BAM Key Details:

  • CNBC’s Jim Cramer and David Faber discussed the Fed’s recent decision not to raise rates at the June FOMC meeting. 
  • Cramer argued that housing is at the epicenter of inflation and that strong measures are needed to correct our “inflationary environment.” 
  • He also pointed out that housing was removed from the CPI in 1983, while rent remained. And, as we know, the Fed’s outdated method of data collection on rental growth leaves plenty of room for doubt. 

CNBC’s Jim Cramer and David Faber recently discussed the Fed’s decision to hold rates steady after ten consecutive rate hikes. 

Here, we’re focusing on a few key points Cramer made, specifically regarding— 

  • The soft landing/hard landing question
  • Housing as the epicenter of inflation
  • The removal of housing from the CPI
  • What it will take to break the cycle

Soft landing vs. hard landing

Fed Chairman Jerome Powell has said before that he’s aiming for a “soft landing” for the economy, even as the continued rate hikes have had obvious and painful consequences for buyers and sellers alike. 

But to those speculating that a hard landing is more likely, Cramer suggests another possibility:

I think a lot of people were trying to figure out whether we’re going to have a soft landing or a hard landing. But yesterday, we discovered there’s a third choice—which is that the plane is still in the air and doesn’t have any intention of landing. So, how do you have a soft or hard landing? And the reason is because of housing. And housing is controlled by wages.

Jim Cramer

Housing is at the epicenter of inflation

As Jim Cramer sees it, housing is the main issue at the center of the inflation the Fed is intent on taming. 

You want to know the key to this? Go to the Home Depot Conference Call…and you will hear why they have to do it. Home Depot is saying this is an incredibly inflationary time. There’s inflation everywhere. Housing, by the way, $13 trillion in value has been created. Home prices are up 40% since 2019. Everything trickles down from housing. And housing, we’re gonna hear from Lennar, same thing. It is where the epicenter of inflation is, and it’s rippled throughout the economy.

Jim Cramer

The removal of housing from the CPI

Near the end of the segment, Cramer pointed out a critical change that was made to the CPI back in 1983:

About thirty years ago…there was a debate about how to make it so the CPI didn’t look that high. So, they took homes out of it! I wish I were joking about this. They took homes out of it, but they kept rents in…I mean, that was sleight of hand to take homes out of it…. And homes are out of control. They can’t build them fast enough…So, the supply of homes is very limited…rental supply is very limited. And we’re supposed to say we’re in a non-inflationary environment? …The Home Depot call was chilling. And if the Fed listened to that, they would say, ‘We are SO not done!’ If Gundlach would listen to the Home Depot, you would just say, ‘Holy cow, are we in a jam!

Jim Cramer

So, housing was removed, and rent data is the sole indicator of shelter inflation considered by the Fed—which, as Byron Lazine has pointed out many times on the Hot Sheetrelies on outdated methods of data collection to measure rent growth. 

Where we are and what it will take to break the cycle

In Cramer’s view, given the shortage of available housing and the lock-in effect of lower mortgage rates, the way to correct our “inflationary environment” relies on two measures that would most heavily impact lower-income households. 

Here’s some statistics that I got that I think are really indicative of where we are. Vacant apartments are now filled in 38 days. Last year, 32. There are eight prospective renters for each unit, down from 11. 

These renters can’t move up to new homes because there are so few new homes. We’re building homes at a radically lower pace than we did last year at this time because the home builders listened to Powell and thought that maybe we were going to have a recession…This is a terrible scenario, but student loans have to come back to where you have to pay them. And people have to go back to live with their parents in order for this cycle to be broken. And I think the cycle is going to be very hard to break.

Jim Cramer

On the Thursday, July 6th episode of the Hot Sheet, Byron touched on a more recent statement by Cramer, essentially saying the FOMC must do something to fix what he’s calling a “housing inflation problem.” 

In addition, Federal Reserve Bank of Dallas President Lorie Logan said there was a case for a rate rise at the June FOMC meeting—and that more rate hikes will be needed “to cool off a still strong economy.”

It would have been entirely appropriate to raise the federal funds target rate at the FOMC meeting in June, consistent with the data we’d seen in recent months and the Fed’s dual mandate goals…I’m very concerned whether inflation will return to target in a sustainable and timely way. The continuing outlook for above-target inflation and a stronger than expected labor market calls for more restrictive monetary policy.

Lorie Logan

Federal Reserve Bank of Dallas President

Byron offered another perspective on inflation rates for shelter, based on data he’s reviewed and shared since the beginning of the Hot Sheet

We’re continuing to defy all odds in these high inflationary times—high inflationary times, of course, according to the Fed. I would argue that our inflation is lower…. They (the Fed) don’t look at real-time data like CoreLogic, like Zillow Observed Rent Index (ZORI), or Apartment List National. All show rents are plummeting. So, if they took that into consideration, my case would be that inflation would be much lower than what the fear is out there, what the Fed is saying.

Byron Lazine

Takeaways for real estate agents

If this doesn’t drive home the importance of staying on top of the most reliable data on the housing market, we don’t know what does. 

While there’s certainly room for different perspectives on the housing market and the economy, there’s also reason to question the Fed’s strategy when they’re relying on homeowner opinion on rent growth rather than hard data. 

Continue to provide up-to-date and reliable data on the housing market when you’re countering the dire assessments and predictions inundating the people in your market. Be the voice of clarity to help guide them to the right decisions for them.