153: Ask An Advisor: What You’ve Been Thinking But Haven’t Asked (Ft. Shaun Meloy) Pt. 1

Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts: Josh Robb, and Austin Wilson.

Austin Wilson:

All right. Hey, hey, hey, welcome back to The Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. I am Austin Wilson, Research Analyst at Hixon Zuercher Capital Management.

Josh Robb:

And I’m Josh Robb, Director of Wealth Management at Hixon Zuercher Capital Management. Austin, today we have a lot of fun stuff, but first, how can people help us grow our podcast?

Austin Wilson:

Yes, absolutely. We would love it if you would subscribe, if you’re not subscribed already. So go ahead and hit that subscribe, follow, whatever that button is, hit it. That way you get new episodes when they drop every single Thursday, and we would love it if you would leave us a review. That is how you can help us. But today, we are excited because we have a special guest, friend of mine who is going to be asking the questions that everyone else is thinking but hasn’t really asked.

Josh Robb:

That’s right.

Austin Wilson:

So I introduced to you, Mr. Shaun Meloy. Shaun, welcome to the show.

Shaun Meloy:

Hello. Thanks for having me today.

Austin Wilson:

Of course.

Shaun Meloy:

It’s exciting to be on somebody else’s podcast. It’s weird to hear somebody else do the open and the close, later on, and then to be able to walk out of here.

Josh Robb:

And be done.

Austin Wilson:

And you’re done.

Shaun Meloy:

And not have to edit.

Austin Wilson:

You don’t have to edit.

Josh Robb:

I know.

Shaun Meloy:

I don’t have to do anything to it. I just get to sit here and just dump all of my questions.

Austin Wilson:

Brain dump.

Josh Robb:

That’s right. That’s right.

Austin Wilson:

It’ll be wonderful.

Josh Robb:

I brought a question for Shaun.

Austin Wilson:

Oh right now?

Josh Robb:

First question, very easy.

Shaun Meloy:

You did not tell me there would be questions.

Austin Wilson:

There is. This is two-way conversation.

Josh Robb:

How frustrated do you get, because your name is one of those names that can be spelled many different ways.

Shaun Meloy:

Yeah, like three, four ways.

Josh Robb:

Yes. I think one of the most differently spelled names that I can think of. Does it frustrate you when someone takes a shot at it and misses or…

Shaun Meloy:

No, not anymore. I mean, you grow up a lifetime of looking at the souvenir rack with all the little license plates with everybody’s name on and yours is never there, and if it is there, it’s spelled completely wrong.

Josh Robb:

Of course.

Shaun Meloy:

So, you grow up with that level of disappointment over and over and over and over again, that when you get to my age, you’re just like, whatever. And so, when people say, “Can I get your name?” And I’m like, “Shaun,” at least some people, a good majority of people do you the courtesy of saying…

Austin Wilson:

Can you spell that?

Shaun Meloy:

More often than not though, it’s A-W-N and I’m like, “It doesn’t matter. Just spell it however you want to.”

Josh Robb:

As long as you say it the right way.

Shaun Meloy:

Yeah. I’m like, “I don’t care how you spell it is what it is. Just go with it.”

Josh Robb:

Okay. Whatever works.

Shaun Meloy:

So, this is as long as you call “Shaun” and I’ll know, except when we went out to lunch the other day…

Austin Wilson:

Main Street Deli.

Shaun Meloy:

Yes, a place downtown. There’s like three, four people in there that all were Shaun.

Josh Robb:

That’s so funny.

Austin Wilson:

They all stood up to go. We were sitting there having lunch for, it was an hour of lunch. And while we’re eating, we already had our food after a while.

Shaun Meloy:

Yes.

Austin Wilson:

While we’re eating, I bet Shaun came up five times and I don’t know what it was, other people’s orders named Shaun, desserts, drinks, who knows what they were ordering, but I was about to go line up again.

Shaun Meloy:

I thought about just going up. I was keeping an eye on the counter. Like “What are they getting?”

Austin Wilson:

If it looks good, I know.

Shaun Meloy:

I could diversify to something else round two.

Austin Wilson:

See, that’s the risk though. I don’t like onions and they put a lot of onions on stuff. Yeah, life’s too short not to eat onions.

Shaun Meloy:

But I’m glad to be here today. Thanks for having me.

Austin Wilson:

Yeah, so Shaun, I guess introduce yourself a little bit, talk about what you do, talk about your family and your interest in the world of finance.

Shaun Meloy:

Well, as you said, my name is Shaun. I’ve been married to my wife for about 15 years now. We have two little kiddos, one 11 and one 8, that’s Cohen and Laurel and I actually work at a church here in town. I do mostly communications stuff, a lot of graphic design, audio production, because we have a podcast and I produce and edit all of that.

Austin Wilson:

Which we’ll plug in the show notes and link that in the show notes as well. So check out the Gateway podcast.

Shaun Meloy:

It’s fine, whatever. People don’t need to listen to me. But I do that and do music too. I play…

Austin Wilson:

A little bit.

Shaun Meloy:

A little bit yeah.

Austin Wilson:

That’s actually how Shaun and I met.

Shaun Meloy:

Yes.

Austin Wilson:

So back in the day, this little college kid walked into Shaun’s office and said, “I want to play guitar!”

Shaun Meloy:

With a buzz cut.

Austin Wilson:

Oh yeah.

Shaun Meloy:

With a buzz cut.

Austin Wilson:

I want to play guitar. And Shaun’s like, “Oh, you know a bar chord? Sure you’re in.”

Shaun Meloy:

But he was a pretty solid guitar player, and he had good choice of footwear. So, I said…

Austin Wilson:

That matters.

Shaun Meloy:

Yeah, let’s take a risk.

Austin Wilson:

And it worked out.

Shaun Meloy:

Listen, I analyzed the fundamentals.

Austin Wilson:

That’s right.

Shaun Meloy:

And I made a recommendation.

Austin Wilson:

Made a recommendation.

Shaun Meloy:

Did a cost analysis.

Josh Robb:

For free we can bring him on.

Austin Wilson:

But yeah, that’s Shaun.

Shaun Meloy:

Yes, that’s me.

Austin Wilson:

So, finance wise, so obviously you’ve been around a couple market cycles, you know what’s going on.

Josh Robb:

Did he call you old? Is that what he just did? Being a couple market cycles?

Shaun Meloy:

I am 40. We’re at the older end of the millennial spectrum.

Austin Wilson:

Yes.

Shaun Meloy:

So, we’re the elder statesmen.

Austin Wilson:

Elder millennials.

Shaun Meloy:

We’ve been through all the things.

Austin Wilson:

Yeah.

Shaun Meloy:

We’ve been through all of them at this point I went to school for business, so I had finance classes. So that’s kind of where my interest, like a cursory interest.

Austin Wilson:

Oh yeah.

Shaun Meloy:

A hobbyist’s interest in finance comes from. So, when things are going wonky with the stock market, that’s probably the worst time to be texting an analyst. It happens like “Austin, check this out.” All these things that I catch on the news or whatever I’m listening to.

Austin Wilson:

Twitter.

Shaun Meloy:

Twitter, yeah, Twitter. I follow a couple of economists and whatnot on Twitter. That’s a weird thing to do, but it’s fine.

Austin Wilson:

It is.

Shaun Meloy:

When you’re not in finance, but just kind of trying to understand the world. I think most Americans probably, when we talk about the economy, they think the Dow Jones Industrial and I’m like, “Well that’s a piece right of it. But that’s not the economy.” And so I always have one, I mean just by nature of what I went to school for and by my own general curiosity about the world, that’s where my interest in this comes from.

Josh Robb:

There you go.

Austin Wilson:

Absolutely. And you came prepared with some great questions today. So Shaun…

 

[5:47] – Debate on If We’re in A Recession or Not?

 Shaun Meloy:

You don’t have any questions that you guys have to hash out so I can see.

Austin Wilson:

I mean we’re on the same page.

Josh Robb:

You want to get an argument? Yeah, there’s a couple we could start. The one question that keeps popping up, and this is something that I get asked all the time by clients, are we in a recession? And that’s one that we could get into debate, and we actually have done some podcasts talking through that. But the idea of a recession, you talked about the economy and the market are two different things. And for the economy to be in a recession, it’s got to be officially…

Austin Wilson:

Announced.

Josh Robb:

Announced.

Austin Wilson:

By the N.B.E.R.

Josh Robb:

Yep. But historically in your classes they probably told you two negative quarters…

Austin Wilson:

Two negative quarters.

Josh Robb:

Gross domestic product GDP is the way to determine it. And I think this is the first time that has happened without it actually being called a recession yet.

Shaun Meloy:

Let me ask you this. So, all of, everything that’s going on in the economy right now, there’s some confounding factors there.

Josh Robb:

True.

Shaun Meloy:

That are leaving people, I’m assuming like Austin going, “Scratch my head. This doesn’t make sense in light of this thing over here.”

Austin Wilson:

Yeah.

Josh Robb:

Yep.

Shaun Meloy:

So do you feel like them saying, “No, No, we’re not ready to call the game on a recession yet.” Is it just a little bit of denialism or let’s just be safe? I mean, because when somebody announces it’s a recession, I mean the market typically just has a full-on freak out.

Josh Robb:

It’s not a good thing.

Austin Wilson:

Yeah, I mean, so the thing is that when you look at the economy of the United States, 70% of it is consumer driven. When you look at the fact that we have three and a half percent unemployment, and we have…

Shaun Meloy:

Which is historically low, right?

Austin Wilson:

It is.

Josh Robb:

That’s very good. It’s a very good a thing.

Austin Wilson:

We have three and a half percent unemployment; we have 10 million job openings right now and we have consumer spending that’s holding up really well.

Shaun Meloy:

In spite of inflated prices.

Austin Wilson:

Inflated price, in spite of like 8% inflation, that’s when the N.E.B.R. says, “Wow, we have all of these good things going for the consumer side of things that represents 70% of our economy, how could we be in a recession?” Even if technically because of things like inventory building or trade balance, we got flipped slightly negative for two quarters in a row. The consumer parts of both of those quarters were very favorable. I think that’s giving the N.B.E.R. a pause to say, “Whoa, I don’t know if that technical definition really hangs right now.” Whereas an analyst guy, I want the yes or no, I want the answer.

Shaun Meloy:

Yeah.

Austin Wilson:

I want to know, are we in a recession based on numbers and facts alone? They’re not willing to make that call yet.

Josh Robb:

So I think part of it is saying that word changes people’s mindset, so they want to be careful about that. And then the second part is broad economic downturn. And their argument is it’s really not broad yet because labor and unemployment and sales are still looking pretty strong. So, it’s not broad yet. We’re feeling it because inflation impacts everybody. No matter what your income level, as you feel the cost of goods adjusting, the lowest income earners feel it the most, but everybody feels it.

And so I think it feels worse now. And I agree that they’re saying, “It’s not broad yet.” It hasn’t affected the whole piece of our economy, but it’s just one of those weird things that, you add in politics and an election year and all that, you can get dicey on what they’re trying to do. And it comes down to though is whether or not we’re in a recession, are people making the right decisions they need to? And that’s where it comes back to is even when there’s, go back historically, look at years where we were technically weren’t in a recession, but things were slowing down. You need to be making those changes anyway. So just waiting for someone official to say “Recession” shouldn’t be the trigger point for you making adjustments.

Shaun Meloy:

And I asked that question about denialism because, I mean the economy’s cyclical and generally isn’t sort of the prevailing wisdom that you have a recession about every seven, eight years?

Austin Wilson:

Yes.

Shaun Meloy:

It’s been 13 since the last one. So…

Josh Robb:

Excluding COVID.

Shaun Meloy:

Yeah. And that was so weird because that was kind of like a hard reset because a free market, it can only get manipulated so far before that free market’s going to say, “Nope, the rubber band is snapped. You stretched it too far. I have to rebalance myself.”

Austin Wilson:

Exactly.

Shaun Meloy:

But I’m like, “Was COVID though, a market correction or was it just extenuating circumstances due to a century event that nobody foresaw?”

Josh Robb:

Well, the interesting thing is, we’ve talked many times, and you’ve probably heard about yield curve inversions, right? So that would mean when you’re looking at bond prices, obviously you can have bonds across different maturities, and generally speaking, a shorter-term bond is going to have a lower yield, than a longer-term bond.

Shaun Meloy:

Yes. They reward you for hanging out longer, right?

Josh Robb:

Yes, exactly. So, in times leading into economic downturns, you often have what’s called a yield curve inversion, where you have higher yields on the front end of the curve and lower yields on the long end of the curve. And we actually, ironically had a two and ten, which is the yield curve everyone looks at, two-year bonds versus 10-year bonds. Yield curve inversion in 2019 before COVID, even though there was no sign of a global pandemic or a global recession coming, that would confirm that theory going, like you’re going to back test this for a hundred years and it worked every time. We had no idea there was a pandemic coming, yet we had that sign coming. So very, very, very interesting sign there.

Shaun Meloy:

And it’s just been so interesting to hear just general people talking like, “Oh, I think we’re headed for a recession.” And early on I would’ve been like, “Yeah, totally.”

Josh Robb:

Right.

Shaun Meloy:

I don’t know what I’m talking about, but sure. But now you’ve got some economists saying “No.” You’ve got Jamie Dimon saying, “Oh yeah, we’re like six, nine months out.”

Josh Robb:

Yep.

Shaun Meloy:

You’ve got the president, which I mean this could just be all election season politics saying, “No, I don’t think we’re going to. And if we do…”

Josh Robb:

It’s going to be slight, yeah.

Shaun Meloy:

Slight shallow quick, we’re in and out. Like it or not, the government has some pretty savvy economists working for them.

Josh Robb:

And I take his opinion the least. It would be any president because their words are the most powerful.

Shaun Meloy:

Yes.

Josh Robb:

If they say we’re heading to a recession, everybody listens to what the president just said, and they almost made that a foregone conclusion. So, I think they always have to be more optimistic and less doom and gloom just because of the weight that their voice carries. So, I think they’re not going to admit we’re in a recession until we’re like right in the middle of a recession.

Shaun Meloy:

Yeah, I know the president, I don’t know who Justin Wolfers is.

Josh Robb:

Right, exactly. Yeah, that’s what I mean. They’ve got to be very careful what they say. So, I think historically presidents are always going to say, “Yeah, if we do, it’s going to be light. It shouldn’t be a problem.” Because I mean that’s part of their job is to help encourage and keep things rolling as long as they can.

Shaun Meloy:

So, I’m listening to these two guys…

Josh Robb:

But yeah, they’re on the other end.

 

[12:12] – Who Should You Listen to About the Markets? Is Jamie Dimon Credible?

 Shaun Meloy:

Why should I listen to Jamie Dimon about it though? He’s the president of a bank and, what The United States’ largest bank.

Josh Robb:

It is.

Shaun Meloy:

Why should I, he’s going to understand how to navigate a recession and in a lot of ways banks look to capitalize off of recession, so why should I listen to that guy?

Austin Wilson:

Well, he’s been through it a lot. And I could say one reason to, that Jamie Dimon has kind of earned the status of pretty smart guy when it comes to what’s going on.

Josh Robb:

He’s out there, yeah.

Shaun Meloy:

Because he’s kind of…A lot of the market looks at Jamie Dimon, and what he has to say.

Josh Robb:

They do yeah.

Shaun Meloy:

And I’ve over the last few years I’ve really noticed, well, “Jamie Dimon. Jamie Dimon.” And I’m like, “Why?”

Josh Robb:

Well, it was the global financial crisis that really put him on the map as a guy who kind of knows what’s going on. So, he…

Shaun Meloy:

The one in 2008?

Josh Robb:

The one in 2008.

Shaun Meloy:

Okay.

Austin Wilson:

So, the one in 2008 really made, he made a lot of decisions during 2008 that made JPMorgan the behemoth that it is today. And actually, before that, he was part of mergers and acquisitions that got it to have all of the different arms that it has right now. So, his navigation of 2008 was really what everyone said, “Oh wow. That guy actually knows what’s going on from a financial institution perspective.” Now again, that is disconnected from politics, that’s disconnected from other areas of the market, but from a financial institution’s perspective, they’re the largest and they’re running, I think I heard the other day, they’ve got $1.7 trillion of cash. Now that’s consumer cash as well as their own cash on the balance sheet. But they know what to do with their money when things are looking a certain way. So, I think people are looking to him because he’s been through some sketchy stuff before.

And the banking system, one thing people don’t understand is that our financial system today, in 2022 in the United States specifically, around the world is a little bit different, but the United States specifically is so much more stable, so much more capitalized in terms of having assets to back up liabilities than it was in 2008, in 2009.

Josh Robb:

Yeah, we’re a lot more stable now than we ever have. So, I don’t think he’s probably as stressed about going into recession as 2008, 2009, when banks were really worried about their balance sheets, but he’s probably looking around at what he sees. And that’s the other thing about JPMorgan and a lot of these banks is they can look at what their consumers are doing trend wise, because they actually see checking accounts and savings accounts and they can see who’s holding cash, who’s not, how much…

Austin Wilson:

What cushion to they have.

Josh Robb:

How much do they have in kind of day to day, week to week cash flow and know, “Hey, if things do get rough, there’s going to be a lot of people hurting.” And as a result, they know how that’ll impact the economy so they can kind of see some of that stuff.

Shaun Meloy:

So maybe should I listen to Jamie Dimon a little bit more, as a consumer, as an everyday person? Should I maybe a little bit more because he’s, in a way, he’s probably going to have my interest at heart a little bit more than these other two guys are.

Austin Wilson:

He’s boots on the ground for the consumer. He’s living in the consumer world, he’s lending the consumers, he’s got consumers cash on hand.

Shaun Meloy:

If I’m making money, he’s making money.

Josh Robb:

The only other incentive he has is he likes higher interest rates because they increase his borrowing. And so, for him, when the Fed is raising interest rates, banks have just seen this increase in what they can then lend out, which from a spread standpoint, they’re making more money and they’re not obligated or forced to raise savings rates at any equivalent rate. So as that spread widens, they’re making more profits. And so, the only thing that puts him in a different corner than you is that he loves higher interest rate whereas the average consumer, we’re not a fan of higher interest rates.

Shaun Meloy:

I don’t want to borrow at a higher interest.

Austin Wilson:

There is a conflict of interest obviously, and I know JPMorgan just had earnings this week and JP Morgan had record quarterly net interest income. So, the interest that they’re earning on their balance sheet, they just had record ever. And the Fed has only started raising rates in March and we’re already at record levels of interest. So, if they continue to go, as they’re planning on doing, which is a whole another topic I’m sure we’re going to get to, if they’re going to continue to increase interest rates for the next couple quarters, whatever that looks like, that spread is only going to get wider. So, there is a notable conflict of interest there.

Josh Robb:

He wouldn’t mind maybe a slow recovery out of here where the Fed has to keep rates higher for a while because they’re just going to bank all that money.

Shaun Meloy:

Print money.

Austin Wilson:

They’re going to bank.

 

[16:17] – Is It Positive for JPMorgan When Consumers Can Afford Less?

Shaun Meloy:

So let me ask you this. So, there’s been that figure that’s come out over the last couple weeks with the interest rate rising because it was what, 25 basis points and 75 basis points and how much, because now this time a year ago you were getting mortgages locked in at 3%, now it’s like 7%, 8%?

Josh Robb:

Yes.

Shaun Meloy:

And before, if your budget was like $3,000 a month on a home, you could afford to take out a $7-800,000 loan. Now it’s more like three. So, is for a Jamie Dimon, a JPMorgan, their balance sheet, is it better that they have high interest but a lower mortgage? Because then if they default on that, that’s less money that’s being taken out of their pot or they’re having to worry about versus a higher amount. So, less buying power, is that better for them that we can afford less?

Josh Robb:

It is in that it spreads their risk out. So, if, let’s say they were going to loan $700,000, a year ago they’d get one mortgage out of that, but this year they’d get two mortgages out of the $700,000.

Shaun Meloy:

So, risk diversified…

Josh Robb:

So, they just diversified the risk.

Shaun Meloy:

Gotcha.

Josh Robb:

So if one defaults, they still have half of that income still coming in, so their default risk is mitigated. So to answer your question, yeah, they do like that. If all else things equal, they’re getting the same income between the two, higher interest rate, lower price, they’re going to take spreading that risk out instead of one large one.

Shaun Meloy:

That increases their customer base.

Josh Robb:

Absolutely.

Austin Wilson:

And the interest spread is huge on a 7% mortgage rather than what it would be on a 3% mortgage. So they’re earning more interest.

Josh Robb:

Compounded.

 

[17:48] – The Effects That the Past Year Has Made on Home Affordability

 Austin Wilson:

A 7% mortgage as a percentage obviously. Factor in home price appreciation, year over year, which a couple months ago was at the highest we’ve seen in a long time, 20% per year increase year over year in home prices, average home price in the U.S. Factor in that and a 7% mortgage versus a three and a half or whatever that would be, so doubling your mortgage rate and a 20% increase in your house, the average mortgage went up 100% for the same house.

Josh Robb:

It doubled, like you said.

Austin Wilson:

Same house.

Shaun Meloy:

That’s insane.

Austin Wilson:

Yeah. Purchased last year versus purchase this year, the same house was twice as much on a monthly payment basis.

Shaun Meloy:

And I’ve heard that a lot. Some of the more recent data has indicated that a lot of people that sold their house and then bought a house during the period of whatever that real estate are regretting it because there was so much selling yourself out just to get into another home because “Oh I’m going to skip inspections of this, that and the other thing.”

Austin Wilson:

Boy I don’t know.

Shaun Meloy:

And now people are like, “My house has all these problems with them.”

Austin Wilson:

And I’m stuck.

Shaun Meloy:

“I lost all the equity I had in my old house.” Normally you would hope that you would sell for more than you bought it in for it and you’d be able to contribute that to a down payment or you’d be able to just have all that equity built in. But then when you have to pay more for the next house, a lot of that goes down. So you’re in a worse position now it seems like.

Austin Wilson:

Well and your home value is going down slowly right now as well. So, things peaked out a month or so ago, and when you think about what a 7%, 30 year mortgage does for home prices, it puts downward pressure on them because the home affordability is less. So, if the mortgage rates are going to stay as high as they are or go up, that’s going continue to cool off housing price increases, and so these people could end up theoretically then being underwater.

 

[19:23] – Are Recent Home-Buyers in Danger?

 Shaun Meloy:

So that was going to be my next question then. Are we looking at a picture where there’s a bunch of people that overpaid for houses and now if things continue like they are for 6, 7, 8, 9 months, there’s a real danger of people being underwater?

Austin Wilson:

Yep.

Josh Robb:

There is, but the difference between 2008, 2009 where we had the housing crisis and now is fewer people are using adjustable-rate mortgages.

Austin Wilson:

Yes.

Josh Robb:

That was a huge problem in 2008, 2009. Now you have a fixed rate. The difference between then and now is even if your home price goes down and you’re technically underwater, as long as you can make that fixed payment, and we just talked about unemployment being historically low, people’s income is not in jeopardy at this point. And even if my home price went down, it means I probably can’t or don’t want to sell, but I’m not in danger of foreclosing or losing, because the banks, even though you’re underwater, they’re not going to come back to you and say, “Hey, we’ve got to readjust this.” You have a 30-year mortgage, as long as you’re making the payments, it’s indifferent to everybody that the housing prices adjusted.

So there’s less danger of the homeowner needing to foreclose or walk away or any of the things we saw at oh 2008, 2009 because they’ve locked in a low interest rate and as long as their income stays the same, because that’s the other thing is banking got a little bit more strict on who they’re lending to.

Austin Wilson:

Well, that’s what I was going to bring up is…

Josh Robb:

We should see fewer foreclosures from that.

Austin Wilson:

Credit quality, credit quality from a loan origination standpoint is head and shoulders above where it was standards wise in 2006, 2007, 2008, where subprime mortgages were norm, you didn’t have to have any credit. You could buy a house as a, working fast food or whatever, it didn’t matter. You can have a $400,000 house for nothing, but now you have to have a pretty good credit score to get a decent rate on a mortgage.

Josh Robb:

So I don’t think we’re in the danger. What you’re going to see, the result of that is fewer homes for sale, which we’re already short supplied. So you’re just going to adjust that pressure from that standpoint. So anybody looking for a home, limited inventory and there’s going to be a lot of people fighting for it, so you’re going to kind of see that pressure where housing prices may not drop quite as fast as they did 2008, 2009 because there’s still some underlying demand of people saying “There just isn’t that much out there, so when something comes available, I’ve got to be ready.”

Shaun Meloy:

It feels, based on what you guys are saying, what I’ve read, it feels like there’s going to be some people that get into trouble, but it feels this time around it’s going to be a little bit more taking a shot from a 22 rather than a Howitzer.

Austin Wilson:

Yes.

Josh Robb:

Yeah. Oh yeah. It’s going to be limited. Like you said, people who maybe overpaid for something that they should have had an inspection on those type of things, and then they may just say, “You know what? The cost of fix ups just aren’t worth it.” And you’ll see maybe some of that type of foreclosure or adjustments. But in general, if I bought a new house, maybe I overpaid for it, but I locked in a 2.8 mortgage, and then I looked at what I could buy now at seven, I’m probably still happy, even if I overpaid to say, “Yeah, but what I would be paying monthly is still a better deal than what I could get right now.” So, I think you’re still going to have kind of that in between where you’re still saying, “Oh, you know what? Yeah, I maybe got a little carried away and overpaid, but what I’m paying monthly I can afford and comparative to what I could change it for. It’s still the best deal I have out there.”

Shaun Meloy:

So, you talked earlier about how “Well you still got your income, your income’s not at risk, you’re in a fixed interest.” So those payments…

Austin Wilson:

They’re the same.

Shaun Meloy:

It’s not going to be like 0% and then by month eight it’s like it ratchets up.

Austin Wilson:

Yep.

Shaun Meloy:

How do you factor inflation into that though, because when people were buying these houses like crazy, inflation wasn’t raging like it has been for the last eight months, what is it? But right now, I mean the new numbers came out just what, yesterday? Two days ago?

Austin Wilson:

Yeah, 8.3.

 

[22:57] – What Impact Does Inflation Have on Ability to Make Home Payments?

Shaun Meloy:

And so, it ticked up a little bit. So that means that prices are still increasing, core inflation is still increasing, and they’re talking about how energy prices are going to go up somewhere between 10 and 20, 28% over the winter just because of the price of natural gas and whatnot and oil in general. How do you factor inflation? What impact does that bear on your ability to make a home payment? Because before you could make it, because the price was…

Josh Robb:

Everything else.

Shaun Meloy:

Down here, food, energy, all that stuff was down here, and my home price was up, my home payment was, my mortgage payment was up here. Those things are starting to kind of creep up in equilibrium in terms of its overall stress on your budget.

Josh Robb:

And that’s where you look at the wage increase. So what is the average wage increase we’re seeing this year?

Austin Wilson:

5% per year.

Josh Robb:

And so, if you’re getting an average of 5% inflation’s eight, you’re losing that 3%, does that 5% hang out for a little while, do you get a catch back up? And because there’s 10 million jobs available, and only about 5 million people looking for work right now, there’s this disconnect, there’s also been an increase in people changing jobs looking for higher payment. And so, there’s still the ability to adjust your income upward because there’s a lot of people hiring. So, you’re right that inflation is impacting anybody who is on a tight budget to begin with, it’s just getting tighter and tighter and that’s where you can see some pressure. But at least at this point for a lot of people, there’s the opportunity to adjust your wages still because there’s a lot of job opportunities.

Austin Wilson:

Two components of that is in the CPI calculation, when you’re looking at the shelter component, which is what housing would fit into. 60% of the shelter component is calculated using what’s called owner’s equivalent rent. So that would say, “Shaun, you own your house, but what would you rent it out for?” That’s kind of how that is essentially calculated, and that is what’s being calculated, that’s most of the shelter component of CPI.

Shaun Meloy:

But that’s all just opinion.

Austin Wilson:

It is. That’s just it.

Shaun Meloy:

Well, I have a $1200 mortgage, but I’m going to rent it out for $3000.

Austin Wilson:

A million dollars! So that’s just it. It’s a little bit interesting there, but actually the math of it…

Shaun Meloy:

That seems funny, Austin.

Austin Wilson:

It is funny.

Shaun Meloy:

That seems really funny.

Austin Wilson:

And it takes nine to 12 months to see the craziness of housing price increases or decreases to really be flushed through to owner’s equivalent rent in the calculations. So we actually still have more upward pressure from the housing price bubble boom, maybe I shouldn’t say bubble, that we have experienced at the last year.

Shaun Meloy:

That term makes people feel a little itchy.

Austin Wilson:

I know people don’t like bubble people, but I mean skipping inspections and buying for $50,000 over asking sight unseen, that sounds bubble-ish to me. But anyway, that’s a different question for a different answer, but owner’s equivalent rent is part of that calculation. But the other side of that coin is the fact that the majority of Americans, if their homeowners, bought a house prior to where we are right now in the housing market. Prior to 7% mortgages again, prior to really jacked up home prices. So, a lot of people, especially if they have a fixed rate mortgage, they’re locked in at a three or 4%, 30-year mortgage depending on when they bought it over the last decade. And they have a house that they bought 50%, 40%, 50% less than it’s worth right now. So, they’re in a very good situation and they’re not actually being impacted by that shelter component of CPI.

So, their personal inflation rate might be less than 8.3% because their fixed rate mortgage on their house they bought seven years ago is the same as it was seven years ago, so they might only have a 6% inflation rate. So, if we see a little bit of noise when we think about the inflation that’s published on the news every month or whatever, because that’s not people’s actual personal inflation.

Shaun Meloy:

Yeah, because we were talking about core inflation.

Austin Wilson:

Yeah.

Shaun Meloy:

And so how much that affects the overall rate of inflation versus well, when I go to the store how much are the noodles that I buy?

Austin Wilson:

Exactly.

Shaun Meloy:

How much more expensive are those?

Austin Wilson:

Very different.

Shaun Meloy:

But that rate of inflation on my noodles is going to be different than what I’m paying for natural gas. That rate of inflation’s going to be different.

Austin Wilson:

And that’s why they strip out food and energy to get the core.

Josh Robb:

Yes.

Austin Wilson:

Because food and energy they have, independent of the rest of the economy, they have their own cycles based on supply and demand on food prices and energy prices.

Tune in next Thursday as we continue our conversation with Sean.

Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe and don’t miss the next episode.

Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin, or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.