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Michael Cianchette is a Navy reservist who served in Afghanistan. He is in-house counsel to a number of businesses in southern Maine and was a chief counsel to former Gov. Paul LePage.
We’re using the wrong hammer.
On Wednesday, the Department of Labor released their monthly Consumer Price Index report. The headline was that inflation dropped below 3 percent for the first time in more than three years.
Most financial folks suggest the report has greatly increased the likelihood of an interest rate cut in September. That’s really the only tool that the Federal Reserve has. It’s their hammer and they will use it to whack all the nails in sight.
There is a political aspect to this. As former President Donald Trump seeks to return to the White House, he is openly questioning whether the central bank should remain at arms’ length from elected leadership. He wants their interest rate hammer to try and shape the economy.
It is a dicey proposition. Both Donald Trump and Joe Biden are pretty dovish when it comes to the massive debt our country has built up. Between them, they’ve presided over more than $11 trillion in new borrowing against future generations. Barack Obama had previously added $7-plus trillion in his eight years.
Suffice to say that giving any of them greater control over interest rates may not be the most prudent decision for our nation’s financial health.
However, while the Federal Reserve still has their metaphorical hammer in hand, they seem prepared to use it. Since inflation is slowing, making money cheaper — by cutting interest rates — can help spur the economy forward.
The devil is in the details.
If you read past the happy headline of the inflation report, you will see that shelter prices increased more than 5 percent over last year. Housing unaffordability is a problem nationally. It is severely acute in Maine.
Unfortunately, if the Federal Reserve cuts interest rates, home prices here will likely increase even more. Mortgage rates drop, which means you can borrow more money for the same amount of payment, which means that sellers may demand a higher dollar amount.
Since many mortgages require buyers to have a certain percentage down, a higher sales price means a bigger down payment is necessary. Which makes it hard to get into the market. And so on.
The interest rate hammer will not solve our housing problems. Real hammers — framing, claw, mallets — building new houses is the only way out.
That was the gist of a different headline reporting on the new book of Portland housing developer Tom Landry.
His premise is simple. Supply and demand are real things. Where they cross, you get a price. When supply is constrained and demand increases, prices increase too.
To lower prices, you need to either lower demand — get fewer people looking for housing — or increase supply.
Landry argues that we need to reduce regulatory roadblocks to enable more housing to be built. That’s a good argument.
However, it also requires acknowledging that some of this new housing is likely to hit higher price points. Land in desirable areas is expensive. To generate a return, developers need to sell at higher prices. They are taking a risk in building, and risk begets reward if you are successful.
Since the higher price of land gets baked into the price, you need to market to more affluent customers. More affluent customers want higher-end finishes and better build quality, which increases the construction price.
But at least some of those affluent buyers are leaving a different house, which goes onto the market. Maybe it is a less desirable location, so it is a little bit lower price. And so on down the ladder.
The Federal Reserve may swing their monetary hammer to knock down interest rates next month, but swinging real hammers and building more is the only real way to knock down housing costs.
