a shit show.

[gt7301b]

This vox article is a pretty good explainer:

www.vox.com/policy-and-politics/23354658/federal-reserve-interest-rate-increase

[notsopicky]

jlt19, based on your (awesome, thank you!) description, it sounds like a high-wire act.

Anecdote: I bought a car yesterday. Via text message pretty much, lol (that's its own story). There are no cars on lots; I understand why, and yet it's still hard to wrap my 48 yo brain around. The earliest I can take delivery is October 26. Re: finances, the rate was 1.9% for 36 months, 3.9% for 48 or 5.9% for 60 months (and that's with my credit score at the top of the scale. I went w/ 36 mo). Of the 7 cars I've owned as an adult, over half of them I purchased w/ 0% interest. I strongly considered leasing, but the rates were even higher, and I was concerned about mileage b/c I am going to have to drive a good distance out of state more often than I ever have in my life.

The payment is comfortable and I am happy to get a car that I really like, but man, it was the weirdest buying experience ever on multiple levels.

PS: The manager said that there was a chance I could get it earlier. I hope that happens.

[carrotsmakemefat]

Oct 1, 2022 20:28:45 GMT -5 konapoppy said:

Oct 1, 2022 20:17:23 GMT -5 Velar Fricative said:

I understand the mechanics of this, but I’m questioning how we are expecting supply to catch up with demand WRT to housing when supply is just so bad (both due to people staying put and not enough homes being built) and will take potentially years to catch up.

www.cnbc.com/amp/2022/09/09/housing-market-confusion-whats-happening-next.html

This article is interesting because it talks about new home builds slowing because of lack of demand, but I would have thought that supply chain and availability of both building materials and skilled labor would have played a role, as well as NIMBYism for high density housing. I think we have a few folks in that industry on the board- hopefully they will chime in.

That’s a good point. I’ll add - I get calls and e-mails a lot from new builds (like Ryan Homes) letting me know they are now offering closing cost assistance, etc. that was unheard of last year when we bought in 21.

It seems to me there is a big disconnect between some builders putting homes on the market at crazy prices (like 2020 and 21) and others that are still pricing high but realistic about less people coming in the door and offering incentives.

My theory is people who aren’t as smart about money or NEED a new car as an example (new to them; whatever) is they will find a way to get it anyway, maybe making a less desirable financial decision.

The expectations of those making these decisions with rates seems to be disconnected from reality of how people make decisions.

[goldengirlz]

John Oliver did an episode on this topic a number of weeks that did a good job breaking it down.

Part of the reason nothing makes sense is because the entire economy isn’t making sense; there’s even been debate over whether we’re actually in a recession (although I think the general consensus these days is “we are.”) Costs have been skyrocketing but the labor market (outside tech) has been strong. Economists also have been debating what’s causing the inflation — whether it’s demand-side or supply-side, or both. For instance, if prices are going up because of supply chain issues (which have been a mess), then raising interest rates won’t have as much of an effect on bringing them down. The Fed raises interest rates to make it more expensive to borrow money. But people have also been sitting on cash from not spending as much during the pandemic, and the stock market was at historic highs. Of course, when interest rates went up, stock prices began falling, and venture capital firms started tightening the purse strings (which affects startups and is why you’re seeing the mass layoffs in tech right now) so there’s a whole cyclical effect beyond just mortgage and credit card rates.

[konapoppy]

Here’s a NYT oped on Newsom trying to stop the NIMBYism and increase housing:
www.nytimes.com/2022/10/04/opinion/california-housing-crisis.html?campaign_id=39&emc=edit_ty_20221004&instance_id=73676&nl=opinion-today®i_id=56438592&segment_id=108910&te=1&user_id=ae113d38fb030437f60b7c35d7ca016f

[calamity]

We bought our house recently when rates were starting to rise and our broker suggested we get an ARM rate and then refinance... and that was a solid hell no from me. I remember 2008.

We ended up getting locked into a lower rate and paying some money to get it even lower but it was stressful with all the chatter of rates just going up and up.