Season 3, Episode 2: Interest Rates, I Bonds and Inflation. An I-motional Roller Coaster.
How normal, well-intentioned people often get economic news wrong and then do weird things with their money
Just when you think finance talk can’t possibly get more boring…bring in the three i’s. But wait! There’s some stuff you should know, even if it’s not the breezy summer beach listen you were hoping for.
Apparently there is a new normal when it comes to mortgage interest rates (sit down for that bitter medicine), which is actually the old normal that we forgot about. But Sara’s ears finally mildly perk up at the mention of a high yield savings accounts. Mildly.
And were you one of those people that got on the I bond wagon last year? Time to chuck yourself off, penalties be damned. Explanation within.
Finally, Sara explains how people can scare us with inflation doomsday scenarios to trick us into doing dumb stuff with our investing, and also that my method of gauging inflation by how much my gas costs is unscientific (and, more to the point, a bad way of measuring inflation). The good news is that we don’t have to do it Sara’s way either! Maybe inflation is fake news? I don’t remember. You have to listen.
FYI: Here is the episode we did about gold, in case you want to be able to debunk myths about gold being inflation-proof after listening to this episode.
Ask us your dumb investing and finance questions for Season 3 on our Ask Us page!
We have the social medias!! Here’s our Instagram and Facebook and LinkedIn.
This episode was edited by our co-producer Kelly West. Music by Bad Bad Hats and Devmo.
Transcript for Season 3, Episode 2: Interest Rates, I Bonds and Inflation. An I-motional Roller Coaster
Caitlin [00:00:07] Welcome to women on the verge of a Financial Breakthrough, a podcast where we're figuring out finance. One dumb question at a time. I'm the dummy. Caitlin Meredith, a coach and mediator based in the Bay area.
Sara [00:00:20] And I'm Sara Glakas. I'm an investor, advisor and founder of Blackburn Financial and the Austin Women's Investing Group, which can be found on Meetup and Facebook.
Caitlin [00:00:30] Before we start, do you know a woman who might be on the verge of a financial breakthrough? Will you text her a link to our show and maybe two other friends while you're at it? Also, if you can, please leave us a review. This helps other women on the verge find us and we read all of them and they make us happy cry. Like this one from a listener who said, OMG, I can't express the amount of gratitude I have for this podcast. As a woman of color who has never taught anything, all caps about finances and now being in my early 30s wondering okay, what should I be doing? This podcast gives me a sense of relief and like, I'm not alone. You are not alone. I am right there with you about reaching a certain age, feeling like, oh no, what did I miss? Thank you so much for writing this review and thank you to all of our listeners. Okay, let's get started.
Caitlin [00:01:30] Sara, I have a gotcha question for you.
Sara [00:01:34] Oh, no.
Caitlin [00:01:36] I want to revisit something that you said in season one, episode 11.
Sara [00:01:43] Do you know when the date of this, this episode was?
Caitlin [00:01:47] It matter? Why are you so worried about that?
Sara [00:01:51] Because markets change over time.
Caitlin [00:01:54] Okay, that is not been our message, Sara. It's been that you do one thing, and that's the only thing you should do. Okay, so I said, Sara, what do you think about high yield savings accounts? And I was waiting for a growl and a roar. But you were had a very like the calm diplomatic response. But I'm going to quote you from it. You said. Okay, so I love the idea of high yield savings account. If you have some cash sitting aside and you have nothing better to do with it, then you should just try to put it in a high yield savings account. But I do think that by and large, there's an overemphasis on this idea of people building up their high yield savings account and spending so much bandwidth and so much time and effort to build up a cash savings account that in this interest rate environment. So there's your question about the date probably only earns a point 5%, maybe 1% maybe gets up to 1.5%. And that's just frustrating. So I wanted to give you an opportunity to revisit this idea of the high yield savings account. So I'm going to try again. Hey, Sara, what do you think about high yield savings accounts?
Sara [00:03:06] Well, Caitlin, I'm so glad you asked. Because I feel like in this current interest rate environment, high yield savings accounts are kind of interesting to look at.
Caitlin [00:03:18] Oh, what makes you say that, Sara.
Sara [00:03:22] Do you know anything about the current interest rate environment? Is that something that's like. Common knowledge.
Caitlin [00:03:29] Oh, you mean you're asking a lay person such as myself, who doesn't watch Bloomberg before breakfast? I understand through a frenzy of activity on my, like, Facebook groups of women that talk about managing their household budgets, that the frenzy went from I bonds to high yield savings accounts. So I can only imagine that that means that the interest rates on high yield savings accounts are worth looking at right now. And just before we pressed record, I did my Google, which is, what are the best high yield savings account interest rates right now? And NerdWallet always list them all. So can you do you know what the best one might be right now? What's your guess for the best one right now?
Sara [00:04:17] I bet it's close to 5%.
Caitlin [00:04:19] Yeah, just over 5.05% right now. So I think from that savings episode, you said you don't get out of bed for anything under 5%.
Sara [00:04:32] I think that's about right. I don't even get out of bed For 5%.
Caitlin [00:04:38] But I so barely can tolerate to talk about it now that it's 5.05%. But that can the compared to 2.5% or even 1.5% or two points that that's an actual thing. 5%. Right?
Sara [00:04:54] Right. I mean, now it's an actual thing. I mean, and the way I always like to think about it is high yield savings is a place for cash. It's not a replacement for stocks. It's not a replacement for, an asset class that we expect to have a higher rate of return over time. It's for cash that's sitting there for a month, a year, ten years, whatever.
Caitlin [00:05:22] And especially for a high yield savings account, because you can take the money out without penalty whenever you need it. So it's essentially still a savings account.
Sara [00:05:30] Right? So 18 months ago, at the beginning of 2022, interest rates were still very, very low, very close to 0.5. Maybe you could find a high yield savings account close to 1%. So if you think about the interest in dollars that you receive from going out of your way to open a new account to put a bunch of cash in there to link the new savings account with the old savings account? It's just it just wasn't worth it, right? If you had $100,000 and you're only getting 0.5% on a high yield savings account, what is that, 500 bucks?
Caitlin [00:06:15] Yeah. Which in and of itself, for someone who doesn't have that much in their account, it's like $500. But the effort, especially if then you're going to change it according to when the interest rates are if it's like a part time job now chasing the interest rate for your savings.
Sara [00:06:33] Well, right. If you don't have $100,000 in high yield savings, then the dollar benefit of chasing interest rates is even worse, right? Right. If you're looking for a place for $1,000 for your emergency fund or $5,000 when you take, you know this the best rate in a low interest rate environment and multiply it by the number of dollars that you are saving. The number of dollars is so low you may as well work an extra shift, sell something on eBay, or, you know, try to find lower price gas or something like that. It would take less time than chasing rates in a very low interest rate environment.
Caitlin [00:07:16] Okay, I get it now. The $100,000 versus the 500 savings is the real thing here, not the 500 in itself. But like your proportion of what you're going to earn on that quantity of money. Those of us without $100,000 in our savings account, because that's just like the extra money we don't need to be investing. It's really hard to put ourselves in that in those shoes.
Sara [00:07:41] Right? I mean, so this kind of goes back to my original point, which I still think holds true if you have a relatively small amount of savings that is there for an emergency, how much time can you spend even chasing a 5% interest rate? You know, 5% on $1,000 is 50 bucks a year, right? Yeah. Even, you know, if you have managed to save $1,000 and this is your emergency fund, is it worth $50 a year to open a new account, transfer your money over there? The answer is maybe. Definitely. A better calculation than if you're at a 1% interest rate and you're talking about $10, but still, even at higher rates. I think that people need to think about the actual cost in hours spent. To set up these new accounts to add a layer of complexity in their life and make sure you know what you're getting for it. 5% sounds like a lot, but 5% multiplied by the amount you're saving in dollar terms is not that much, but at 5%, it's way more interesting.
Caitlin [00:09:01] Okay, so you're at like on a scale of 1 to 5 now your interest is at about a 2.5.
Sara [00:09:09] Million dollars I reported.
Caitlin [00:09:13] Right. But then you would say it shouldn't be on your savings account at all. Well, which is brings me to a question which I think I'm pretty sure I already know the answer. Well, at least your answer to it, but it's confusing when the stock market itself isn't giving 5%, or is giving much less than that to say, like okay, instead of contributing to my 400 and K for this year, while the high interest up high, I got high. What the hell are we talking about? High yield savings account. Well, the high yield savings account interest rate is at a solid five.
Sara [00:09:51] So I think but I think this is really important, Caitlin, because I think this is where individual investors get tripped up. If I told you that you could get a guaranteed 5% rate of return on a high yield savings account, and it's FDIC insured, and you're not going to lose any money. Yeah. What would most people say?
Caitlin [00:10:13] Well, depending.
Sara [00:10:14] Sounds pretty good.
Caitlin [00:10:15] Exactly. And in depending what era, you know, like 2020, we'd be like yes, jump on it. There was so much insecurity about the stock market. Like that does not seem like a safe bet. So a 5% guaranteed safe bet.
Sara [00:10:30] Yeah. And then over the last year if you'd made that bet a year ago and the stock market is up 13, you missed it, right. You took the safe bet and you gave up the upside of the risky bet. And if you if you do that for long enough, you miss out on a lot because that is not an infrequent occurrence right over the long run. And even over most of the middle term, the stock market should outperform cash. But it feels like we should be able to tell when it's going to happen.
Caitlin [00:11:06] Yeah. That they should ring a little bell and be like, cool, it's going to go up, put your money back on the market.
Sara [00:11:11] Yeah. And they don't. Right. So again it's coming back to oh 5% is interesting. I think I want to go back to my original point 5% is interesting for cash. So if you.
Caitlin [00:11:24] Already have cash you're not making any different decisions. It's going to be cash no matter what.
Sara [00:11:30] Exactly. So it's not the difference between cash and stocks. Which one is better? It's everyone should have some amount of cash to protect them from uncertainty. And so whatever that amount is for you, 5% is interesting 5% in cash relative to the stock market over three years, five years, ten years up is probably not going to be a contest. The stock market is probably going to win.
Caitlin [00:12:00] Okay. And that's why I have faith in that. Because you told me to.
Sara [00:12:07] I kid you, but there's nothing like if you look back over the last year or the last three years. Like what can you hang your hat on to be like, you know what? The stock market's going to be good.
Caitlin [00:12:18] My own psychology regarding the money I put into my retirement account just has to do with my faith in you. That's really what it is. I've just I just transferred from any sort of bigger idea about capitalism to just like Sara said, I. It's like guilt. If I disappoint you now, I'll take it. I mean, it's making me do the right thing, but I always want to test the your authority over my, financial guilt. And so this idea of this high yield savings account that's now at five is so tempting because it takes all of that emotional roller coaster away. But now I'm wondering when you taught us about compounding interest and how that becomes the flywheel, that how many times is your money going to double over the time, you know, between the time that you save it and the time that you need to use it after retirement? Well, from the little financial math I know how to do, I don't see how 5% could get you there. I don't see how 5% interest rate could double your money. It would take so long to do that. And so from there, I can see that even though it's safe, it makes me feel safe today, looking at the balance that it has no chance of going down. That in 20 years. 30 years that. What? I'd really feel it then.
Sara [00:13:43] Yeah. That's right. I mean, so if you string enough of these years together, I'm going to wait till the market gets better. I'm going to wait till the news gets better. I'm going to wait until I feel better. I'm going to wait until there's a sign that I should not take the 5% in cash, and instead dip my toe into the stock market. You just keep delaying that doubling cycle. You can't get another doubling cycle in there before you need the money before you die. Yeah. So doing it faster is, you know, for people who are trying to build wealth, not preserve wealth, trying to build wealth, it's we really have to think really, really hard about when we start that cycle and the sooner the better. In my opinion.
Caitlin [00:14:27] But it does make me curious about I bonds. Now, we had we talked a lot about I bonds because everyone, it seemed and their mother was talking about I bonds. And I'm curious for those people who really went for it in my memory as a response to the insecurity in the market. And because inflation was so high, they wanted to benefit from that. But you really detailed how locked in people are and how it's a very variable interest rate and there's penalties for withdrawing the money early, etc.. So by the end of that episode, I was like, oh, thank God. One thing I don't have to figure out anymore doesn't sound that great, but a lot of people are had them that never had them before. And I'm curious what that looks like for them now.
Sara [00:15:13] Yeah. So if you opened your, Treasury Direct account in 2022, which is when most people did it, there was, for 2022, you probably received a blended rate of about 8% on those bonds, risk free. So if you put the max of $10,000 in and earned $800, you would have almost you'd have somewhere around $11,000 by now. Okay. But those rates on the I bonds as inflation has come down. The rates on the I bonds have come down because they're pegged to the stated inflation rate that gets that gets announced in May and then again in November I think. So I just I actually didn't know what the rate was until you. As asked. So as of today that I bonds are paying 5.27%, which is much less than the nine the nine ish percent that they were paying a year ago or 18 months ago.
Caitlin [00:16:16] And just a little over the high yield savings account, which doesn't have any penalty or lock in.
Sara [00:16:21] Exactly. So does it make sense for someone to take the the interest that they earned on the high bonds and sweep that money into something that is more accessible, more liquid, and paid the penalty you'd pay you'd sacrifice three months of interest if you've held the bonds for less than three years, I think that's what the penalty is. But even so, I think a lot of people would say, yeah, that would be that's worth it.
Caitlin [00:16:50] Okay, so just eat the penalty fee. Don't be scared away by that, but be actively monitoring. Is this money still going to make money to to to justify it being tied up in an account.
Sara [00:17:05] I mean, and at this point too, this is really, really tricky for an individual person to assess because you own it. Bonds. If you're afraid of inflation, if you think inflation is going to continue to tick up, or if you're under the assumption that inflation is still going up, it's not right. So but you could very easily be convinced by someone that you need to be afraid of inflation, that inflation is still it's not even that it's high. It's that the I bonds make sense when inflation is going up. Right? When it's increasing I don't think that's the case. So I think at this point a high yield savings account or a CD or something that pays a guaranteed five, or you can get a CD for five, you get one at 5.5% if you look hard enough. So you would be able to exceed that inflation adjusted interest rate without taking any additional risk. I personally that's what I would choose. But if you had some reason to expect that inflation was going to continue higher, then you'd want to sit in your I bonds.
Caitlin [00:18:13] Sara, how does an individual I feel predict they can't monitor inflation because I feel like the way that I do it is by what stuff costs at the grocery store and what gas prices are.
Sara [00:18:25] Yeah, don't do that. If you're making an if you're making investment decisions because, nobody cares about that stuff like when it comes to you do well, you do. Right. And so you think the data that you are consuming, it's not the data that they are using to calculate the rate on bonds. They're using the published I think it's the CPI, the consumer price index which is published that you can find the methodology. You can you can mark your calendar. It's published every month. It's published at 730 in the morning on like a Tuesday or a Thursday. You will know in advance and you can see what the CPI numbers are. They have CPI, they have PPI, which is the producer price index. They have all of these different inflation measures that if you wanted to, you could follow how those numbers are being published and you could look up the methodology. People like to quibble all the time about like, oh, it's not accurate. It's I, it it doesn't matter if it's accurate. If you're trying to decide whether to buy bonds or not, write the I bonds, the methodology based on size justified. Knowing whether it's accurate or not is like beside the point. So if you're trying to make an investment decision to I think inflation is going up. Okay. You'll have to find your data set that shows that. But the consumer price index that's published, inflation is not going up. And then one of the things I'd like to keep an eye on that you can just go to whenever there's an inflation now cast the Cleveland fed, the Cleveland branch of the Federal Reserve publishes something called the inflate. Third inflation now cast. They're trying to calculate in real time what inflation is instead of it always being a month behind. So that was super duper popular as inflation was going up.
Caitlin [00:20:13] Popular among your people, but somewhat like me, never ever has to Google the Cleveland Fed, right? Like, if I'm not making a part time job out of, like, staking my investment decisions on the experts inflation index, I don't have to ever look at that. But I'm also not allowed to use my my individual consumer data. How much things cost as any indication of the general trend for inflation or deflation or whatever. No one's copy.
Sara [00:20:50] You're not allowed to do that, because the only thing that people pay attention to are milk prices and gas prices, and because that's what we consume. Right? Every day. Because you go. Past the gasoline stations every day. That's the only price that registers in our minds. And so people always people do this all the time. They assume that inflation is much higher than it is because they don't they don't take all of the other things into account. They don't take into account that electronics are getting cheaper. Right. That travel, you know, in hotels are, you know, can be very up and down. Used cars last year, you know, spiked with a shortage of cars and then have come back down very quickly. And so because those are one time purchases, people don't keep them top of mind. So people overly focus on groceries and gas.
Caitlin [00:21:47] Well, and I'll say so I live in Northern California. Before I left the week of Thanksgiving, before I left Northern California at gas is almost $7. I've come back and it's back to almost $5 like those are I catch. That's an eye catching difference. I have no idea what why it goes up, why it goes down. I'm not actually interested.
Sara [00:22:13] Oh dang. I was just about to launch into it because I follow a guy on Twitter who talks about that, and that's why.
Caitlin [00:22:20] We stop you there. I mean, I care in that. I hope the news will always be it's going down. And when I visit Austin, I see, oh, this is how people outside of California live with gas. So I get also that depending on where you live, gas price, it's real. Those fluctuations are huge. And I, I never thought about it that those are some of the only prices that are posted daily that most of us see on a daily basis. And so of course, we're tracking them, right, and making inferences about the broader economy from them. We don't see any other prices on a daily level like.
Sara [00:23:02] That, right? I mean, so that makes it really, really difficult for individuals to make investing decisions based on their perception of inflation. And I have this conversation all the time with people because as part of financial planning and retirement planning, you're trying to make a projection for the future. What's the rate of inflation going to average over the next 20, 30 years? Because it's a pretty important component. And people will be like, I don't know, 5%. And I was like, like, if you put a 5% inflation rate, it's going to it's going to blow up your whole financial plan. But you can look back over, you know, over time and say, okay, over the last 30 years, maybe the average inflation rate was, between 3 and 3.2% per year on average since 2008, inflation has been well below 2% over that period of time. We had higher inflation last year. Where do we expect it to be going forward? I would expect it to be at 2%, because that's what the Federal Reserve's mandate is to get the inflation rate to 2%, and I think that they'll do it. But even if you want to say like, well, they, they won't get it all the way to 2%, then two and a half is still a pretty it, it's a pretty good cushion between 2% and 2.5%, 3% on the high end. But if you think that inflation is going to average 5 or 6 or 7%, I think you're. I just think that it's a it's a wrong projection and it's going to mess up your financial plan.
Caitlin [00:24:35] And it's so boring. It's so boring.
Sara [00:24:39] It's so boring. It's also it's boring. The data is not great and it's highly emotional for people. It's very easy to convince someone that inflation is out of control. Really, I.
Caitlin [00:24:53] Didn't I wasn't even aware that that was a scare tactic. Is it? To buy gold is because gold is inflation proof. Except when we've already have an episode about that. That's not true. Look it up.
Sara [00:25:03] Right. If you think that, you know, because it's kind of the opposite of inflation, not the opposite though. The other side of the coin is that your dollars buy less, right? So the devaluation of the dollar, why would you own dollars if they're going to be devalued over time? You should own Bitcoin. You should own gold, you should, own farmland, you should move to a different country. You should like, kind of do all of these things very, very easy to manipulate that fear in people. Which is, which is sad, because like when if you look at data like there are numbers that are available that, you know, economists and researchers and people go to a lot of pains to try to figure out how we really are spending money. What are we spending it on? Where are prices going up, where price is going down so that we can all make more informed decisions? So it's just it's it's hard when people get caught up in headlines, that don't have any like basis in reality. And, but that happens all the time. It's just part of like the fear and greed cycles of of the financial world.
Caitlin [00:26:15] It's. I don't know. But, like, we have so many other things to worry about and be genuinely scared about and whatever. Okay.
Sara [00:26:31] Oh, wait. Can. Can I make a suggestion as to, like, a simpler way to think about it.
Caitlin [00:26:36] Please?
Sara [00:26:37] All things considered, stocks tend to be good inflation adjusted investments because companies can raise prices and offset the impacts of inflation. Bonds tend to do very poorly during inflationary times. But when you have disinflationary or deflationary times, usually because there's a recession or some sort of economic weakness, bonds do great. So again, going back to that diversified portfolio. Cash will do great during deflation, poorly during inflation. bonds same thing. But stocks should do well over a long period of time even if there's some amount of inflation. You have a diversified portfolio where you have some assets that are that are working, no matter what the environment is.
Caitlin [00:27:29] Trying to think, how to describe your hands as you just take it like, well.
Sara [00:27:33] You're trying to wind up with my right hand stocks and that and wind up by cash and bonds with my left hand.
Caitlin [00:27:44] It's a flurry over here. Okay. While we're talking about such incredibly boring topics, why don't we just bring out bonds? Not just bonds, but regular bonds. What is your current perspective about bonds? My memory is that they're a very conservative thing that you want to have maybe 10% in your portfolio index fund of bonds, just because it hedges against the variability of total stock market index funds. But do you have anything new to say? Is the current environment make you amend any of your previous statements about bonds?
Sara [00:28:23] No, I think I think bonds are like a high yield savings account. I think bonds are interesting for the first time in. Two years, maybe not two years like 20 years, right? Again because of the inflation rate environment. So now you can get a bond where you lend someone money for some period of time, and maybe they pay you 5 or 6% interest, maybe more, maybe less, depending on who you're lending to. But that's way different than getting 1% or 2% in bonds, for a pretty safe investment. So again, for that, that portion of your portfolio that is for stability bonds now are way better than they were two years ago, better than they were 15 years ago. We may kind of be entering a new era where bonds have a place in your portfolio. They can generate some income. You're receiving interest so they can generate some income. They're also in the like. Oh, they're well into the worst. It's something like 18 month or 24 month bond. Bear market bonds have just been the worst. Like they've gone down in price by a lot as interest rates have gone up. And so a lot of people have dumped them. A lot of people don't want anything to do with them, but kind of like, you know, the buy low, sell high mentality. The interest rate, the bonds pay now are pretty interesting to look at again for that portion of your portfolio, not relative to stocks, just for the more conservative part of your portfolio.
Caitlin [00:30:06] When I'm trying to decode what you mean by interesting with Sara, it's that, like, you don't have to, like, grin and bear it as much as you usually do. Sara. Like a risk taker. Like you. Like you're more willing to accept the fact that you have to have some bonds because they're, quote, interesting. Now, whereas in normal times, when they have low interest rates, you have to just like tolerate it. And now you feel less like you're tolerating and that you're a little bit more welcoming into the ecosystem.
Sara [00:30:41] Yeah. I mean, I think that maybe a good way to think about it is, you know, when we prepare our tax return and they send you that 1099 T form, you know, your bank sends you that form which shows you how much interest you earn that year. Yeah. We just I mean, in Austin women's investing group, we just have like many years where people would joke about these. 1099 so I got from their bank where you got like $0.04 in interest.
Caitlin [00:31:05] So ridiculous. Yes.
Sara [00:31:07] Right. And we got used to that. Now, if that's if that 1099 INR is coming in and it shows like a couple hundred or a couple thousand bucks. That's way more interesting than a few cents. That's and that's what I mean by it. It's like that the return that you're able to see is real money.
Caitlin [00:31:29] Right. Turn that. Yes. Yes. Yeah. Okay. Whereas in other eras I'm going to just use yet another metaphor. It's just like a holding space. You're doing it for due diligence. Keep that money more conservative. But you're don't expect anything out of it.
Sara [00:31:48] Right, right.
Caitlin [00:31:49] You're not going to lose money on it. But that and now you're like, oh, some extra money to get a new laptop. Yeah.
Sara [00:31:57] Yeah. That's how a lot of people frame it, as if I put this money. If I move it from my big bank checking account, which still pays 0%, probably if I go through the effort to move this into high yield savings or a CD or, or something like that, the amount that I'll earn can pay for a new laptop or a vacation or, you know, it depends on how much, how much it is. But that is the part that's interesting. You can start envisioning what you could buy with the interest that you receive for making that decision, instead of just being like, oh, $0.13. Awesome. Why did you even send me this piece of paper?
Caitlin [00:32:39] Okay. If you. Is there anything else related to this topic which now I'm okay. We started with high fee high yield savings account. So those interest rates being higher than usual and then inflation going down. So Ivan's going down and then bonds being more interesting. Is there anything else in this realm that is useful for a woman on the verge of a financial breakthrough to understand about our current market environment?
Sara [00:33:12] I think one of the things that is important to understand is we went through a long period of time where interest rates were kept artificially low by the Federal Reserve. Because of what happened during the financial crisis, the economy just wasn't strong enough to stand on its own. And so the low interest rate environment that we really got used to, it's not really healthy. But since then, things have changed, and it's going to take a while for us all to adjust to it and adjust to the idea that an 8% mortgage is fine. It's normal, right?
Caitlin [00:33:58] Oh wait, this just all took a turn. What, an 8% interest rate mortgage is five. Yeah.
Sara [00:34:09] If you if you look back through history, there have been plenty of times where the housing market has functioned with higher rates on things like mortgages or car loans or credit cards, student loans, all of that stuff. And I think we're going back to that era. Like if you don't have a 3% mortgage, don't hold out for one. It's I don't think we're going back there. I think the way that the economy is functioning now with higher rates and higher inflation, I would say I think it's important to understand why that's happening. And the data seems to be pointing to, higher economic growth, that more money that came into the system because of Covid and the response from Congress, through like all of the different, rescue packages and. Money that they sent people during Covid. That has put people in a better financial position than they were before Covid. It doesn't feel rational because we're not used to it, but people are not acting crazy like they're taking the money that's in their pocket. They're spending it. That spending turns into someone else's paycheck. Unemployment is relatively low. And there's kind of a new supply and demand equilibrium that I think we have to consider getting used to, instead of assuming that we're going to go back to the way things were three years ago.
Caitlin [00:35:43] So I think anyone listening that has a mortgage rate at 3% is like, I will die in this home now. Now I know. Yeah.
Sara [00:35:52] Well, yeah, I mean, you have to pick that up.
Caitlin [00:35:55] Yeah. It's one thing if you don't have it because then you're like, okay, that sucks. I don't kick myself forever that I didn't buy during that market. Whatever. If another if you have it and we're thinking, well, I'll live here for two years, I don't love this place. Whatever. And then you're like, how do I you're like, locked in.
Sara [00:36:15] I mean, that's kind of part of what I need, though, by, like, getting used to it. Like, what if you bought a place and you have a 3% mortgage and you do not want to live there anymore.
Caitlin [00:36:25] You might. You must continue to live.
Sara [00:36:28] Your 3% mortgage is not. There's no longer a benefit. It's a it's golden handcuffs right there. Like keeping you from taking the next steps. That to me does not sound like a positive, right.
Caitlin [00:36:42] Oh it's like a rent controlled apartment that you don't want to live in anymore. But it's such a good deal, right?
Sara [00:36:48] You can't leave. So the sooner we all kind of make this pivot to. Oh, okay. Like when I buy a house in the future, I'm going to pay. Maybe if they go down to 6%, 7%. You know, those rates in the in. Through a historical lens are completely normal up there, just where rates usually are. But based on recent history, they seem extraordinarily high. Right? And of course, like the other part of the affordability calculation is the price of the house that you're buying with the 8% mortgage. Right. So I would say if I do guess, housing prices come down and mortgage rates stay somewhere in the realm of where they are now. And real estate is no longer a sure thing, right? There's no it's very difficult for housing prices to go up by 10 or 20% in a year. If mortgage prices are very high and people can't afford, you know, the Million Dollar Shack in Crestview, Austin, Texas anymore, right? Than the only thing that can change is rates go back down, which could happen, or prices come down until people can afford them again.
Caitlin [00:38:02] Okay. So, when you initially said 8% and I felt like the record scratch. Oh. That also came with the assumption that housing prices stay really high. So essentially, if you don't already have a house, you are officially blocked from the market unless you're making millions of dollars. So like quote unquote normal people, of which I consider myself a member of that group, I like, that's it. There's no way you could afford a monthly payment. You know, current housing prices in many markets, plus an 8% interest rate is just like that's not financially like either feasible or advisable. Yeah, but if market if that causes the market rates to go down. So houses cost less. It's kind of the same thing. Like we're paying the same amount. Either way just more goes to interest than it does to the homeowner that we're buying from.
Sara [00:39:00] Yeah I mean those are the two components of buying a house, right? The rate that you borrow at and the price that you pay for the house. So if rates are too high for anyone to afford them, eventually someone's going to have to sell a house and they're going to be selling into a market where there aren't that many buyers.
Caitlin [00:39:21] Right? So they have to accommodate that.
Sara [00:39:23] You have to accommodate by cutting the price once that starts happening. It freaks people out a little bit. I think there's some pent up, again, like people being attached to the prices and the interest rates from two years ago. And I haven't really adjusted expectations for what this looks like going forward. Like there's a there's a block at one street down for me where there are four houses on this block listed between 1.4 and $1.6 million in my neighborhood, which, you know, is like a nice neighborhood in Austin. But it's it's that seems like a lot of 1.4 to $1.6 million houses on one block. And they're just, you know, like three threes. Maybe they have a pool, but they're on small lots. And we're just like, you know, Judy and I walk by whenever we can. There's no one looking. There's no one like sit at the door. They're sitting. So all of these houses are all of these people that the sellers have decided they're going to sit at 1.4 to 1.6. But how long can you let a house sit? Yeah, without anyone living in it. Right. So what's. And so I'm so interested to see what happens. I mean, for a one block. Yeah. There's a lot. So what is what does that mean for buyers? If I'm a buyer, I'm like, I don't know. I'm gonna wait for a price cut.
Caitlin [00:40:47] Right? Or what? Maybe they give you a Bogo. Buy one, get one. I mean, literally, I may get a set. I'll go. Oh, I'm.
Sara [00:40:59] Gonna ask for that.
Caitlin [00:41:01] Well, yeah, we're all trying to chase the dragon. Those of us who saw on Zillow the houses we own go. The prices go beyond what we ever imagined. Really? Speaking for myself, like, agonized for so many months about. Do I sell now? Because look at these. Like, once you've reached that height, that fantasy of what it could be, it's really hard to let go of it because the, the alternative is self-loathing. Oh, I'm so hard. I did the wrong thing again. Yes. Why did you want to go into this line of work? That's another episode. But okay, so the market prices are going to go down. We're going to get started to get like quote unquote bargains on houses and only a bargain in the sense that what they could have charged for it in 2021 now is back to reality so that they can actually get a buyer. And so it might feel like a bargain to us. And the trade off, it's a higher interest rate. All right. I just I feel like there's still a stunned silence inside of me with this idea that the mortgage rate, the new normal will be, which you're saying is the old normal, and the new normal is mortgage rates at around 8%. So just like, stop making a big deal or stop waiting for them to go down by a lot and just like, accept that as reality and work with it.
Sara [00:42:38] Yeah, I think it's more accepting, accepting like the prices are telling us a story. Right? Like the price of a mortgage is telling us we shouldn't really expect the price of a mortgage to go up or go down by by that much more. It's just. I don't know, like, I just think it's a it's a new. We're in a new era, right?
Caitlin [00:43:07] Should we hope for another pandemic? Just kidding. Just kidding. We do not. No. No. No. But. And when we see there was a huge sacrifice for many, many people for a very long time. And this, like, side bonus, was the economy doing all this stuff that help people out. But like, the cost might have been greater than all of those benefits, but it messed with the economy enough to set our expectations a certain way. Right. And it's going to be hard to reset them.
Sara [00:43:39] Right? I mean, it is like a very real issue in a lot of places that prices are still so high and interest rates are still so high that regular people can't afford to become homeowners who would really like to become homeowners. I still like I don't I don't know, I still don't know whether that's specific to, like, certain, cities or certain places where people want to live or if that's true. You know, I mean, I think that throughout the course of human history, like, people have had to live where they can afford to live. There's always been, you know, differences in affordability. Like if you wanted to buy a house, can you find a place that is, generally aligned with where do you want to live? You don't get to live wherever you want, right? Nobody. Yes. That's the part that I. That I don't know for sure. I think, like, I'm colored by my Austin bubble, thinking like, oh, well, if people want to move and live in Austin, it just it's a higher price point than it was 10 or 20 years ago.
Caitlin [00:44:46] Significantly. Yeah. Okay. Are there any other showstoppers you want to end with about talking about the current interest rate environment?
Sara [00:44:57] No, I mean, I, I did not expect to go off on that, on that well, rant a little bit and freak you out so much.
Caitlin [00:45:04] I'm not even in the market. I just. I just know 8% is. And student loans like that's a huge that will make a difference between who can finish school and who can pay off their loans. Yeah. And who can't.
Sara [00:45:26] I mean, but it is like thinking about the the price of money, how easy or difficult it is to borrow as being a break on the economy is interesting. Right? The most recognizable effect of the rising interest rate is on the housing market, right? Because in March of 2022, rates were still very low and prices were going up so fast that that's when all the bidding wars were happening, right? And people were buying houses sight unseen. As soon as rates ticked up high enough, people cut that shit out. Yeah, right. They stopped doing it because the pricing inspections.
Caitlin [00:46:07] Yeah.
Sara [00:46:07] Right. Right. So I mean, thank goodness. Right. No effect of cheap money was not good for anybody except the sellers, the few sellers that were there.
Caitlin [00:46:17] So that those lucky bastards. Yes. That I appreciate that these guardrails also protect. I going to say this sounds very patronizing, but protect us from ourselves. Like, make us really consider, high economic investments before we make them and consider the consequences. Consider all those things in the best case scenarios. I don't think in the housing market is, yeah, hoping that there's rentals that are affordable. You know, affordable housing, of course, is a huge problem and a crisis, whether it's rentals or buying. But for something like student loans, I don't see any benefit. And I don't think we should have such high, you know, medical, medical loans, all that stuff like in those certain categories where it just seems like education and health care, we shouldn't have to borrow the money in the first place. That's a different podcast. But, you know, housing, I can get there or credit card. Although many people pay off their medical expenses with their credit card. Okay. We have now reached my maximum capacity to think about or consider the current economic environment. Thank you so much for answering all my questions.
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Sara Did you have a question about finance or investing? Send it to us in an email or voice memo on our website. Womenontheverge.com.
Caitlin Hey, we want our listeners to know that economic abuse can be subtle, but it's a serious form of control. Watch out for partners who limit your access to money. Sabotage your job or rack up debt in your name. If this sounds familiar, know you're not alone and there's help available. Please learn more at the hotline.org or call 800 799 safe.
Sara This episode was edited by our co-producer Kelly West, with music by Bad Bad Hats and Devmo.
Music outro by Devmo
Devmo I know the first thing you notice is that I'm covered in gold, the flick of the wrist it could turn a hot bitch cold, to get what you want in life girl you gotta be bold. Now Imma die rich, and I know...
Sara This podcast contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this podcast will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.