Power Up Wealth podcast – By The Numbers – Episode 76 transcript:
Sharla Jessop 0:00
Recession or no recession, many Americans are feeling the pinch. I’m Sharla Jessop, President of Smedley Financial, and today, my guest and colleague, Parker Thompson, is going to give us an update on the numbers that may be impacting most Americans.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Parker, thank you for joining me today.
Parker Thompson 0:49
It’s a pleasure.
Sharla Jessop 0:50
Parker Thompson is part of our wealth management team. He holds a CFP designation and works with clients in helping develop plans for the future. Parker, you have written an article in Money Moxie, which is a by the numbers update. Let’s just talk through it and talk about some of these numbers that are impacting so many Americans.
Parker Thompson 1:08
Yeah, I think it’s exciting to kind of look at the economy and what’s happening, trends that we hear about, not just as headlines and in the news, but by the numbers right. Statistics can sometimes be misleading, but it can also be very informative in the way that we look and the way that we feel about our financial situation.
Sharla Jessop 1:25
One of the numbers that caught my attention was the average cost to raise a child. Talk to us a little bit about that.
Parker Thompson 1:33
When I looked at the numbers here, and we’ve seen this cost go up, and it’s been in the headlines, but the estimated average dollar amount was $310,000 just over that. That may not mean a whole lot, but when you look at it, in contrast to what it was back in 2017 it was just over $230,000. So what they calculate from one study to another over the course of what five, six years we have grown, you know, almost $100,000 in cost just to raise one child. They say, from age zero to 17. When they’re born to age 17, what it costs to raise them.
Sharla Jessop 2:04
That doesn’t even include any additional education for you know, college, university, none of that is included.
Parker Thompson 2:10
Right. 17 gets them to graduation or to high school, right. If you’re wanting to fund education, that’s on top of that. If you’re wanting to have them live with you to save on costs of rent, that doesn’t include those costs either after high school.
Sharla Jessop 2:22
Speaking of the costs of rent, also, household costs have significantly increased.
Parker Thompson 2:27
Right. So that’s a part of the study. Is that, okay, how much does it cost to have enough bedrooms to house that child and to let them live, you know, in the house up until age 17, because house prices and renting prices have gone up so much, that’s why this number, I mean, that’s obviously a huge part of inflation. It’s also a huge part of this number in this calculation.
Sharla Jessop 2:46
More and more expensive to raise a children.
Parker Thompson 2:48
Yeah.
Sharla Jessop 2:29
Or to raise it.
Parker Thompson 2:30
It’s all part.
Sharla Jessop 2:31
Not a child, a children, a child.
Parker Thompson 2:35
One, one child. Yeah, yes. You start talking. Okay, what if we only have two or three, four children?
Sharla Jessop 2:48
Yeah it’s a big expense.
Parker Thompson 2:51
It is.
Sharla Jessop 3:00
So talk to us also. Another number is the housing. What’s happening in our housing market, not just in Utah, where we’re making this recording, but across the US.
Parker Thompson 3:09
We know and what we’ve heard from the studies that come out that the housing affordability is at all time low. So what that means normally, we’re used to inflation charts that go up into the right showing that there’s more and more inflation. Things are more inflation. Things are more and more expensive. This housing affordability is going down into the right, which to some people would say that’s a good sign, but it’s not. It’s the affordability housing. It’s not the prices, the prices of the homes have gone up into the right, right up over time. That just means that the affordability so in relation to the wages that we are earning, the salaries that we have in our jobs, housing is outpacing those raises that we’re getting at our jobs, essentially, the end all be all is that housing is just not as affordable. It is at all time lows for the last I want to say, you know, two or three decades is where this chart goes back to.
Sharla Jessop 3:55
Yeah, that’s a big impact, especially when we think of the younger people, younger generations, who are trying to live that American dream where they get into a home and have home ownership. It’s some for many of them, they don’t even think it’s going to be a possibility.
Parker Thompson 4:09
Right! We grew up with with our parents and our grandparents that bought houses, you know, after they got married, a few years after they got married, and were able to raise their families in those starter homes, then move to better homes. A lot of those younger generations are thinking, it’s not even possible for me to get into a house until I’m in, you know, until my middle aged and have a set job that is finally able to pay the bills for that home, that mortgage cost.
Sharla Jessop 4:33
Thank goodness everything is cyclical, and things will cycle back again for some of those younger people.
Parker Thompson 4:39
Right. That is the home, that is the hope that that will correct itself, or at least adjust, so that things look a little bit more peachy as far as affordability in the housing market. One of the things that I noted is because the ultimate, I won’t say the argument, but the counter argument to that, is that, okay, well, the generation now today, has not had to live in a high interest rate environment. We may think it’s high at six, seven and 8% but we haven’t seen the 12 or 13% upwards to 17 or 18% that was seen in the 70s and 80s. The data that is behind that is that even when those interest rates are higher, the home prices were so much lower. And I know we’ve said that a lot on this podcast, but to put it in perspective, the average historical home price compared to the median income. Right where we get this affordability index, the average one over time has been five times your salary. So you take your salary, you times it by five, and that’s where you get the average home that you can afford, the average median home price at that time, back in the 70s, 80s, where those higher interest rates. But you have to realize that you only had to buy a home that was three or four times your salary, whereas nowadays, we’re getting close to eight times, today, eight times what our salary is to afford a home. So you’re now having to extend a lot more than what you’re earning in your salary to get there. So yes, interest rates are at lower points than they have been back in those decades, but we are vastly outpacing what we’re earning as far as stretching to a get home.
Sharla Jessop 6:03
And wisely enough, many young people are not willing to jump into those big mortgages and become house poor and be slave to their house payment.
Parker Thompson 6:11
There are some that are doing it. It’s scary. As financial advisors, we look at that and say that we don’t really like those trends. We’d urge people not to do that. There are people who are in a position to do that, and that’s fine. If a home is affordable at any point, we say, go for it. But if people are overextending themselves and deciding to go in and just say, well, you know, things are cyclical, eventually we’ll be able to refinance, or eventually we’ll make more some that could be true, but eventually that home could be unaffordable for most of their life, and they could be house poor. They could be, not being able to save in other places in their life, like for retirement.
Sharla Jessop 6:44
That takes some of the enjoyability away.
Parker Thompson 6:47
It’s not so much, you know, an enjoyable place to have enough rooms for your family in a backyard if you are living on rice and beans the whole time.
Sharla Jessop 6:54
Right? Most of us start out there. We don’t want to end at the same place, right? So talk to us a little bit about HELOC loans, too. Because, you know, many people, especially during the pandemic and interest rates were so low, we saw many HELOC loans, which are typically variable. Talk to us a little bit about that. I
Parker Thompson 7:09
think it was popular when, when the rates were at 3, 4, 5 percent. I think it was popular because you realized that you could get out of the just appreciation of your home. You could appreciate more than what your HELOC was, was paying an interest, or what you were paying interest to your HELOC. Nowadays, with those variable rates, they’ve gone up to 9% in some places, they’re offering over 10%. It’s very hard to have your home or your asset that you’re purchasing with that HELOC appreciate that much annually, year over year, and paying off that interest. If you look at it that way. To me it’s very hard to see even an interest rate that high and to think, okay, I’m gonna loan someone money at a nine or 10% rate. That just scares me as a financial advisor. There are some situations where someone is actually improving their home with that, with that HELOC. But a lot of the times we’re seeing people pull out HELOCs for other expenses in life, not just for the home, and, you know, for.
Sharla Jessop 7:57
Toys.
Parker Thompson 7:57
The toys for a new car, for a boat. You know, some toys that that may not be necessary. Those are the situations that that frightened me a little bit.
Sharla Jessop 8:05
Understandably. You know, we were talking about overall inflation, and it goes way beyond just raising your kids and the price of your home, but just, you know, living you were talking about eating a McDonald’s, which has been in the news quite a bit lately. Talk to us about that.
Parker Thompson 8:18
Yeah there was a social media wildfire that got started based off of a Big Mac meal. Up in Connecticut, there’s a city in Connecticut that was offering a Big Mac meal for $18 and there was a social media wildfire. It got went viral, and a lot of people were up in arms about it, because it’s McDonald’s typically a very affordable, right, family friendly restaurant for those who are working class or lower class, but to have an $18 Big Mac meal for just a Big Mac to them, was asinine, and so they obviously backed off that once there was the social media wildfire. But it just proves to us today that inflation is a real thing, that what we thought used to be an affordable McDonald’s with $1 menu and where we could take our kids to eat cheaply is very different today based on just cost of goods and how everything is increased.
Sharla Jessop 9:00
That is a lot to do with the impact of inflation, and we’re seeing it not just at McDonald’s, but everywhere.
Parker Thompson 9:05
Overall. One of the good things the economy is showing right now, even back when I wrote this article in the beginning of summer, as opposed to now we’re in late summer, we are seeing that inflation is coming down slowly, right? It’s still sticking. There’s still some areas we obviously don’t want to see deflation, we don’t want to see negative prices, because that means that the economy would be, you know, stagnant or not growing. But we haven’t seen those high prices go away. They’ve just stuck, and year over year, they haven’t increased as much. That’s why we’re seeing inflation going down, and that’s a positive thing, but we’re still feeling the pinch. Like you said, these American households families, are still feeling that pinch of things costing a lot more than they used to.
Sharla Jessop 9:43
And because of that, when you still need to spend money and it’s beyond what your budget is, oftentimes, people tend to go to credit cards talk to us a little bit about what’s happening with credit card debt.
Parker Thompson 9:54
One of the things that economists like to look at as far as, is it a recession? Is it not is the delinquency rates? On certain debts, the number one debt that they look at being credit cards. Because typically, credit cards are indicative of we have now wasted our savings. We have wasted all the money that we have in the bank. We have to now lean on credit cards to afford life. This could go one way or the other. There’s not a certain historical rate that we’re looking at that indicates a recession, but we just noticed that card balances that are 90 plus days delinquent, so you’re over three months late on your payments are climbing over 10% for credit cards. So not a good sign for consumers. Obviously, we would like to have that as low as possible. Some other debts that people are defaulting on are not quite defaulting on, but they’re just delinquent on, is auto loans, obviously, because those are high interest rates and other debts. Surprisingly, with the high rates that mortgages and he locks and other things are at those, those have stayed pretty low. So this is kind of a story of two tales there. There are people who are going into consumer debt and delinquent, and they’re delinquent on that debt, but on their home and housing debt, they’re doing okay. They’re keeping up with it for the most part.
Sharla Jessop 10:58
Which feels, feels daunting, but that’s a good sign if they’re able to just keep up. If people can just manage the excess spending, I think it puts them in a much better position. The numbers would tell us that.
Parker Thompson 11:08
Yeah I think it’s a good sign for now that people are keeping up somewhat. It is obviously foretelling that if people continue to have more consumer debt and cannot control it, that eventually leads into they have to pull out of, you know, whatever mortgage or HELOCs that they’re into, you know, they’re not able to pay those bills. And so eventually people start to eke into those debt levels, and those things start to become delinquent or default. I mean, this is not a prediction one way or the other, but we just something that we watch because we worry about the health of the economy.
Sharla Jessop 11:34
Right. And the health of our clients and of individuals. You know, one of the other things you said was overall household debt is increasing, which is a little bit frightening in a tight economy.
Parker Thompson 11:44
The number that we usually concentrate on, that we have for the past few months is government debt. It only is look at consumer debt. The total consumer debt out there is over $17 trillion. It’s very hard for us to wrap our mind around that. Again it that number doesn’t mean anything unless it’s compared with prior years or prior number. Back in quarter one of 2021 that number was sitting at 14, just over $14 trillion. So if you think about that, just in the space of three or four years, we’ve climbed another, you know, three, $4 trillion in consumer debt, again, part of that just to the massive hysteria around getting into a house that happened after 2020 you can maybe attribute a lot of it to that, but so total debt levels is something we look at and just making sure that our clients specifically are staying out of the certain kinds of debts that worry us.
Sharla Jessop 12:29
And I know the market is moving all the time, and so any information we give about the market is outdated tomorrow. It’s outdated before we even finish recording the podcast, but as of the date that you had written the article. Talk to us a little bit about the numbers and some of the trends we see.
Parker Thompson 12:45
At the time that writing this again, early summer, the economy was doing great. The markets were going up. There was still talk of a potential recession, as there is today. As of right now, the markets are just defying odds, and they’re and they’re melting upwards, is what we like to use, as far as terminology goes. At that time you had, here, I’ll throw a few numbers at you. You had the S&P 500 that was up 11%, you had the NASDAQ that was up 13%, the Dow was up just two and bonds were actually negative 2%. Now this was as of June, beginning of June, this year. Let me take you on the roller coaster ride that has happened since then. Those numbers, the NASDAQ, went from 13, climbed to 25 up 25% went down to 9% and is now back up to 20% and we’re recording this as of middle of August. The S&P 500 went from 11, went up to 18% went down to, you know, plus 9% for the year, and then is now at 18% again on the year, as of today. So you can kind of see the roller coasters that we’ve gone on, and bonds has turned positive one and a half percent for the year. Maybe this is not necessarily the podcast to talk about volatility, but it just shows you kind of the ups and downs of what can happen in the market in the year. But so far, the market just seems to be defying odds, like I said, and proving people wrong as far as recession or it could be foretelling of a larger drop like we’ve just experienced.
Sharla Jessop 14:01
Well, in order to know that, we’ll have to update the numbers again another time, right?
Parker Thompson 14:05
There’s not too much value in looking at just kind of the ups and downs market. That’s obviously why we tell our clients that the market is a very risky thing. We try to diversify as much as possible to mitigate some of those risks. But it is good to see that the US economy and stocks and the companies in those that represent those stocks are doing well and that they’re still profiting.
Sharla Jessop 14:23
And over time, if you keep a long term perspective, and we don’t worry about the ups and downs in the last two months or any short period of time, and we keep our eye on the long-term goals, will come out ahead.
Parker Thompson 14:33
Yeah the averages work out a lot better when you look 5, 10, 20 years in the future.
Sharla Jessop 14:37
Great Parker, thank you so much.
Parker Thompson 14:39
Appreciate you indulging all the numbers and percentages.
Shane Thomas 14:47
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Osaic Wealth, Inc., member FINRA/SIPC. Investment advisory services offered through Smedley Financial Services, Inc.® Osaic Wealth is separately owned, and other entities and/or marketing names, products, or services referenced here are independent of Osaic Wealth.
