Physics States That Gas Rises

Good Afternoon,

Another newsletter, another week of the economy going crazy. A perfect storm of factors has pushed the economy to the brink of stagflation (thanks Powell), and we all are asking the same question: Will the economy see another quarter of negative GDP? Well, in the past week markets have jumped up $0.13, as investors now believe there is a 76% chance for another negative quarter this year. Atlanta’s Fed GDP now tracker is predicting a GDP growth of 0.0% in Q2 as well.

It might be time to stock up your cupboards for a long upcoming winter. This week, we take a closer look at gas prices and mortgage rates and see what’s in store for your tank and your home.

In the News

Gas[ses] Rise

In our middle school science classes we learned that gasses rise, but recent gas prices have also risen through the roof. Gas prices recently hit the highest national average price ever recorded: $5.1/gallon. These gas prices fueled (pun intended) the highest inflation prints the country has seen in 40 years.

High gas prices are more problematic than other expenses because of their potential to cascade to other parts of the economy. Consumers can avoid price increases in luxury goods by adopting a more frugal lifestyle. However, gas isn’t exactly elastic – what are you going to do, not pick up your kids from school one day? In the short term, consumers are forced to deal with it. As a result, there is a negative correlation between gas prices and presidential approval. As 538 shows, Biden’s approval rating has continued to fall in recent months.

With midterms around the corner, Democrats and the Biden administration are looking closely at solutions for high gas prices. One potential fix in the limelight is introducing a gas tax holiday.

Basically, the government is considering removing the federal tax of 18 cents per gallon on regular gas and 23 cents per gallon on diesel for a period of time. Recent news from the Biden administration is hinting at a July 4th weekend announcement regarding the gas tax. However, markets are predicting there’s only a 15% chance that this announcement will actually happen by the end of the year, let alone in two weeks.

Maybe the markets think this announcement is just a political stunt. Maybe they think that Biden will propose it, and it’ll just die in Congress. Regardless of the reason, it seems like help is NOT on the way.

And the House Came Crashing Down

The housing market has been booming the past couple of years, largely due to low interest rates set by the Federal Reserve. Low interest rates means low mortgage rates which means more people buying homes.

At the beginning of the year, mortgage rates were around 3%, but since the Fed began hiking interest rates, that number has jumped to 5.81% as of this week. Markets are predicting the Fed will continue to aggressively hike interest rates through the end of the year, with a 59% chance we’ll end the year with rates higher than 3.5%.

As a result, markets are also expecting mortgage rates to at least double from where they began the year. There is currently a 55% chance that mortgage rates will climb to >6.5% by the end of the year.

So do we expect housing prices to fall? Demand for new homes has already started to decline. The Mortgage Bankers Association reported that mortgage applications are down 16% year-over-year. However, this downturn might not be enough to cause prices to fall. 2021 saw the lowest supply of homes in 40 years, and supply chain disruptions are still delaying home construction. Regardless of interest rates, restricted new housing may keep prices elevated.

Moodys’ Analytics estimates that if a full blown recession comes, average home prices will fall 5% and overvalued markets will see 15%-20% declines. If you live in one of the teal areas below, now is definitely not the time to buy a new home.

That's all for today, have a great weekend 🤝

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