Rocket Fuel Newsletter – 05/27/2024

Looking to get off the grid but not feeling the mountain hermit vibes? A beachfront cottage in the Florida Keys running off a rain cistern and solar panels, and only accessible by boat or plane, may be for you!

In this edition: Check out the latest Build-A-Broker episode, a big Rocket ProSM TPO anniversary, and how the Fed performs a delicate balancing act in upholding their dual mandate.

And don’t forget to put in your bid on your new cottage!

Fuel Up! 🚀  

Kim Peterson – Success In Niches

In the latest episode of Build-A-Broker: The Journey, hear from Kim Peterson of KPT Mortgage Advisors, who has built her business around building relationships in unexpected niches of the mortgage industry.

Listen here!

What’s “comfortable” in your state?

Recent research has estimated how much income a family of two working adults and two children needs to live comfortably in each state, with Massachusetts topping the list at $301,000. "Comfortable,” according to the article, is defined as maintaining a spending ratio of 50/30/20 – that’s 50% on necessities, 30% discretionary and 20% going to investments or savings.

Read more here!

Over the past couple of weeks, we have discussed employment data and how it shapes our understanding of the economy. This week, we will explore the Federal Reserve’s dual mandate, a concept that is pivotal in guiding the central bank’s decisions.

What is the dual mandate?

The concept of the dual mandate was established in 1977 with the Federal Reserve Act as a response to the concurrent high inflation and unemployment persisting in the 1970s. This was a modification to a previous act establishing the Federal Reserve in 1913, clarifying the roles of the Board of Governors and the Federal Open Market Committee (FOMC).

In this amendment, Congress set two primary objectives for the Federal Reserve, now called the dual mandate: maximum employment and stable prices. The challenge for the Federal Reserve lies in balancing these two goals effectively.

Source: Federal Reserve Bank of St. Louis

The idea of maximum employment is simple: Create the conditions that support a high level of employment. This should result in as many people as possible employed in jobs that make full use of their abilities. These gainfully employed workers earn wages that are then spent on goods and services, which contributes to social stability by reducing poverty and social inequality, and enhancing overall well-being.

Price stability boils down to maintaining a stable inflation rate, i.e., keeping the prices for goods and services relatively steady over time. Price stability helps avoid rising prices due to inflation and falling prices from deflation, both of which can be harmful to the economy.

Stable prices also make it easier for businesses and consumers to make long-term financial decisions, like investing in a new business, saving for retirement or buying a house! By keeping inflation low and stable, the Federal Reserve helps to maintain confidence in the currency and the broader economy.

How is it implemented?

The Federal Reserve uses monetary policy tools to achieve the goals of the dual mandate, such as adjusting the federal funds rate, conducting open market operations and regulating reserve requirements. Let's break each of these down to understand how they work.

  1. Federal Funds (Interest) Rate: The Federal Reserve can cool down or stimulate economic activity by raising or lowering interest rates, respectively. Lower rates encourage borrowing and investing, while higher rates help curb inflation.
  2. Open Market Operations: The Federal Reserve can influence the amount of money that is circulating in the economy by buying or selling government securities. Buying government securities boosts the money supply by adding funds to the banks’ reserves, which in turn provides banks with more lending power, leads to lower interest rates and encourages economic growth. The converse is also true of selling securities.
  3. Reserve Requirements: Similar to buying and selling government securities, by adjusting the amount of funds that banks must hold in reserve, the Federal Reserve impacts banks’ abilities to lend money.

What does this mean for real estate?

By adjusting interest rates, the Federal Reserve directly affects mortgage rates – higher interest rates can make home loans more expensive, which can cool the housing market; conversely, lower rates can provoke home buying and refinancing.

When it comes to property value, stable prices are crucial for maintaining the value of investments. High inflation rates can erode purchasing power and lead to higher costs for construction materials and labor.

Finally, maximum employment means more people have jobs and income, supporting demands for housing. A strong job market can lead to increased home sales and rental occupancy rates.

Navigating the balancing act.

The dual mandate is a delicate balancing act. Too much focus on lowering inflation could stifle economic growth and increase unemployment. On the other hand, prioritizing maximum employment without regard to inflation can lead to rampant price increases.

We’ve seen this recently as the Federal Reserve has maintained higher interest rates despite strong employment. This approach aims to cool down demand and bring prices under control without significantly harming the job market.

As real estate professionals, staying informed about the Federal Reserve’s decisions and understanding the dual mandate can help with anticipating market trends and making more informed decisions. By keeping an eye on interest rate changes and economic indicators like the unemployment rate, we can better navigate the complexities of the housing market and position ourselves for success in a fluctuating economy.

Fawaz celebrated his 13th anniversary at the Rock Family of Companies last week with a surprise lunch in his honor. Congrats, Fawaz, and here’s to the next 13!

  1. Mortgage Applications Increase In Latest MBA Weekly Survey
  2. Unemployment Insurance Weekly Claims Report
  3. Tale About Inflation Tails
  4. Buying A Home Is Getting More Difficult — And It Isn’t Just Because Of Price
  5. HUD Announces Disaster Assistance For Texas Survivors

It was a close race between Ali W., Mark Goldstein and Mike C. on last week’s tough puzzle. In the end, Mark’s time of 43 seconds narrowly beat Mike and Ali, who tied at 48 seconds.

This week’s puzzle gets 4 Rockets out of 5.

Click here to solve!

Good luck!