Financial and Economic Check-In

[MUSIC PLAYING] EMILY: Hi, and welcome to the podcast MakingCents, brought to you by Navy Federal Credit Union. I'm your host, Emily Bigham, and each week I'll be taking your questions to the experts to help you make sense of your money. Pun intended. 

 

We're over halfway through the year and many are looking at their budget goals, finances, news headlines about the economy. So our guests today are Bob Frick-- he is our corporate economist-- and Thomas Rocca. He leads the personal finance management team here at Navy Federal. 

 

So Bob, can you paint us a picture of the current economic landscape? How are things looking as of today? 

 

BOB: Well, believe it or not, they're starting to get better. We've been through a terrible time with high inflation and high insurance and high maintenance bills. It's been tough for everyone, but we're starting to see some cracks. We're starting to see some light at the end of the tunnel. For most people, that's not apparent. But we're getting to places where people can take advantage of some changes that are happening. 

 

EMILY: So what are some things-- what are some signs that have you thinking that way, like specific points? 

 

BOB: Yeah. Well, car ownership has been a killer and now car prices are starting to come down. Now car insurance and car maintenance are still really high. But the fact that you can get a cheaper car is a huge change from a year ago, two years ago, that sort of thing. 

 

Interest rates are starting to come down, or at least they will be shortly. That's going to be a huge relief, especially on people with high credit card bills and high other kinds of bills. 

 

Now, the housing situation is still bad. It won't be getting better for a while. But just those two things, lower interest rates and some relief in the auto market, are going to be huge helps. I think a year from now people will see that their spending power has increased and that this terrible weight of inflation is going to really start to ease. 

 

EMILY: So is now the time to think about-- would now be the time to buy the car if you've been waiting? Or would you say, wait until interest rates also come down a little bit? Like, where's the sweet spot? 

 

BOB: Yeah, if you can afford to wait, it's probably a good idea. Prices are coming down and interest rates will be coming down. So I think probably a sweet spot will be later this year or early in 2025. 

 

EMILY: Great. Thomas, your team works to help advise members and provide financial advice. So what kind of issues or concerns are members coming in with today? 

 

THOMAS: I think what our members are expressing to us the most frequently on our councils is a frustration with their credit card payments. We are seeing an increase in the members that are either living on credit cards or an increase in impulse buys, trying to keep up with the Joneses. And then at some point, they see that that bill comes due. So we are hearing from a lot of members where they're calling in and they're feeling a sense of helplessness because they are looking at their credit card statement and they're not entirely sure how they got to that point. 

 

We're also seeing some folks that are a little bit further down that trail that are relying on their credit cards for living expenses. And in some extreme cases, we see people that are paying debt with more debt and they're not improving their situation. They're digging themselves further and further in, which is going to make it harder for them to recover financially. 

 

EMILY: So what do you guys tell them when they come in with these concerns? 

 

THOMAS: The most important thing that anyone can do to get control of their finances, is always-- first step is sit down with a pen and paper and know your numbers. If you don't know your income, you don't know your expenses-- and I mean every single line item-- if you don't know where your money is going, then all of the best planning in the world is going to be completely worthless. 

 

So when we sit down and we talk to a member, the first thing we do is how much are you spending on your housing? How much are you spending on your grocery bills? And then we start to do a drill down and see where are the anomalies in the budget? Are you spending too much on eating out? And invariably we'll come up with some line items where they say, oh my gosh, I didn't realize that I was spending this. And that's really the first step to knowing where the panic might be coming from. 

 

BOB: Yeah, we talk about this a lot. Thomas and I talk about budgeting and how budgeting works and getting those expenses down. And light items is really important. 

 

People also need to realize that the future is unknowable. And in the future, you're going to have months where things don't work out. You're going to have an unexpected car bill. You're going to have a medical expense, and your budget's going to blow up. That's OK. 

 

Your budget isn't going to be right every month. So you just have to realize that you've got to hit your budget. Even if you hit it seven months out of 12, you're still going to be much better off having a budget than not having a budget. 

 

EMILY: This reminds me a lot of counting calories approach. 

 

THOMAS: Right, right, right. 

 

EMILY: Which sounds ridiculous, but if you don't know what your baseline is and then writing down everything line item, like don't leave anything out. How long would you say that someone should track it for in order to understand, or do you have them go back the previous month? 

 

THOMAS: So while we recognize that there's going to be some variables in your budget, you need to start out knowing exactly what your fixed expenses are, your rent, your car note. Some of these things are pretty consistent month to month. And then when you get into the variable expenses, we'll usually say track for two to three months, fined an average and that gives you a pretty good idea. 

 

And then one other thing to pay attention to is there's going to be seasonal differences. So your gas bill may increase during the winter. Your electric bill may increase during the summer. But try and get an idea of what your utilities cost and then plan accordingly. 

 

EMILY: You mentioned they're using debt to pay down debt. Can you explain a little bit about what that means? 

 

THOMAS: Yeah, for sure. So in some instances, it's a smart approach. In some cases, it's doing a balance transfer from a high interest credit card to a low interest credit card. And that could be a smart decision, but we are seeing folks starting to max out their cards and they're robbing Peter to pay Paul. 

 

So they're paying one credit card with another credit card, and it's not on a promotional rate. You're not getting a low APR or a 0% balance transfer. And that can actually make it worse because you may have to pay for a balance transfer to go from one card to another. And then when you start leaning on those credit cards for your living expenses, that can really double down on the pain points, increase the balance on that credit card. 

 

EMILY: So Bob, this environment's been tough for many members. We've talked about a lot of the things that Thomas's group is seeing. But would you say that there's a light at the end of the tunnel soon? 

 

BOB: Not soon. But what we have working for us now is that people's raises are higher than the rate of inflation, and people's raises should continue to be pretty good and the rate of inflation is going to continue to drop. Depending on how you measure inflation, people are making, say, two percentage points per year higher. It doesn't sound like a lot, but it really adds up. 

 

So we're going to reach a point now where this tremendous weight of inflation is going to seem less and less and people are going to start being able to pay off their bills. They're going to start being able to make bigger purchases. The problem is we're not at that point yet, and we're going to dig ourselves out gradually. 

 

And I know people don't want to hear this, but there is a light at the end of the tunnel. And patience is key. If you can just kind of do what Thomas says and keep your spending in check, I think people will find out certainly by this time next year, mid 2025, they're going to see their spending power much greater and they'll start feeling some relief on these high expenses. 

 

EMILY: Yeah. So I guess it's a combination of solid labor market. We'll have relief fund rates go down. We know there's going to be a break in the used car prices. People with homes can use HELOCs. So how many rate cuts? How long is it going to take, and is it going to be 25 basis points? Is it going to be 50 basis points? What do you think the fed's going to do? 

 

BOB: We could easily have 75 basis points, a 3/4 of a percentage point down by, say, January of next year. That's what the markets say. That seems very likely at this point. But let's say a year from now, you could see mortgage rates down around 5% whereas they're 7% now. That is going to cut $300 a month off of people's mortgage payments. That's huge. 

 

When that starts affecting auto loans and credit card bills, people are going to be saving hundreds of dollars a month in those cases. So rates coming down is going to be a real boon to consumers. But just as important is wages are going up. So those two things together increase buying power more than anything. 

 

EMILY: So it might be a good time to also get a balance transfer in January. So if people can just hold off and wait until the end of the holidays. Do you think there's going to be a big holiday spending push again this year? Have we seen any of that change, or are people like this is keeping up with the Joneses, like this is what we do around the holidays? 

 

BOB: That's the big question right now, is people's behavior in spending. People keep spending and they keep saving less. And a lot of it's because they have to pay their bills. 

 

But a lot of it is, look, we're exhausted. COVID is an emotional hangover. We're still all going under and we have to have some fun. We have to have some relief. People are taking more shorter, low cost trips. People bragging about going to Europe, that's a very small percentage of Americans right now. 

 

So I think we should see a moderate spending season this holiday. Much different than we did last year. 

 

EMILY: And don't use those buy now, pay later loans. 

 

BOB: Nope. 

 

EMILY: Not for holiday spending. 

 

BOB: Nope. 

 

EMILY: So switching gears a little bit to child care, I saw an article this morning about child care. It was about how women in the workforce, if you have children who are under five years old, you've reached your peak. I don't know exactly what it was, but I know child care costs are very expensive. And I don't think that's something that has improved. Do we see it improving? 

 

BOB: No. That's something I'm really concerned about. My wife used to run a preschool, and we're in Fairfax County, Virginia, which is one of the richest counties in the country, and still there are a lot of kids on scholarship there. And if you have two or three kids in preschool, it's a tough row to hoe. So it's a problem. 

 

We still don't have the number of workers back in child care as we did pre-pandemic. Imagine that. That's one of the reasons why costs are so high. So that's a real problem. 

 

I mean, Thomas can talk about this. We talk every quarter with a lot of our front line people, and people are doubling up. Your aunt is going to watch your kids or you're going to go to maybe an off the books daycare, which isn't a bad thing. I'm just saying people are doing what they need to do. 

 

EMILY: Thomas, do you guys see this a lot, people calling in about child care, or-- 

 

THOMAS: Yeah. That is probably one of the biggest financial obstacles for families today. I'll tell you a couple of things that I've heard on phone calls that I really think some people might get some insight on. First off, for a two parent household-- and when I say the cost has gone up in some areas of the country, we're seeing $400 and $500 a week. 

 

So for two income families, there needs to be a really detailed discussion on how much is the parents making less money actually pulling in? And then is it worth it for them to continue to work? And then if it's not, it might be worth one of the parents to take a step back and look at the gig economy where you can still have some money coming in every month, but it can be done during outside of normal child care and business hours. 

 

And then specifically for our membership, I actually heard a great piece of advice from one of our counselors for our military members, the on site daycare, the way he put it is there's no room at the inn. They're going in and they're full up. 

 

So one of the things for perhaps a military spouse to consider is, hey, I have a need. I see a need. Maybe I will start my own daycare at home. I'll be able to be home with my child and I'll be able to give some relief to the people in the same unit or station on the same base. 

 

BOB: Yeah, people have really imaginative, but it's not enough. 

 

EMILY: Right. And is it ever going to end? Like the light at the end of the tunnel, is that going to happen for child care? I really don't see it. Seems like it just got so expensive so quickly. I don't know what happened. 

 

BOB: People got out of the child care business because it wasn't paying enough. It's so hard to make money. And again, my wife used to run a preschool and trying to pay people a living wage, it was more of a hobby for most of the teachers. 

 

THOMAS: The margins in the industry are a lot lower than you might expect. You look and you say, I'm spending $400 or $500 a month-- or a week, I'm sorry-- you're spending $400 or $500 a week on this expense and where the providers aren't getting rich doing it. 

 

BOB: Yeah, no one's making a million in child care, especially right now. 

 

THOMAS: No. And then there comes a price point in the industry-- and we've seen this pop up more regularly as well where people either double up and they get a nanny or an au pair for a family or for two families. Where's the break even point where you say for an extra $50 or $100 a week, if you have the disposable income, I'll just have a college student come in here and give my child one on one attention? And the return on investment for that kid could be astronomical. 

 

EMILY: And I wonder if sometimes if the daycare is even enough, because if you're a working parent and you're going into the office now, I mean, daycares are only open for so long. People might need even more support than just daycare. So it's a lot. 

 

So the housing market, why is homeownership so important to people's finances? 

 

BOB: Well, this is the thing that gets lost in this discussion. Home ownership is an economic boon. I mean, it doesn't work all the time for everyone. But you build equity. You tend to live in a better neighborhood. Your kids are by a better school. You take pride in that. You invest in that. 

 

It becomes an asset that will help you retire. Home ownership is a very American way of getting ahead. And the fact that a whole generation now is having a hard time getting a home is a shame. 

 

My oldest daughter-- I have three daughters. She and her husband were probably the last ones in. A starter home, paid into it, built their equity, got a bigger home. I mean, a really nice home now. This is in North Carolina. 

 

My two younger daughters who are around 30, they don't have that opportunity. They can't afford a starter home because they don't exist anymore. 

 

EMILY: No such thing as a starter home. Another article I read this morning, I think $1 million now for someone to buy a home. That's the average, $1 million. 

 

THOMAS: 200 different markets. It's $1 million for a starter home. That's wild. 

 

BOB: This is outside of Wilmington, North Carolina. But they bought the starter home and a track. It wasn't much. Concrete slab floor. I forget how many square feet it was. Our granddaughter was born there. That house they bought for $179,000. I was just talking to my son-in-law about this. That house is now $370,000. That's not a price as a starter home. 

 

You have to have a lot of money to afford that down payment in those payments. So that's disappeared. That whole lower middle swath of housing is gone now because we just don't have enough houses and those prices have been bid up. 

 

EMILY: Yeah, I know there's no such thing as a starter home anymore. And then it's very frustrating to see and to watch and you're trying to understand, so who is buying homes? Who is able to buy homes? And it's probably people who already have a home and don't need to move. 

 

BOB: Or their mom and dad gives them some money. We live in Northern Virginia. We live in a very modest neighborhood, and our home is just a walk out rambler. But in our neighborhood, houses nicer than ours are million dollar houses. And these young couples are moving in. 

 

And it's always, well, mom and dad sold their second home so we could buy this; or I've never heard someone say, well, we're making a ton of money, so we can afford $1 million house. It's always some generational wealth. 

 

Occasionally it's people work for a high tech industry or something like that. But it's interesting that the number of homes bought for cash is actually increasing because only people with a lot of wealth can afford homes. 

 

EMILY: So how's the renters market doing then? 

 

BOB: Well, man, it was supposed to be better at this point because we were building all these apartments. But the demand because we don't have enough houses and because of population growth, rents were going down, but now they're not really going down anymore. In fact, they're going up in a lot of markets. So that's part of this plan is to build more rental units. 

 

It's interesting, the industry seems to have shifted back to building more apartments. So maybe the market can solve that problem in a couple of years. Maybe not. But what we do know is if government gets involved-- and they're talking about $400 or $500 billion. Throw that at the problem. Hopefully it'll help. Hopefully it'll solve it, but we don't know yet. It's still too early to tell. 

 

EMILY: And with inflation going up and the price of groceries, it must be difficult to save for a down payment. I mean, is that something that you guys are hearing in your space? 

 

THOMAS: Oh, certainly. So on the housing market piece, one thing I would like to point out is there's definitely an idea that you have to save up a certain percentage for a down payment. And for a lot of folks out there-- and I'll just speak for the Navy Federal products-- there are 0 down opportunities to get into a house. 

 

And to Bob's point, in terms of building wealth, the best time to buy a house is last year. The second best time is today. So if you can find a way to get into a home through your local credit union, through whatever down payment assistance you might be able to get, there are a lot of government subsidies out there that can help you bridge the finances and get into a home. 

 

BOB: Yeah. One of my other daughters is married to a veteran, an Army veteran, and of course, they can get a VA loan, and that is the ace in their back pocket, 5% down. And so that's great. But not everybody has that advantage. And they're good savers. They'll get there. 

 

EMILY: I was going to say, how much is 5% now with the average home price being so high, and how long does that take? 

 

THOMAS: Is 5% down still the norm in today's market? 

 

BOB: I'm not sure, to be honest with you. 

 

THOMAS: I was going to say, again, I'm pretty sure that 0% down is true for a lot of products. And I've seen some articles on state sponsored where the state will lend you 3% of the down payment, which becomes it needs to be repaid before the loan can be satisfied, but they will lend you that 3% down at 0% and you just pay it off over the course of the loan. 

 

BOB: I know a lot of people are worried that the housing market is going to crash because housing prices have gone up so much. And they remember the crash of 2008, 2009. Well, the reason why it crashed then, not only was it shoddy lending, but we had this unbelievable excess of homes, and now we don't have that anymore. 

 

We've gone from too many homes to too few homes. And because the building back of homes is going to take so long, I'm not worried about there is no housing bubble. If we had 10 million more homes than we have now, which would be the equivalent of where we were in 2005, 2006, yeah, that's a bubble, but we don't have a bubble now. 

 

EMILY: Right. Supply and demand. I mean, demand is high, supply is low, and it's also expensive because of the interest rates. 

 

You mentioned the homebuyers choice loan. So Navy Federal has the loan where you don't need to put money down. I have used that twice now in the past five years. And even though it makes your month to month a little bit more expensive because you're not putting a down payment, I mean, it's worked wonders for me because in the long term, it's so much better, like you said, to have the equity. And so I really would encourage people to look at those loans because they might-- for some reason, people seem to be a little bit skittish about the no down payment, I think, because some products like buy now, pay later. But no, it really works. It really does work. 

 

BOB: Yeah, absolutely. 

 

EMILY: I've used it twice. 

 

So for members who own their homes, are they calling in for financial assistance? Like, do we see any sort of distress coming from that population? 

 

THOMAS: So we are seeing a high degree of panic from members at all income levels, at all financial literacy levels. And I will tell you, one of the things that I find very encouraging is people are calling in and the panic is largely around the unknown. And when they speak with a personal finance management counselor, what they're getting is a detailed review of their income and expenses. And more often than not, the panic is unfounded. It's the unknown, it's the uncertainty that is creating an environment where they just don't know what's next and they don't know what steps to take. 

 

So yes, we're absolutely seeing it with homeowners. We see it pretty frequently where people call in, and when we go through their budget, we say, hey, you have a surplus. And they say, well, it doesn't feel that way. Or it might be, hey, you have the potential for a surplus. We can help save you a couple of hundred in excess of that dollars per month. 

 

And in some cases, it is that frank discussion where we are taking 30 minutes, 45 minutes, talking to the individual, pointing out where the areas of opportunity are and just giving the member sense of confidence on here are some very actionable, specific things you can do moving forward. 

 

And I'll tell you, often it might be around the grocery delivery services, it might be the eating out. But we're also seeing where the conversations do have to become a bit more serious. And it might be, you need to take on a roommate; it might be, you need to consider borrowing from family instead of running up your credit card. Again, it really runs the gamut on depending on where each individual is. 

 

But to Bob's point, the light at the end of the tunnel, we need to get there. 

 

BOB: Yeah. One of the interesting things, Thomas and I recently had a call in which retirees are in trouble because they thought they had all their expenses lined up. And now inflation has ruined their retirement and now they have to get a job. So it's been creeping up on people. Inflation really is pernicious has been really eating away at people's security for a long time. 

 

One of the great things about what Thomas groups does and what our MSRs do is having those discussions about people's finances. We all assume because we're in the finance business, that everybody should know all this stuff. And I always like to say, I've been in personal finance before I became an economist. I know all this stuff, and you're arrogant if you believe that everyone knows what we know. And so calling in and just getting a little bit of our advice is important. 

 

Every time I try to wire something in my house, sparks fly and fuses are blown. I do not understand electricity. And I have a friend who is an electrician, and he comes in and says, you're an idiot. This is so simple. How many times have I told you to ground this outlet? I don't get it. It's just not what I do. 

 

Hey, you want to talk about the economy? I can talk about that, but I cannot talk about wiring. 

 

And so getting that little, even as Thomas says, half an hour or 45 minutes of advice, is so crucial and not only brings perspective and relief, but it puts people back on track. And right now, you have to stay on track because, again, to torture the metaphor, there is a light at the end of the tunnel. And if you can stay on track, you're going to get there. But it's going to take a year or so. 

 

EMILY: Well, thank you both for coming on today. It's always great to talk to you. I could talk about this stuff forever, but I think ending on a high point, we will see interest rates coming down, and inflation is coming down. And, we're going to see a tipping point probably around January. So if you need some help, call into Navy Federal, Thomas's team can help bridge the gap to get there. But yeah, thank you both for coming on. This was really fun. 

 

THOMAS: It was fun. 

 

BOB: Thanks. 

 

NARRATOR: Navy Federal Credit Union is federally insured by the National Credit Union Administration. This podcast is intended to provide general information and shouldn't be considered legal, tax, or financial advice. It's always a good idea to consult a tax or financial professional for specific information on how certain laws may apply to your individual financial situation. References to and participation with the military community does not constitute organizational endorsement. Navy Federal is an equal housing lender. Navy Federal Credit Union. Our members of the mission.