In this jam-packed episode, Peter and Jeff discuss 50-year mortgages, the Magnificent 7’s recent pullback and low consumer sentiment before offering their tips of the month.
Hosted by Creative Planning’s Director of Financial Planning, Jeff Stolper, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Transcript:
Jeff Stolper: I’m Jeff Stolper, Director of Financial Planning at Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down the Middle. Peter, another month has passed since our last episode, and today we’ve got a lot of ground to cover. We’re going to be talking about interest rates, long-term mortgages, the Mag 7, what that could mean for investors. So lots going on, so let’s go ahead and get right into it. So the last rate cut that we saw from the Federal Reserve was in late October, and since then it doesn’t seem like people can quite decide which way rates are going to go. What do you think?
Peter Mallouk: Just a few months ago, we thought rates were going to go higher, the stock market was on fire, unemployment was exceptionally low — not really a reason for rates to come down, even though President Trump was pushing very, very hard on the Fed to do just that. Of course, the government was shut down for a while. We didn’t have any data coming out, and the government’s reopened and the new Jobs Report is soft. And so it’s giving the Federal Reserve another reason besides pressure from the administration to lower rates. I think you look at that, some softness among some stocks, particularly large tech stocks, which I mean the definition of softness is all relative.
I mean, there’s still incredible run even though they’re double digits off their highs, which I think is perfectly healthy. But with the labor market soft, unemployment ticking a little higher than expected, now the bond market is expecting interest rates to come down. And so I think that’s the most likely scenario here. And of course, the stock market loves easy money. You know, if companies are borrowing money and they’re paying lower interest rates, it drops more money to the bottom line. So it is usually bullish.
Jeff: We’re recording this the day before Thanksgiving. I think that maybe paired with a strong Black Friday could be a good indication. Speaking of rates though, we’ve also had something else in the news that President Trump, I’ll say “floated” recently, and the idea of a 50-year mortgage, and where he got the ideas, actually, I looked into this a little bit further, was from Bill Pulte, who’s the director of the Federal Housing Finance Agency. So the group that kind of regulates mortgages, and what I found interesting, Bill is the grandson of William J. Pulte, who founded the Pulte Group. So not shocking that the grandson of one of the largest home builders in the country is giving this idea and comes from a place probably where interest rates are a little bit higher, home prices haven’t yet come down, so it tries to make homes more affordable. But do you think that would really be the outcome?
Peter: I think that there are very few times that I take a very strong position, and this would be one of them. This is an incredibly stupid and dangerous idea, and it will create a nation of debt slaves. That’s what it will do. It will be good for only one segment of the economic universe, and that is Wall Street. This would be a rich get richer, and everyone else struggles more objective. I think it actually comes from a good place. I mean, I think that probably the people that are coming up with this idea are saying, “Hey, we can now make it more affordable. Lower monthly payment for somebody to buy a house.” But you’re 10 years in and you have no equity. It’s terrible. And it will have the opposite intended effect. If you leave a housing market alone, and I know this is going to be hard for people to imagine because it’s been a tough market for new entrants.
No one wants to sell their home because they’ve got low mortgage rates and they know if they sell and go buy a new home, they’re going to have a double or more interest rate. And so you have these permanently high prices it seems. And younger people are trying to buy houses and they can’t afford the monthly payment. We have the highest percentage of people that can’t afford a home in the United States because of the monthly payment that we’ve had in 50 years. And so the administration saying, “Well, let’s make it easier.” But really what we are starting to see is the housing market is softening. I just posted this on LinkedIn and Twitter recently. You could see most major markets, housing prices are coming down. This is economics 101. If there is housing shortage, a couple of things will happen. Builders will build more homes. That will eventually happen and eventually people will sell their homes.
The supply demand equation will work itself out. It can be long, it can be painful. It can take a long time for somebody to buy a house, years longer than it normally would, but the supply and demand equation will work itself out. If you introduce a 50-year mortgage, what you will do is you’ll immediately get a lift in prices, because people don’t buy homes based on the value of the home, they buy it based on the monthly payment they can afford. They get a real estate agent and say, “Hey, I’m going to go buy a house. And the real estate agent says, “How much monthly payment can you afford?” Or the real estate agent says, “What’s your income?” and then they back into how much monthly payment they can afford. So that monthly payment will now be able to buy a more expensive house.
So it will drive prices up permanently. It will actually create a real structural shift. All of these people will be paying monthly payments without building equity. Wall Street would be in love with it. Main Street would get crushed. Terrible idea. This actually has legs. I think this is one of those policies … It’ll be one of 100, 200 policies that come out this year. This single one can create a lot of generational damage. And I’m concerned about the traction that it’s already getting.
Jeff: Just think about if you’re, let’s say 30 years old and buying your first home. Previously it aligned somewhat. You’re going to retire, you stick with that same home, it’s paid off around year 60, you can go into retirement without a home payment. Now you would have potentially people paying into their eighties on a mortgage. What a disaster.
Peter: Yes, not good and very curious to see how this plays out.
Jeff: Yeah. Well, rates and mortgages are certainly making headlines, but shifting gears a little bit, the equity markets also have their own story to tell. We’ve seen a little bit of a pullback in the Magnificent 7. And for our listeners, just a reminder at the Mag 7, that’s Alphabet, Google, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. So large tech companies. Of recent history, they’ve really been leading the charge in terms of growth, but they’re coming back down. Peter, do you think this is a little bit of a signal or just noise?
Peter: Well, I think it’s healthy. We don’t want stocks to go straight up into the right all of the time. It’s not normal. It invites speculation. And in a typical year, the stock market comes down an average about 14% off of its highs. We’re seeing that not in the whole stock market right now, but we are seeing it with big tech. And I think it’s very, very positive for this sector to take a breather. Still has had an absolutely incredible run. A lot of the returns of S&P 500 this year are just from Google, for example. And so if we can have a pause, I think that’s fantastic. I think that the AI revolution is real. I think there’s going to be winners and losers, but the winners are going to be absolutely jaw dropping winners. This is going to be much like search engines or phones. Winners take all. Going to have just a couple players and that’s it. That really dominate. And so I think that the bets that are being placed, they make sense to me. And also the pauses along the way make sense and I think are positive.
Jeff: Yeah, I agree. And all the people that are driving that growth, if you look through to the actual companies, it’s consumers. They’re driving the earnings of these companies. They’re the ones that are buying iPhones, they’re buying Teslas, they’re the ones buying new laptops. So as you think about the future, Peter, and you look at consumer confidence, you look at their future spending idea, what do you think that’s telling us right now?
Peter: Well, I love the University of Michigan Consumer Confidence study is one of my favorites. I wrote about it in my first book, the Five Mistakes Every Investor Makes and How to Avoid Them, because every time they say consumer sentiment is bad, it tends to be a signal that the stock market is going to do good. And right now is one of the worst consumer sentiment ratings ever. The average American is very negative on economic outlook. It’s fascinating because you look, the stock market’s doing really well, housing’s holding up pretty well, unemployment is still low. And I think that the consumer confidence is negative because the political environment. It doesn’t matter what side of the aisle you’re on, it’s incredibly negative and unfortunate. And I think that by itself taints everything no matter what your political complexion may be. Couple that with how expensive it’s gotten for the average American to just operate a household because of inflation.
And the average American does not have the benefit of having a big 401(k) or taxable investment accounts or a lot of equity in their home that has stayed ahead of inflation or at least with inflation. And so I think there’s a lot of reasons consumer sentiment is more negative than you would expect in a market like this. And the theory is that if consumer sentiment is negative, those people aren’t invested. And when they get positive, they will go invest, which is why it tends to be a contrarian indicator. So I would put that category as not indicative at all of what’s going to happen in the future, but it’s sad to see that the average person today has a negative outlook.
Jeff: So you’re saying that, I mean you’ve spoken before even in the Five Mistakes book, that experts can’t predict the future of the stock market. Now you’re telling us consumers can’t either. There’s some alignment there, certainly. Well, let’s move on to our tip of the month. Peter, what do you have for us?
Peter: All right, so I’m going to do, given that we’re going into Thanksgiving and the holiday season, I’m going to do our first throwback to Jonathan Clements. And my favorite tip of the month that he ever did was his unexpected gift tip, where he basically said, “Look, there’s times of the year where people expect that you may give them a gift like their birthday or Christmas or Hanukkah or whatever.” But he found a lot of pleasure in giving gifts, no matter how small, to people when they weren’t expecting them. And just really sent the message that you were thinking about them. I’ve definitely incorporated that into my life now. It’s a lot of fun. This does not need to be a big thing. It can be something that’s $5, but it’s just sending a message that you’re thinking about somebody. I take this so, so seriously that I’ve kind of got it even as a recurrence on my follow-up to make sure I’m thinking about it. And so that’s my tip of the month. How about you, Jeff?
Jeff: Mine is to take an inventory of all the good things in your life that are outside of your financial wealth. We’re focused so often on a financial balance sheet that we don’t take time to pause and think about our broader personal, non-tangible assets: health, good friends, family. These are things that don’t show on any one statement you receive in the mail, but I would say they’re equally if not more important.
Peter: Definitely more important. Definitely more.
Jeff: Yeah, so I would pause and be thankful for those and think of those around you and reach out and let them know. So thank you to all of our listeners. I am Jeff Stolper, Director of Financial Planning at Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down the Middle.
Disclosure: This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.
