Physicians' Guide to Wealth

A guide for anyone pursuing financial independence

Reigning in Inflation

Aug 24, 2022

This year’s goal for Jerome Powell, Federal Reserve Chairman, and his committee since January is to slow inflation. The primary culprit was the massive disruption of supply and demand caused by Covid-related government policies. Although governments around the world are cautiously relaxing their restrictions on their society, production from cars to children’s toys is still in flux.

Nonetheless, the imbalance is slowly returning to normalcy. The Federal Reserve’s first step to combat rising inflation earlier this year was to raise their discount rate charged to the largest of central bankers.  Housing is the number one focus of consumer spending, and the 120%+ increase in mortgage rates had an immediate impact on refinancing and housing sales. Since the 30-year fixed mortgage rate peaked above 6% in June, Bank Rate reported last week that the national average mortgage rate remains at 5.66%. This rate is still over 100% increase from the ultra-low rates that were available in the first quarter of this year and did not provide any meaningful relief to new buyers.

The impact on housing has been dramatic. Existing home sales peaked at 6.5 million in January and have plunged 26% since. Year over Year (YoY), existing home sales have dropped 20.2% from the same time last year.

The housing market will most likely continue to slow its pace with mortgage rates still in the high 5% range especially going into the traditionally slow periods of Q4 and Q1. Expanding the perspective of historical housing sales to 1965, a pattern of cycles of housing sales is typical, and the current weakness in sales and pricing will probably extend into spring of 2023 or further.  

The new home market is experiencing a bit more of a pullback, probably due to new homes cost more along with all the after-purchase expenses like landscaping and interior furnishings. July sales plunged by 12.6% Month over Month (MoM) since June to a seasonally adjusted annualized rate of 511,000 sales. Trading Economics reported that July was the biggest drop in sales since February last year and the lowest reading since January 2016.

Housing is the top expenditure for consumers, and the Federal Reserve slowing the housing market has had a major impact on slowing inflation. The result of declining housing demand and sales is increasing inventory. The National Association of Realtors reported that inventory had increased back to levels of pre-covid in 2019.

However, high mortgage rates are not the only influence on housing sales. Household budgets have increased faster than income in the past year, primarily due to higher gas, energy, and food prices. 

Gas prices bottomed in late 2020 due to the historical impact of reducing average car mileage travel as the largest percentage in the history of employees were working from home. Also, countries around the globe instituted global travel restrictions that nearly collapsed the tourist industry. Since then, workers have been slowly and reluctantly returning to the office and increasing their vacation traveling, but the war on Ukraine created new imbalances of supply and a resurgence of gas prices. In 2020 Western Texas Sweet Crude future prices plunged to -$40/barrel (you read correctly, negative) and had since soared to levels not seen in decades. AAA reported that June’s national gas price average is well above the highest price in 20 years at $3.89 per gallon, and in wonderful California, the state average is $5.32 per gallon. The good news is the gasoline futures market continues to decline, with last week the fourth week of declining contract prices. If Iran is able to revive its 2015 nuclear deal with world agencies, then new gasoline supplies and exports from Iran may begin later this year. An increase in supply may further pressure prices to decline, and good news for consumers.

Probably the next most impactful hit on household budgets besides gasoline is food. You may have experienced more than once this year sticker shock at your local food store as the checkout cashier rings up totals of over $700 for a shopping cart of food! It’s not your imagination, and food prices have also soared.


Fortunately, this is not the worst in history as prices soared at much higher rates multiple times in the past 80 years. Hopefully, prices will ease later this year, just as construction prices have declined that few thought would happen.

What Does This Mean to Me?

Our opinion is the slowdown in housing is a good and needed pause to avoid a hypermarket that was the primary concern of the Federal Reserve. The outcome of hypermarkets in any sector always results in rampant pricing increases and subsequent crashes, leaving millions in foreclosure. A still strong employment market will support a strong rental market, and the affordability index for house ownership (ratio of average income to average house price) will continue to improve with increasing household income.

In the meantime, housing prices for existing and new homes will probably sag but not crash. Our opinion for investors is that there will be good but not excellent buying opportunities in the next 12 to 24 months. As inventory grows and listings age, sellers will need to lower prices if they want to sell, which starts a cycle of declining prices. The bottom and renewed demand happen when affordability reaches a favorable buyers’ market, the result of rising incomes and lower housing prices.  

We maintain our favorable view of the US economy and stock market. Yesterday, the S&P 500 experienced its single largest daily decline since June. After a near 19% rally since June 17, one would anticipate a short-term pull back to reestablish new entry points for investors. The index is below its 20, and 50-Day Moving Averages (DMA), and a key for renewed confidence in the market recovery will be the index bouncing off this level and rising above early June levels.

Give us a call if you have any questions about this Weekly Brief or your accounts. We welcome the distinct opportunity to assist you with the financial goals that impact you and your family.




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