Money For the Rest of Us

How Higher Interest Rates Alter Our Financial Blueprint

Oct 4, 2023

The podcast explores the impacts of higher interest rates on housing affordability, new apartment construction, stock buybacks, excess returns for stocks and bonds, alternative investments, and financial opportunity costs. It also discusses the challenges of predicting future interest rates, the consequences for homeowners and the economy, the impact on risk premiums, and strategies for protecting returns and making financial decisions.

28:38

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Quick takeaways

Higher interest rates reduce housing affordability, leading individuals to spend money on other expenses instead of saving for a down payment.

Higher interest rates make it challenging for businesses to undertake new capital projects, affecting their investment decisions.

Deep dives

Impact of Higher Interest Rates on Housing Affordability

Higher interest rates lead to higher mortgage rates, reducing housing affordability. The average 30-year mortgage rate in the US is currently at its highest level since 2000. This, combined with constrained housing supply, has made it challenging for potential homebuyers to afford a house. As a result, some individuals are choosing to spend their money on other expenses, such as travel, instead of saving for a down payment.

Introduction

3min

Uncertainty in Forecasting Future Interest Rates and Historical Prediction Errors

3min

The Ramifications of Higher Interest Rates on Our Financial Blueprint

3min

Effects of Higher Interest Rates on Homeowners and the Economy

6min

Impact of Higher Interest Rates on Risk Premiums

6min

Impact of Higher Interest Rates on Financial Landscape

7min

The Impact of Higher Interest Rates on Our Financial Decisions

4min

We explore six impacts of higher interest rates on housing, capital projects, stock buybacks, excess returns for stocks, bonds, and other asset classes, and individual opportunity costs.

Topics covered include:

Where current interest rates stand
Central banker predictions for how long cash yields will stay this high
Why housing is the least affordable since the early 1980s
Why new apartment building construction has collapsed
What has been the excess return for stocks, bonds, and other asset classes when interest rates are higher and lower
Why there will be fewer stock buybacks and how that can impact earnings per share
Which alternative investments do better when short-term interest rates are higher
Why financial opportunity costs have increased and how that should impact our investment and other financial decisions.

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Show Notes

Summary of Economic Projections—The Federal Reserve

The Apartment Market Is Hitting a Construction Lull by Will Parker—The Wall Street Journal

30-Year Fixed Rate Mortgage Average in the United States—FRED Economic Data

Americans Are Still Spending Like There’s No Tomorrow by Rachel Wolfe—The Wall Street Journal

Honey, the Fed Shrunk the Equity Premium by Portfolio Solutions Group—AQR

Companies ease off on share buybacks as rising interest rates push up costs by Nicholas Megaw—The Financial Times