Client Update

Did you know that last year, roughly 1.65 million new homes were authorized for construction (according to information aggregated by census.gov)?  This includes single-family homes (975,600), 2–4-unit residences (54,800), and buildings with 5 or more family units (634,700).  This total number is actually down from the 1.74 million new homes built in 2021, and 2023 is on pace for a further decline, to somewhere around 1.44 million residences.

These numbers are closely tracked by the U.S. Census Bureau on a monthly basis and are among the tea leaves that economists are reading to determine the health of the U.S. economy.  One of their conclusions is that more construction is needed to combat a persistent housing shortage among younger people in America.

A bigger issue might be affordability.  Just over 28% of new homes sold last year were priced between $500,000 and $749,000, and from 2021 to 2022, there was a 15% increase in the number of new homes sold in that price range.  Meanwhile, less than 1% of all new homes sold in 2022 were priced under $200,000.

While developers seem to be dragging their feet a bit, there is evidence that demand for new homes is strong and getting more so.  Nearly half (49%) of new homes sold in 2022 were under construction when they were sold, and another 20% were purchased before construction began.

As Hurricane Idalia made its destructive way across northern Florida, Georgia, and South Carolina, it was a reminder that this has been a tough year for natural disasters.  We have experienced a tropical storm slamming into southern California for the first time in memory, historically bad forest fires in Canada and Louisiana, and power outages during killing heat waves in Texas.

The people in the path of Idalia and other major disasters have been the biggest sufferers, but the property and casualty insurers are also feeling the impact.  Last year was one of the costliest years on record for natural disasters, with $120 billion in insured losses, roughly on par with 2021.  Total losses, including uninsured losses suffered by homeowners and consumers, came to more than $250 million last year and more than $300 million in 2021.  This year, the numbers could look even worse.

Of course, those losses eventually find their way into consumers’ pocketbooks, in the form of higher insurance costs.  Before Idalia, the average home insurance policy in Florida came to $4,000 to $6,000 a year, with a 2% hurricane deductible.  That will go up no matter how many claims are related to the storm; reinsurance costs increased 40-70 percent over the past year.

The is trend of expensive disasters are increasing; some believe the world has entered a new normal of natural catastrophes, which means homeowners insurance will be increasingly important—and increasingly costly—going forward.

This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice.

Through constant predictions of an upcoming downturn, it is fair to ask: how healthy is the U.S. economy?

Some of the tea leaves that economists are reading offer mixed messages.  The 3.8% unemployment rate for August is higher than the previous 3.5% (bad?), but a related number, labor-force participation (the percentage of working-age people actually working) ticked upward to 62.8%, the highest rate since February 2020 (good?).  More people are looking for work after being on the sidelines, which would seem to be a positive sign for economic growth.  Also: average hourly earnings are up 4.3% over a year ago.

The growth rate of the economy has been anything but robust (2.0% in the first quarter, 2.1% in the second, still to be determined in the third), but it has been consistent since the roller coaster of the pandemic.  Inflation?  The annualized rate for the 12 months ending in July was 3.2% (as measured by the Bureau of Labor Statistic’s CPI Index), up from 3.0%—which might not be ideal, but it is certainly an improvement over the 6.5-7.0 percent rates of the past two years.

Of course, interest rates are much higher now than they were a year ago, which in theory tends to put a damper on profits and growth.  However, many corporations and individuals took advantage of the lower rates and refinanced.  As a result, corporate financing costs as a percentage of profits are at a 60-year low (good, for now).  The Inflation Reduction Act and the CHIPS act have spurred a boom in company spending on construction of factories and facilities (good, but possibly temporary).

The U.S. Fed is experimenting with "digital dollars".  Does that mean the U.S. is about to embrace Bitcoin, or some other crypto-currency?

The answer to that question is: absolutely not.  But the concept of a digital currency apparently intrigues the Federal Reserve Board and some of the largest members of the banking community.  Recently, the Fed’s New York Innovation Center simulated a process of issuing digital money that represented actual customer deposits.  It found that the digital dollars, sent and cleared through the blockchain technology behind bitcoin and a number of cryptocurrencies, were able to improve the speed and efficiency of payments without altering the legal treatment of the deposits.  

Participants in the experiment included giant banks Citigroup and Wells Fargo, who noted that the digital version of currency especially facilitated speed and efficiency when moving cash across borders.  The test proved that converting actual investor deposits into their digital equivalent (and, of course, back again) didn’t break any U.S. laws or compromise the account ownership of banking customers.

Does that mean that we are about to move into an environment where all transactions are digital, or that the government will stop printing greenbacks?  Conspiracy theorists are free to speculate, of course, but the most immediate impact of the experiment seems to be that banks and the Fed—and foreign firms collecting or paying dollars—may have found a speedier and more efficient way to transact business through the blockchain rather than the cumbersome systems that have been in place for decades.  Fed officials were quick to say that there are no plans to create a digital dollar, now or in the future.  The best speculation, if you want to indulge in it, is that the global banking system would like to take the best features of bitcoin and its ilk and leave the wild price swings to the more adventurous crypto investors.

This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice.

The U.S. Federal Reserve Board once again raised the so-called fed funds rate, the rate that our central bank charges lending institutions on overnight loans.  Does anybody care?

Most of the attention in the press centers around what this tells us about how the Fed economists and governors are thinking, and whether there will be more rate hikes, and what the impact will be (or not be) on the inflation rate and the prospects of a prolonged downturn.  As it turns out, this particular rate hike was relatively modest (a quarter of a percentage point, to 5.5%) and anticipated well in advance.   

But there are more mundane impacts that the fed funds rate can have on those of us who live normal lives.  Perhaps the most direct is a return on savings accounts and cash.  Not long ago, before the Fed decided to attack inflation, people were earning around half a percent a year on their parked cash.  Today, it is possible to shop for certificates of deposit yielding 5%.  There is no direct connection between the Fed actions and short-term interest rates, but they do tend to move in tandem.

Another impact is credit card debt.  When the Fed raises rates, credit cards raise their rates accordingly.  Auto loans and personal loans will charge higher interest rates, and most of us have watched mortgage rates move higher in loose lockstep with the Fed’s policy decisions.

The reason the U.S. central bank moves these rates up or down is directly tied to the behaviors it wants to influence.  Right now, with these hikes, Fed economists think that this is a good time to encourage saving and discourage borrowing and leverage—basically cooling off the pace of the economy, and reducing the demand for goods and services that cause inflation to remain persistent.