Housing, Interest Rates, and the Chili's Economy ft. Kyle Cipperley

Grab your Triple Dipper, and join Adam and Kyle as they unpack the latest in personal finance news. They're helping you make sense of recent homebuying trends, whatever's going on with interest rates, and a phenomenon The Wall Street Journal has dubbed the "Chili's economy."

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Transcript

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- Housing, interest rates, and the Chili's economy. Welcome to "Common Cents on the Prairie," a podcast dedicated to helping you demystify the sometimes complex topic of money. I'm Adam Cox, head of Wealth Management for The First National Bank in Sioux Falls. We're a community bank based out of South Dakota. In this podcast, we share expert insights from around the country and stories from our local community to arm you with the tools you need to make better financial decisions, because the truth is, the more we talk about this stuff, the better off we're all going to be. In today's episode, we're taking some items that have been in the news recently and giving you our take on them, including the resurgence of a beloved '90s restaurant. And to help me do that, I'm joined by a familiar face to the show, my colleague Kyle Cipperley. As you know, Kyle leads our Investments team. So, put on your flair.- I don't really like talking about my flair.- Grab your chips, salsa, and spicy margarita, and enjoy the episode.- Kyle Cipperley, welcome back to the show.- It's great to be here. Thanks for inviting me.- You bet. All right, as was mentioned earlier, you've been on the show a few times, so you got to get a little more creative with icebreakers. So, you're a big golfer. If you picked three other people for the dream foursome for a round of golf, who are you picking?- You told me you were going to ask me this question this morning. It's all I've been thinking about all day. So when I was growing up, I was a huge Tiger Woods and Phil fan. Phil Mickelson. So I think I'd have to say those two for sure. Just because, you know, my youth, Tiger's the GOAT, all those things. The first name that came to mind kind of surprised me was Nate Bargatze.- Oh, funny.- Just because it'd be nice not to be the worst golfer in the group.- Yep.- And I saw a video recently of him golfing with Rory, and it was just hilarious. But yeah, so I think just the comedy relief, and then those two great golfers would be a lot of fun.- Yeah. Well it'd be nice to have a comedian there. Break the tension between Tiger and Phil too.- Exactly. Yeah. Yep.- Oh, that's a good one. Yep. Nicely done.- What about you?- Oh, me. Well, I don't golf anymore, because I don't have a functioning back. Right. Assume you have a back.- Assume I have a back. I don't think about golf much these days. I would golf with my dad again. So my dad. I grew up golfing with my dad, and he just loved to golf. So I would definitely golf with him. As far as the other two, John Daly would be fun to have in the foursome.- Love it.- And I'd probably have to say Tiger too. Yeah. It'd be good. Like, I feel like Tiger would be really serious, and John Daly would be smoking heaters. And my dad would just be laughing, and that would be a good time for me.- Good answer.- Mm-hm, mm-hm.- Okay, Kyle, for this episode, we're going to try something different. Something we've not done before. We're basically going to take three things that have been in the headlines recently and give our spin on it. So the place I want to start is probably the one most popular topics to talk about in personal finance these days and that's interest rates. Everybody wants to know what are interest rates going to do? Are they going to stay at the currently high levels, or are they going to drop? So before we start there, why don't we talk about who sets interest rates and why are they so important?- Yeah. So, who sets interest rates is a good question. There are different types of interest rates that matter. The one that gets the most, you know, media attention is something called the Fed funds rate. So short-term interest rates. You hear in the news a lot about the Federal Reserve, the Fed, they basically control short-term interest rates. And they do that through what's called the Fed funds rate. This is an interest rate that banks can borrow overnight, deposits, excess deposits from each other. That rate affects a lot of different types of interest rates that affect people like you and me. People that borrow money, it affects prime rate, it affects something called SOFR. These are interest rates that a lot of businesses borrow at. It affects credit card rates. It affects interest rates you earn in cash like your bank accounts and your money market accounts. And so that's why it gets a lot of attention, because it does affect a lot of people. So the Federal Reserve sets that Fed funds rate, and right now, people expect that rate to go down. They want it to go down.- Yep.- The other rates that matter, though, are longer term interest rates. And that's kind of the confusing part right now is that things like mortgage rates, people that can need to borrow money to buy a house or refi their house, those longer term rates, like 10-year U.S. government rates, that's kind of the rate that affects mortgage rates.- Yep.- And so while the Fed gets most of the attention, those longer-term interest rates, like the 10-year government bond I just referenced, those are kind of set by different factors. They're not really set by a governing body, necessarily. They're kind of set by market forces. And so, every day investors out there are buying and selling 10-year government bonds. And the things they have in their minds when they're deciding what to pay for those bonds are things like economic growth, future Fed funds rate, inflation. These are all factors that investors think about to set those rates. Last time when the Fed cut short-term rates, longer-term interest rates actually went up. Borrowing costs went up. And so that's kind of the challenge right now, is that even if you assume short-term interest rates are going to go down, it doesn't necessarily mean that you're going to get a great deal on your mortgage anytime soon.- Yep. But I think people really do have those two like in lockstep. If the Fed drops rates, my mortgage interest rate might come down.- Right.- So for the last, I'll call it 15 years or so, that short-term interest rate that the Fed sets, that's basically been at or near zero.- Right.- Why is it so much higher today?- Yeah. So I guess we'll go back to kind of what is the Fed's job? The Federal Reserve, what are they trying to do? The Fed basically has two jobs. They have to maximize employment. In other words, make sure that unemployment is low. And they want to ensure that prices are stable. And they really don't have many different ways they can keep prices stable. You know, because what their tool is, is to control short-term interest rates. So if you go back to 2006, 2007, Fed funds rate or short-term interest rates were right about where they are today. And then the great financial crisis happened in 2008 and 2009 and they took interest rates effectively to zero. When I started my career back in '07 and '08, accepted wisdom at that time was that, yes, short-term interest rates are zero today, but it's only a matter of time before they'll have to go way back up because of all the stimulus from the great financial crisis is going to cause all this inflation, interest rates will go sky high. It's just the price we have to pay to get out of this crisis. Fast forward 15 years, we got basically none of that. So I've learned in my career to be extremely humble about what interest rates are going to do. But basically, interest rates were zero for a long time because the Fed had to deal with low economic growth. They had to deal with inflation that was below their 2% target. And so they were trying to get interest rate or to get inflation up. Then we had COVID come in 2020, interest rates had to go back to zero. 2022 comes along, we have supply chain crisis, which is kind of a hangover symptom from the COVID stuff probably.- Yep.- And we had inflation go up to 9%. Well back to that toolbox, the Fed has one thing it can do to stabilize prices, is to jack up that Fed fund's interest rate to try to slow down borrowing, to try to slow down economic growth. So they did that. They took rates from zero to basically five point half percent in short amount of time. Well, inflation came down. It could just be that the supply chain stuff, the COVID hangover thing kind of just naturally solved itself a little bit. But now we're in a position where inflation is kind of coming down and so there's some pressure on the Fed to lower that short-term interest rate. But that's why we're talking about rates going down right now is, I think, it's because for the last 15 years we got so used to them being basically zero and borrowing costs being so low that we want to go back to that environment.- Yep.- Because it was kind of fun to be able to buy a house for a 2.8% mortgage. And so we're kind of yearning for those days a little bit. But if you just zoom out or if you talk to anybody over the age of 50, they'd be like,"Well these interest rates we have today are like perfectly normal."- Yep. A lot of my clients, I'll get them talking, they'll be like, "I remember my first mortgage. It was 18%."- Yeah.- These kids these days don't know. So, you know, while interest rates probably will come down a little bit in the short term, it doesn't necessarily mean they will go back to what we had just lived through for the last 10 to 15 years.- Yep. Yeah. I mean you talked to some folks, it wasn't at all uncommon for your mortgage to be 16%.- Yep.- Now the price of the house was also $50,000, but still, you know, on a relative basis, 5% even, if we're there today, historically speaking, is not outside of the norm, but it is outside of the norm of what our experience has been.- Right. Yeah, absolutely. You know, we're all just, you know, creatures of the environment that we grew up in. I mean, there's a whole generation of people spooked by the Great Depression. That kept them out of stocks for forever and ever. People our age were probably, a little, seeing ghosts from the great financial crisis still. And so it just stands to reason that people that over the last 15 years were able to borrow at zero, just assume that's what they deserve and that's what they should expect. So, I don't know. We'll see. Like I said earlier, I have no idea where interest rates are headed. Everybody that I admire was wrong on that. I mean, you know, Warren Buffet, the greatest investor that's ever lived, basically said in '08 and '09 that interest rates were going to go way higher. He was wrong on that. You know, so I just have learned you just can't predict. You just have to prepare. And so we're prepared, preparing our clients for any eventuality. Interest rates go down, we've got a plan. Interest rates stay where they are, we've got a plan. Interest rates go up, we've got a plan. We're ready to take advantage of anything that comes.- I'm going to make you do something that you probably don't want to do, which is to talk out of both sides of your mouth. So, on one hand, I want you to tell me why when the Fed gets together in September, why they will drop interest rates. And then I want you to tell me why they won't drop interest rates.- All right. So why wouldn't they drop interest rates? So currently, Fed funds rates, short-term interest rates, are about four and a half percent or so. Four and a quarter to four and a half percent. The Fed could look around at the state of the world and say, "Well, why should we lower interest rates?" One of the reasons you'd want to lower interest rates is try to stimulate growth, try to stimulate the economy a little bit. But if you look around, you'd say, well, we've got Bitcoin in an all-time high. We've got the stock market at an all-time high. Inflation is kind of stabilized at kind of a two point seven-ish percent rate. Unemployment rates, pretty low. In other words, things seem to be pretty good. So for what reason would we cut interest rates if the current set of interest rates seems to be producing an economy that's okay. It doesn't mean it's, you know, going gangbusters necessarily, but things seem to be okay. They also might say, well, we just recently took tariffs from an effective rate of like 2 to 3% to something, depending on how you define it, 15-ish percent effective tariff rate on imports, which is the highest rate we've seen since 1930s. And so you'd say, well we want to just kind of wait and see. The Fed kind of wants to wait and see what the data says on the effects of tariffs in the economy, because we don't really know. Early indications are that companies are kind of eating a lot of the tariffs rather than passing it on to customers. But I think the Fed would say, well, we kind of want to wait and see. The other unspoken thing that they are not, you know, saying is that there is some pressure from the executive branch of the government to lower interest rates.- I've heard that.- Yeah. And I don't think they want give the impression that they're reacting to that pressure. And so whereas they might have already cut interest rates, you know, the pressure from the executive branch, they need to put some space between that pressure, I think, and the act of lowering interest rates. You know, Chairman Powell didn't call and tell me that, that's my interpretation of it.- You guys don't talk and text.- Don't talk and text, don't talk. Yeah. So, I don't know. Those are the reasons I think they might just want to wait. And the other thing too is that there is some history with the Fed of cutting too soon and then having inflation come back and then having to cut again. So I think there's some desire to want to avoid that.- Sure.- Kind of that, you kind of want to give. And they're really big on kind of like predicting, you know, having people be able to predict what they're going to do. And so I think they've tried to telegraph to the extent they can, the timing, and so they're trying to be consistent with their prior timing or their prior guidance or whatever. And then the reasons why they will cut rates would just be that the level of interest rates is higher than inflation right now. And so that, by definition, is restrictive. So many times, short-term rates are higher than economic growth or inflation. It's kind of, in theory, it's restrictive on economic activity. So, and you could say the inflation war is kind of won. You know, we aren't dealing with 9% inflation throughout the entire economy anymore like we were in 2022. And so you could kind of say, war's over on inflation, let's just cut rates. Something lower. So I think that's probably what's going to happen. I think they probably will cut rates in September. The other thing too is that, you know, the government borrows a lot of money in the short term and so the government kind of wants interest rates to come down. For all those reasons, I think they probably will start cutting rates slowly in September. Current Federal Reserve tariffs job is up next year. Very likely that the next person will be someone that's expected or likely to cut rates even further.- More accommodative.- Accommodative. Yep.- Okay. I won't put you on record. Say what you think that they'll do because this episode, by the time it comes out, the Fed may have already met, so I'm not going to do that to you, but maybe you'll tell me afterwards. Next topic. Housing. So housing feels like it's been in the news since the start of the pandemic when everybody all of a sudden had more money, had more mobility, and bought houses like crazy. And we saw home prices skyrocket, and we've kind of been feeling the after effects of that ever since. So recently, Wall Street Journal published an article, and in it they said that the housing market was basically frozen. No one's buying, no one's selling. And there was an interesting quote in there that jumped out to, and it came down to the fact that people aren't able to downsize because they are paying more to get less house. So people are kind of staying there. They aren't able to move up. Other families who are growing families aren't able to move up because people who normally are downsizing aren't downsizing. And then basically, anyone who's getting into the housing market for the first time is locked out a bit because no one is moving. So Kyle, my question to you is: Why is no one moving?- You tell me.[Adam laughs] No, I think there are a few reasons. I mean, I think, and everybody understands these at this point, but you know, I think one of the reasons is that yeah, I think it's something like 80% of mortgages in existence have a rate below 6%. You know, and so, if you are going to move and to consent mortgage rates are higher than that today, you are taking a higher mortgage rate. And by the way, median home prices are up 50% in the last five years, and oh, because of that, your insurance costs are through the roof. I know mine are. Your property taxes are through the roof, and ultimately, people are buying. Yes, they're buying a house, they're buying shelter, but they're also buying a monthly payment. And so, you know, and ultimately, there's a governor on that payment, and that's your income. You know? And so the standard financial advice is you try to keep your housing payments roughly 30% or so of your income. I think today it's like 39% or something much higher than the guidance. And so everybody that's buying a house today is basically saying, "Well, hopefully I'll be able to refi."- Yep.- And so I think that's why people are not moving, is just they're kind of feeling like they're stuck. They've got a great deal on their current mortgage rate, and so their payment, if they're looking at their alternatives, it's just too darn high compared to their income.- Yeah. It's wild to me. I mean, you look at people's personal financial statements and you see their mortgage rates and some of them, it starts with a one, which is wild. And so normally, in a normal market, if they've got a mortgage on their current home that's a one point something or a two point something and then they are thinking about doing something different when it starts with a six or a seven, well there's absolutely no incentive unless you're bursting at the seams or you're having to move to a new city. So people are like, "I don't think I want to trade this payment I have today. Even if the house isn't ideal or whatever, we'll make it work." For something that's a ton more expensive.- Right.- Without that, I mean, I think it, for me, I think it really starts with people who are downsizing. I think if more people are going to downsize, because they're often the ones that raised families in the school district that you want to be in, and now they normally would cycle out of that home. They're not currently doing that. So the families that want to get in the school district. So it just becomes this whole supply and demand thing. And I think without people downsizing, I don't know that we're going to break the log jam. Because the other thing too is we're not building homes fast enough.- Yeah. Yeah. I think that's exactly right. I mean, I think it used to be the case that you could expect something like, I don't know, 15% or so people to move in any given year. And now that rate is below 10%. I think it is. You know, I think it's, like you described, the baby boomers not moving out as fast as they would. Maybe it's because they want to host the grandkids a few times a year or what have you. But it's also because those downsized homes, you look at it and it's like,"Well, geez, that's going to cost me just as much to buy that. Why would I want to buy something smaller, and it's going to cost me just as much?" So I don't know. That's been the big surprise to me. I would've expected home prices to adjust quite a bit. You're starting to see it in some markets, like in Florida, you're starting to see the supply of houses coming in the market, it really ramp up. But you know, I just look around Sioux Falls, these surrounding markets, it just isn't the supply quite yet that you would need. And so what's going to take that to change? I think it will be interest rates coming down will cause a lot of mobility. I think people will start moving a lot more. So, but what's going to cause those mortgage rates to come down? I have no idea necessarily. It's going to be a slowing economy or whatever. But once you start to see supply of houses really spike, I think that's when you'll see people start to move again. And I think a rates below 5% or so, you'll start to see a lot of activity.- Yeah. My feeling is, and I'm not an expert in this, but you know, I think you get below 5.5% on mortgages, I think that will be enough for people who are on the sidelines to take the leap. We'll see.- Right. Yeah. The tough part is, it's just not going to be that in isolation. You could have like, 20% unemployment plus low mortgage rates. It's like, you know, there's all these different factors that you have to consider too. You know, because we had low mortgage rates during COVID, but you know, so COVID, maybe you lost your job or something like that. And so there's a lot of factors that affect the housing market other than just rates that you have to have to think about.- Yeah. Last topic is a surprising one. If you're watching the episode, you may notice that we have some props. Despite the fact I haven't eaten cheese in 13 years, there's a block of cheese sitting next to me right now and some chips and salsa. So the reason for the props is there was an article, again in the Wall Street Journal, last week and the headline was,"The Chili's economy is here. What's behind the casual dining boom?" So in the article, like why are we talking about Chili's and restaurants? In the article, it talked about kind of a divergence that's happening right now in the food sector. So basically, in the restaurant sector, excuse me. You've got fast food and fast casual. So fast food would be McDonald's, Wendy's, Burger King, the likes. Fast casual would be the Chipotles, the Cavas. Basically any place where you can build your own bowl would be, be a fast casual. Not doing so good, right?. Those stocks are down, they're seeing slumping sales. And then on the other hand, the surprising winner right now seems to be casual, sit-down dining. So Chili's, where this food's from, or Olive Garden are having this huge resurgence, and, you know, I don't think anyone would've predicted it, and certainly not when there's economic uncertainty. So sales are up, and they're super optimistic. So I guess my question is like, Kyle, what's going on here?- I mean, I haven't been to a Chili's in, I don't know.- You're about to. We're going tomorrow.- All right. So, you know, I think it's a couple of things that you're seeing in the economy. I think, you know, first of all, the fast food places have raised their prices because their labor costs have gone up, and their food costs have gone up. And so that, you know, $5 footlong or the dollar meal deal at McDonald's or whatever is kind of going away a little bit. So you get some sticker shock when you go to these, you know, McDonald's of the world. And so people are probably just doing the rational thing, and they're just looking at Chili's and saying, well gosh, I can get like way better food, and it's like almost the same price. I'm going to do that. But I also think it's just the typical customer of a fast food restaurant is really getting stretched right now. You know, they're seeing their cost of living going up faster than their incomes, and so they're having to make tough choices, probably going less often. Maybe they're, you know, not buying a pop or something like that. So I think it's probably a couple different things. It's a lower income consumer getting stretched. And, I don't know. I think the other thing too is just, it could be people trading down into Chili's from even fancier places too.- Sure. Yeah.- So it could be coming from both sides of it. But honestly, I don't really know. I mean, I listened to some conference calls from places, like we talked about the other day, Portillo's out of Chicago.- Yeah. Yeah.- Most of our listeners may have not heard of that because we don't have one in Sioux Falls, but it's huge in Chicago. And so the reason why Portillo's is interesting is because it's like the most successful restaurant in the world. I mean, Chick-fil-A is jealous of Portillo's sales. That's how busy they are in Chicago, for example. And you know, even they're saying they're seeing people really make, you know, when they go, they're making choices of not getting fries. And so people are just starting to have to cut back on things. And that's because what we talked about earlier, their property taxes are going up, their homeowner's insurance is going up. A natural place to cut back is going out to eat. So I think you're sort of seeing the early innings of that in the restaurant sector.- Yeah, well I think the other thing too is people are looking for value, relative value. So you can go through a drive-through, get your food, and by the time you get home, it's cold and you're eating at home. Or you can go with your family, and you can have an experience at a sit-down restaurant and kind of, you know, do the whole thing. So, like the value, if the money, if the cost is relatively the same, people are saying,"Okay, on one hand, I could have this experience over here, or I could maybe trade up for the same price and get a little bit more value over here." So it's an interesting time.- Yeah, by this time next year, Chili's will probably... The bottom will have fallen out, and Chili's sales will be down 20%. And we'll have to explain why that's happening. I mean, some of this stuff just kind of has shooting star phenomenon to it too. It's just like, you know, things get meme-ified, and Chili's could be popular because people think it's popular. And so there's like, you just go see it. And then you go to Chili's and you're like,"Well this isn't actually that good." So by the time next year, we, you know... I don't know, I guess I just lost Chili's as potential sponsor for us.- Yeah. I mean, you know, we had a good run there for a minute. I thought we were getting some free advertising. We are going to try the chips and salsa.[Kyle laughs] That's funny. Well, and it's funny you mentioned Portillo's. Around circa 2010, I had a body by Portillo's as well. Portillo's is fantastic. Fantastic.- Still never had it.- You haven't had it?- [Kyle] Nope.- Oh, you don't know what you're missing.- I'll try it next time I'm out there.- All right, Kyle, I think that's it. Thank you so much for joining me. And this was interesting. And if you're listening out there, watching, let us know if you like this format, to kind of pull some things from the headlines and chat through them, get our perspective, and we have props, so life is good. All right. Thanks for joining me, Kyle. I hope you found this helpful. If you did, please subscribe and share with your family or friends. If you have a topic you want us to cover in future episodes, send us a note through our website. And, if you're at the point where you want an expert opinion on your finances, reach out and we'd be happy to start a conversation. And remember, any comments, insights, or strategies discussed on this podcast are intended to be general in nature and, therefore, may not be suitable for you and your situation, whatever that may be. Before acting on anything we discussed, please consult with your attorney, CPA, and/or your financial advisor.