Understanding Inflation at a Macro and Micro Level

By Megan Anderson, Vice President Public Relations

Macroeconomics is the study of the overall economy, including things like inflation, recessions, interest rates and economic growth. Microeconomics is the study of how macroeconomics change behaviors in individuals and businesses. Understanding how the world is connected and how it affects the mortgage market is vital to our success.

Inflation at the Macro Level

One macroeconomic topic we have been experiencing is inflation. Right now, inflation is at a 40-year high due to increased government spending through stimulus, supply chain disturbances, COVID-related port shutdowns and pent-up demand.

If you have wondered why rates have moved so high in such a short period of time, look no further than inflation. Not a lot of people know this, but inflation tends to move in the same direction as rates.

Imagine you have a fund and you're lending money on mortgages out of that fund and you've given me a mortgage. I make a payment to you of $2,000/month. You take that $2,000 and you buy a list of goods and services. Now every month for the next several months, you purchase the exact same number of items on your list. But then over a little bit of time, you notice that you can no longer buy everything on your list. This is because inflation makes things cost more and as things cost more, you must leave some purchases off your list because the check you receive from me is for a fixed amount.

And while you can’t do anything about the loan you’ve already given me, what do you do to protect yourself from rising inflation on future loans?

You must increase your interest rate so you receive more than $2,000 on that same loan size to offset the more rapid loss of buying power, the more rapid erosion of that fixed amount that you're receiving. And that is why as inflation rises, mortgage rates rise as well.

Microlevel Inflation

Now that we understand inflation on a macro level let's dive down to the micro. This micro audience will be the potential homebuyer you hope to close. This client receives a fixed income and is paid biweekly and every week the client has a list of goods and services to purchase. Groceries, haircut, dog groomer, bills, savings, investments and a fun night out or two with some friends.

But once inflation and the costs of goods and services started to rise, your client noticed that their budget isn’t stretching as far as before. Their spending behaviors change, and they start to wash their dog themselves, skip the night out for dinner and opt to have a small potluck party at home.

What’s more, your client now feels like buying a home is out of reach. They are already struggling with how to make ends meet, let alone figure out how to have the money and down payment to make one of the largest financial decisions of their lives.

During times of inflation, it is important to understand the various loan programs your company offers. It is also important to educate your clients on what they may not know, including the power and wealth generation one can achieve through homeownership. MBS Highway makes this easy through co-branded email campaigns for prequals and tools to show the benefit of buying over renting.

The Role of the Federal Reserve

The Federal Reserve is the central banking system that has power through monetary policy to help achieve and support price stability and maximum employment.

With the rapid rise of inflation, the Fed has stepped in to help achieve price stability by attempting to cool off inflation. They have two levers they can pull to help fight inflation, one of which is raising the Fed Funds Rate, which is the overnight borrowing rate for banks.

The reason this helps fight inflation is raising the Fed Funds Rate makes certain loan types like car loans or business/commercial loans more expensive. Knowing this on a macro level will help us understand what will happen on a microeconomic level. For example, if borrowing is now more expensive on that brand new car, people might just fix the one they have and wait until they really need to purchase a new car.

Also, savings rates tend to become more attractive as the Fed raises the Fed Funds Rate, which can contract the economy by slowing down the velocity of money. Velocity of money is essentially the rate at which a single dollar changes hands in a given time period.

As an example, consumers may be enticed to save rather than spend due to the increase in savings rates. Their money would just sit in an account and the rate of change or velocity of money, in this case, would be rather slow.

A slowdown in the velocity of money typically signals a contraction in the economy and may signal an oncoming recession. Not many people know this either but looking historically, 100% of the time the Fed has come in to fight inflation by raising the Fed Funds Rate, it has led to a recession.

What Will a Recession Mean for Your Clients?

A recession is defined as a contraction in economic activity. On a macro level, this would not be a terrible thing for us in the mortgage industry. History has shown us that during every recession, mortgage rates tend to decline as demonstrated in the graph below.

Knowing this can help us on a micro level as well. Getting back into the mindset of a potential homebuyer, they are in rate shock. It took them months to find a home in this low inventory market and now with the increase in rates and fear-mongering media headlines about a recession, they begin to wonder if waiting on their home purchase is the best option.

If you believe like I believe that there will be a recession in the near term, then you can use this knowledge to alleviate rate shock with clients. Explain to them that in the not-too-distant future there will be an opportunity to refinance at a lower rate. Take advantage of the various loan programs and rates your company is offering. And remember that all your purchase applications today will be your bread-and-butter refinance volume in the future. Knowing that, you can prepare and plan for proper follow-up and customer service.

For clients fearing a recession and what it will mean for the value of their home, use the chart below to alleviate their fears. Show them that historically home prices have done well during every single recession. The only time this wasn't the case was the housing bubble back in 2006 to 2008. People often get this wrong, but it was the housing bubble that led us into the recession and not vice versa.

Today we are not in the same situation, as we have an undersupply of homes on the market, supply chain disturbances slowing down completion of new homes, and increasing demand among first-time homebuyers (especially when we look at birth rate demographics). All this points to healthy and stable home price appreciation into the future.

Vision Summit 2022

My hope is that this article demonstrates how brushing up on your economic knowledge can give you the ability to see an opportunity when others see chaos and confusion. Barry Habib will break this down even further on stage at the Vision Summit in Tampa, Florida on June 28-29.

This year's theme is all about leveraging your ecosystem to create high-performance results. The definition of an ecosystem is, “The complex of living organisms, their physical environment, and all their interconnected relationships in a specific unit of space.” Thinking about how this relates to becoming our highest performing selves, there are many ecosystems involved and founder and event host Christine Beckwith didn’t leave any out!

Reaching our highest potential isn’t just about being the best in business, it’s about the whole picture. Health, mindset and overall thoughts or attitudes towards life and how all of that connects to reach peak performance.

This will not be your typical mortgage conference. You’ll hear from Craig Capurso, the famous health and fitness coach, alongside motivational speaker Les Brown. You’ll hear business and coaching strategies from Joe Panebianco and Ray Befus. Click here to register for this amazing event and receive a $100 discount. And make sure you stop by the media booth and say hello! I’ll be doing live interviews with the keynote speakers during the event.

You can also join Barry Habib and Christine Beckwith on the next MBS Highway webinar next Tuesday, May 24 at 12:00 p.m. ET as they discuss how to leverage your ecosystem to create high-performance results. Don't miss this opportunity to receive clear, concise and actionable advice from Barry and Christine that you can use to accelerate your business growth in 2022 and beyond. Click here to register for this free webinar.