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Reading the Auto & Housing Markets: Inflation & Deflation Trends · Leaders in Lending

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You're listening to Leaders and Lending from Upstart, a podcast dedicated to helping consumer
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makers in the finance industry offer insights into the future of the lending industry,
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best practices around digital transformation, and more. Let's get into the show.
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Welcome to Leaders in Lending. I'm your host, Jeff Keltner. This week's
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episode features my conversation with Kurt Long, the chief economist for NAPHEW, the
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National Association of Federal Credit Unions. This is a great conversation for reference.
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We recorded it on July eighteenth, because this is a little bit more timely
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content than many of our many of our podcasts. We really talked about the
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state of the economy. A recent CPI print actually a little surprising to the
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positive generally, as we talked through the implications of that for interest rates,
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for auto markets, for housing markets, where we think the economy is going,
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and how financial institutions can adapt to the world as we're finding it.
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So it's really interesting conversation. I always love diving into data on the economy
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and details. It's not an area I follow sometimes as closely as I feel
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like I should, and so getting to talk to an expert always fun and
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I think really insightful for anybody thinking about how the state of the economy and
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the response of the FED maybe impacts the decisions they're making as a financial institution.
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I think it's a great set of information for that. So please enjoy
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this conversation with Kurt Long. Kurt, thanks for joining us today on the
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podcast. I appreciate your making the time. Yeah, excited to join you,
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Jeff. Now we should give the date we're recording this on July teenth,
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because I feel like some of the podcasts are kind of evergreen and ones
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where we talk about economics are maybe a little less so. So maybe i'll
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start with that caveat and then ask you a version of my standard opening question,
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which is, like, I think most people didn't grow up dreaming of
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being in the banking industry when they were kids, and probably not economists at
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you know, Credit Union Association. So tell me a little bit about your
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path to where you're at today. Yeah, sure, it's uh, you
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know, definitely wasn't a straight line to get here. I actually grew up
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in Texas and uh, first first got my first degree in accounting, So
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I gave that a shot for a few years and eventually learned what most people
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learn much earlier than I did, which is that accounting is a fine profession,
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but not really for me. And so for some reason, I got
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it in my head that KON was a more might be a more interesting path,
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and so I went back to school, got a degree in that,
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and then moved out to the Washington, DC area after school, and that's
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where I hooked up with the credit union credit union movement. Love it.
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And how long have you been in the credit union movement? Then, yeah,
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it's been about ten years, so join NAFQ. Yeah, right after
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the financial crisis. So it's been a you know, interesting, uh kind
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of an interest interesting business cycle to follow over that over that span. Yeah.
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So this is I find like in somebody's the most fun kind of interview,
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and Someone's the hardest for me to prepare for because you never really know
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what you want to talk about until the day off, because the ground keeps
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shifting underneath your feet. And I think the thing on most people's minds right
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now. The latest bit of data was the latest CPI print, which came
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out recently and was you know, I think pretty positive over all. What
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can you give me your take on what we learned from that and how people
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are reacting to the kind of the latest set of inflation data. Yeah,
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I think it was a really positive report. Positive in the sense that it
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seemed like the inflation number was nice and nice and low, right where we
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want it. And in particular, when you got under the hood, we
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saw some real deflationary trends kind of developing in areas where we've been expecting them.
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So two in particular, one being automobiles, and so you know,
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autos were obviously a big source of inflation the rite up, and then now
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we've sort of been waiting, knowing that at some point that would probably reverse
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course. We've gotten I think just today actually we got new data on auto
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production. And now we've had three months in a row of much better numbers
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on the production side than what we've been getting. I think actually June,
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the June number was down a little bit, but still roughly in line with
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where we were pre COVID. So you know, there's still a pretty big
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deficit in terms of the number of autos that are still missing from you know,
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what didn't get produced in the last couple of years, but I think
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production is improving. As that happens, you're going to start to see some
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of the air taken out of, you know, some of these car prices,
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both on the new and the used side. The use side actually is
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where we've seen a ton of inflation just because there haven't been any new vehicles
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to new vehicles to buy. So so that's that's one area where we saw
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you know, much better numbers last month, and hopefully that's a sign of
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things to come. The other is housing, and housing UM is sort of
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a similar story we've been waiting and it's sort of by construction. The way
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that the government statisticians UM develop their estimates of housing inflation, it sort of
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operates at a lag. So what you see happening in the market, you
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know, when you see rents starting, you know, rents starting to cool
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down. We've seen that for several months now, but it takes time for
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that to work its way into the official official stats, and so UM it
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seemed like we we started to get some of that last month. And the
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good news is that because it happens on a lag, there's a lot of
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certainty about what the path forward is on on the housing inflation piece at least,
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and so I think things are things are looking looking good from that standpoint
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as well. Interesting. Yeah, certainly, it's always interesting to dive.
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I always get these takes from our CFO on the very detailed sets of numbers
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inside of the gross inflation number, and I think there's a lot of a
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lot of important information and insight in there. I want to dive into each
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of these areas. You talk about autos and housing and a little bit more
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depth. What do you think to how sorry the autios will start? There?
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Says to lenders, because one of the things I've heard some concern about
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it is as prices come down, what does that mean for loan to value
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in terms of what I underwrote to where I'm going to stand and do I
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need to be? I mean a lot of people are nervous about lending on
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autos when prices were high going I mean, the value of that collateral it's
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probably not going to stay where it's at compared to the prices things we're selling
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out a year ago. How do you see that playing out and impacting lenders
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moving forward? Yeah, I think that's a valid concern. I think you
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here, you've heard a lot about you know, worries about residual values for
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a while now, and I think especially on the on the lender side,
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we started to see that maybe middle of last year, starting to sort of
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pull pull back a little bit. We saw some of that evidence come through
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from the you know, the FED does this core release survey of senior loan
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officers, and I think that we saw some evidence of that there. Credit
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unions too, I think are starting to us starting to get a little bit
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more conservative in terms of, you know, the amount of lending they're willing
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to do on the auto side. And I think to the you know,
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the the inflation numbers kind of feed into this in a sort of a different
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way as well, which is, you know, in terms of what this
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means for the rate outlook, a lot of you know, I think a
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lot of concern when inflation was running really hot. I mean, it's still
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running pretty hot, but maybe when recessionary concerns were higher that rates could come
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down because of because we were entering a recession, right, so the FED
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might have to cut rates because growth is negative and so um, maybe there
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was a rush to the door to get those loans in while while rates were
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higher. But now as I think some of the uh, some of those
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inflationary worries have subsided a bit. I think with that, some of the
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recessionary concerns have subsided to And so I expect, you know, I think
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the rate outlook, I expect the rates to remain sort of elevated for for
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for maybe a longer period than maybe some some we're concerned about because I don't
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think we're gonna I don't think recession is right on our doorstep. Interesting,
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and the market seems to agree with you, at least judging by the color
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and the stocks app when I opened my phone. It feels like people are
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more optimistic about the possibility of a soft landing or avoiding a recession, and
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they've been historically. Is that? Is that the sense you get from the
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from the markets generally, that people are optimistic about not only the rate environment,
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but what, you know, what the economy holds for us for the
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next period of time. Oh yeah, I think so. I think You've
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seen this among a lot of economists too, not just the markets. A
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lot of economists are revising their slushing probabilities too. And yeah, I think
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you see that play out in both senses. So you know, it'll be
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interesting from where I sit to see how the Federal Reserve deals with that.
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Um, you know that they have they have a meeting upcoming at the end
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of July where they're probably going to raise rates again. But now I think
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the narrative has shifted a bit to where we expected that to be maybe the
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first amongst several more rate heights, maybe not in succession, but we would
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still have to get several more on Yeah, But now I think with clear
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signs that that inflation has started to cool just a bit, maybe the Fed
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can take it, can be a little bit more patient. They're probably going
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to raise rates in July, but I suspect, um, the Doves are
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going to push for you know, they're gonna say, Okay, we'll give
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you the rate hike for July, but you get a you know, we're
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gonna hold rate steady in September and then we'll circle back in October and uh
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and if we don't get a massive you know change from where things seem to
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be headed right now, I think I think July could be the last rate
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hike. Wow, I'll put that as your bold prediction for the episode because
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that's um, that would be interesting certainly not where we thought we would be
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just a couple of months or even a couple of weeks ago in terms of
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what the expectations were for the for the rate environment moving forward. Um,
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how do you see that impacting the housing sector? Because it's interesting there's you
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know, when when rates go up, all of a sudden, the refi
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business that a lot of people had been living on from a from a banking
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point of view, from a lending point of view, with like, wow,
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we can't really refly when as rates go up, there's not a lot
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of refive business to be had. Um, But it seems like often buyers
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are waiting for rates to go down to go out and make larger purchases.
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Do we expect to see that? What do you How do you think the
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kind of rate environment and the shifts in that impact that the housing sector,
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both in terms of sales and in terms of the loans that maybe credit unions
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banks are looking to make and are able to find in the market. Yeah,
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I think in terms of housing, you know, on the buyer side,
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I'm not sure mortgage rates have much room to come down here. In
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the near term, just because you know, one of the things at least
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weighing modestly on the longer rain at the curve was the idea that a recession
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might be in the works. And so as those recession probabilities have been sort
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of reined in, some of those downside concerns are abating. So, you
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know, here just in the last few weeks, you know, even though
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I think expectations for the short end of the curve have changed a little bit,
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we haven't seen that really play out on the long long end as much.
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So um, you know, unfortunately for you know, a lot of
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credit unions rely heavily on refi activity, but I'm not sure I see a
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lot of refi originations here, and at least in the near term. Yeah,
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it didn't feel like we're going to be down to a world where lower
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rates are driving refined and it's always important to remind people about the longer sweep
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of history. I talked to. We have some many young people that I
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talked to, and they they find these rates of you know, they're going,
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oh my god, rates are so high, and I go, well,
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I mean two percent and at two and a half percent mortgages. It's
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not exactly the standard across the sweep of history, and even where we're at
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now is not really compared to the eighties or not exactly super high interest rates.
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I mean, certainly we've we've experienced much higher rate environments than we're in
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today, even as the Fed's been raising for a while. Yeah. Talk
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to your parents, right, they they'll have some good stories about the first
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mortgage alone they got. Yeah, mortgages that sound more like credit card rates
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to us these days than than mortgage rights. Um. All right, So
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that's second. So one other thing I wanted to ask about was how has
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the environment I think the you know, as we've seen inflationary pressures, the
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fear of recession, the question was like, how is this going to play
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out in the performance of credit, particularly consumer credit? Are we going to
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see deteriorations and credit performance. We've seen bits and pieces of that, but
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not I don't think a broad sweep of like massive deterioration broadly. How do
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you think what we're seeing now changes the outlook for what people are expecting from
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credit performance for existing portfolios over the next period of time. Yeah, I
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think, you know, at least on the credit union side, we have
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seen some some you know a bit of an increase in delinquencies, and I
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think that's consistent with what other lenders are seeing as well. It isn't clear
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to me, though, that things are going to continue that way. I
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mean, what we've seen so far is, you know, delinquency and charge
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off rates sort of come back to where we were entering entering the pandemic more
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or less. Obviously there was the big drop, uh, you know in
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the first couple of years after after the onset of the pandemic and things of
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sort of reverse course. But you know, is that just sort of coming
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back to to equilibrium or is it going to just continue continue to rise.
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I think, um, you know, my my leaning this is more my
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gut is I think we're okay. Um. Part of that is just because
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I've I think I've had a more optimistic view that we can get the soft
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landing and the economy that maybe others have had um and that that does seem
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to be the more and more the prevailing view. And so if we can
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avoid a recession, I mean, you know, unemployment rate is still below
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four percent, and it's just hard to it's hard to squeeze a lot of
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you know, credit problems out of economy where so many people are are working
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and still getting reasonably good, good wage growth. Yeah, I think that
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makes sense, and I think people also underestimate when they see the kind of
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rapid deterioration I mean, not massive, but it came pretty quick, and
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just how big the government stimulus was and how quickly it stopped, and the
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kind of that was a that was not a sloping curve, that was a
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big discontinuity in terms of what people had available, and it did kind of
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push us back to what the world looked like when there wasn't government stimulus or
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a depressed economy due to a pandemic that was keeping people in their houses and
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stopping production and stopping services from being delivered and all that. So it feels
15:35
like something more pre pandemic normal is what we should be looking for. But
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you know, figures crossed because it's always people always like to connect the dots
15:41
and draw a line, and it certainly points in one direction right now.
15:50
I'm Margie clip president and CEO of Agricultural Federal Credit Union in Washington, DC.
15:58
When we wanted to a quiet are more members of personal loans. We
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If you'd like to learn more about our partnership with Upstart, you can read
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more at upstart dot com, Forward slash Lenders. Thank you, and back
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to the show. So what's your advice when you're talking to your credit UNI
16:32
members these days? Like? What are you telling them now? I'm curious
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how that's changed over the last couple of weeks, because, as I said,
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we kinda have had some good news at a different time. What's your
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advice to them on how they're you know, preparing for both? Sometimes it's
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like am I preparing battening down the hatches for tough times? Or am I
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ready to start, you know, lining up my opportunities to take advantage of,
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you know, good times. If I think things are going to be
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more stable, I want to go out fire. How do I grow?
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How do how do I drive growth? As opposed to how do I limit
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my exposure to loss? Where are you at and what are you hearing from
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that in terms of what they're doing to prepare and how you're advising them.
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Yeah, it's it's interesting. I think as as conditions have changed, I've
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sort of had to tailor my message, even though you know, we get
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a lot of stuff wrong. I think I think in general, we've we've
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sort of been right about how at least the first half of the year would
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would develop. I think, um, you know, our position was,
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you know, despite all of the problems and all of the risks, the
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labor market is so strong right now, and that's going to boothe the economy
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for long enough to get to the point where we start to see some disinflation.
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And I think that's sort of what played out. Um, so my
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you know, my message to our our members has been, uh, don't
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be so pessimistic. You know, I think a lot of times they're they're
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instinct, and what they're hearing from from a lot of other folks is that,
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you know, recession is inevitable, A reasonable position to take, by
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the way, given what the Fed has done, you know, going from
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zero to five percent almost overnight. I certainly sympathize with anyone who who had
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that view. You know, now that we're at the position that we are
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where people are I think a bit more optimistic about getting at this soft landing.
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Now I find myself starting to worry a bit more. You know,
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maybe it's just a human human nature. We all need something to worry about,
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right, So you know, I think the risks that maybe the number
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one risk that's out there that I don't see people paying maybe enough attention to
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is okay. So, you know, the labor market is still really good,
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Inflation is starting to subside. That means real incomes are going up now,
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right. I think actually the Wall Street Journal just ran a big article
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on you know, real wages are now positive again after being negative for quite
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a while. So with that comes a little bit more spending power on the
19:07
part of workers and consumers. And so you know, it's certainly not out
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of the question that we could get a re emergence of inflationary pressures. So
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I think that's actually is the bigger risk than an immediate recession, is that
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we get inflation coming back to life like sort of like the bad guy in
19:27
a horror movie. Right, And the FED actually does have to have to
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raise rates further to address that. Interesting now you bring me to something that
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it's always been curious to me, and we talked about this in the beginning,
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which is it seems like we have this long term inflation target that the
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policy holders are trying to hit around two. We often run below it,
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and then when we go above it, the sense is like, no,
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no, no, we're not allowed to be above it. We must be
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below. And you know, I'm sort of a numbers guy, and for
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something to average out, you have to have equal time at least time weighted
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delta between when you're below it and when you're above it. Yeah, we
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don't seem to be comfortable being above it as long as we are comfortable being
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below it from a target point of view, from inflation, what's your sense
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of that? Is that just like a political reality that can't change, is
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there, you know, any movement to really, from a policy point of
20:17
view, be be honest about the desire for what the average should be and
20:19
live till to a long term average, which might mean periods of higher inflation
20:23
following periods of really low inflation over time. Like, how do you think
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about that? Because it's always been interesting to me that it feels like as
20:30
soon as you clear the average, you're in like the reds, and people
20:33
are nervous and trying to fight it back down, which which feels counterintuitive to
20:37
the nature of an average, a target for an average. Yeah, so
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that's that's a super interesting question. And I'll try not to let myself go
20:45
to too crazy here being a being a nerdy economist on this question. But
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you know, the Federal Reserve has also noticed this asymmetry that you've described,
20:55
where you know, for the better part of a decade prior to the pandemic,
21:00
we were below the Fed's two percent target, and yet no one seemed
21:03
to be too bothered by that. There wasn't too much effort made to try
21:07
to get back up to the two percent target. And yeah, things seem
21:11
much different when you're when you're above the target right then below it. The
21:15
way that the Fed they did make some measures to try to address this asymmetry,
21:22
it was kind of interesting. I think the if they had it to
21:26
do over again, they might might not have done. So. It was
21:29
actually right before the onset of COVID when they announced it a change in their
21:34
framework, so they called it. They called it fate FAI Flexible Average Inflation
21:40
target, I think if I if I still remember that acronym. But the
21:44
idea was that they were going to do just what you suggested an average the
21:49
inflation over a period of time, so that it was sort of the idea
21:55
was there would be a payback period. If you spend some time below the
21:59
target or above the target, then you've got to shoot to go on the
22:03
other side of it, so that over time it averages out. Now,
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you know, as I said, the timing of this couldn't have been worse
22:11
because the better maybe, Yeah, that's right, So you know, it
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seemed like the obvious motivation for this was to convince people that they know that
22:26
we're we're we're recognizing and dealing with this asymmetry. So we're not gonna spend
22:32
the next decade being below two percent, right, We're gonna we're gonna hit
22:36
that target over time. And of course we all know what happened. Things
22:40
did not go according to plan. And so now that we've spent quite a
22:44
while well above the fed's two percent target, I think the natural question is,
22:48
does that mean we have to be below target for who knows how long
22:52
once we get inflation back under control? And I think the FED, not
22:59
in so many words, has said, you know, I'll just forget all
23:02
that. So I think once they get back to two percent, they're just
23:06
gonna say, hey, we're starting from new right now. And who knows,
23:08
maybe they'll you know, maybe they'll sort of keep the flexible average inflation
23:15
target model going forward. But I don't think that's going to cause them to
23:19
to feel like they have to spend time under under the target. Well,
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I mean, theoretically could tell you the opposite, which you should be allowed
23:27
to come back down slowly because you know you've got I mean, if you'd
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if you'd set that marker five years ago, you have a lot of muff
23:34
right now to average into where you're happy. Yeah, we don't need to
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be back there tomorrow. We need to you know, let it play out.
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Um, it'll be interesting to see if that plays because it's always I
23:45
do worry that too, that that's it's a nice framework, but politically the
23:48
pressure will always be there's very little pressure to increase inflation, particularly when you're
23:52
at super low rates. There's not that many tools to drive inflation up.
23:56
Um. And then you know, but nobody likes to see inflation high.
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That it's everybody's pocketbooks, and there's going to always be political pressure to do
24:02
something to change that scenario. So I don't know that the incentives for pressure
24:07
are aligned equally on both sides of that line. So I'm not sure you
24:11
can really ever solve that problem with with just a policy approach. So I'd
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love to believe that you could. Yeah, I think that's probably the more
24:18
parsimonious answer, right, is that you know, no matter what the fence
24:21
framework is, the political realities are what they are, and we've seen that.
24:26
We've certainly seen that as clearly as as we could during the last few
24:30
years, which is, you know, consumer centiment measures are in the tank.
24:33
Business centimon industry is the same thing. People don't like inflation, And
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if you needed to be reminded of that, then now you know, a
24:42
couple of years of inflation will remind you that people really really don't like it
24:45
when inflation runs hot. YEA, Well, Kurt has been a fascinating conversation.
24:51
I appreciate your joining me today for it. I do have three closing
24:53
questions I ask everybody, and I'd love to throw them at you right now.
24:57
They're totally different than the last twenty twenty some odd minutes of conversation.
25:02
UM, but I think equally interesting. So here they are. UM.
25:06
The first is, what's the best piece of career advice you've ever gotten?
25:12
The best piece of career advice I've ever gotten is, uh, you know,
25:17
I remember when I was seven years old and my grandfather asked me what
25:21
I wanted to do when I grow up, and uh, he said,
25:23
just do what you love and you'll never have to work a day in your
25:26
life. And uh, I feel like that. You know, all the
25:29
best decisions I've made with respect in my career have been UM, when I
25:33
sort of didn't worry too much about where things were headed and just wanted to
25:37
work on interesting, interesting subject matter and interesting jobs. And uh you know
25:41
that that's that's uh, that's served me, served me well, all right.
25:45
I like it Little Steve jobs from your grandfather. Maybe maybe Steve your
25:49
grandfather when he was writing a speech and he'd heard that one before. UM.
25:55
My second question, which is, uh, it may be interesting given
25:57
the last conversation, but what's the best of ice you've gotten about the general
26:00
consumer banking segment? I hate saying banking to credit unions, but I don't
26:04
know. The credit unioning is like a sector indu cy, so I use
26:07
it. But what's the you know, what's the best advice you've got about
26:11
that that industry in general? You know, I think maybe just because when
26:18
I started it was right after the financial crisis, and so I think I
26:23
think that the advice I got not not in so many words, maybe about
26:27
but when banking is good, it means it's boring. When when banking is
26:33
interesting, that means something's going wrong. And so uh you know, um,
26:40
a lot of times I find this in our own work, is we
26:41
uh we sort of you always want, you know, consistent with my previous
26:45
answer, you want to find the most interesting corners of the of the of
26:51
the market. And but but sometimes that's where those are the most dangerous corners,
26:56
right, so uh um, sometimes boring is good. Sometimes boring that's
27:02
that's actually really interesting advice. It is. It is fascinating how many,
27:04
how many problems in the banking industry historically have come from trying to get away
27:08
from the boring in good times, like you know, the basic taking of
27:11
deposits, lending of money, making of net interest margin. Um, you
27:15
can you feel a little bit boring when you know things are stable and then
27:18
we reach for something else, and it's usually the something else that causes a
27:22
problem. Um, when when the when the next cycle turns interesting? Yeah,
27:26
am my last found that out in March, right, A few a
27:29
few banks try to get a little interesting and didn't work out. So well,
27:33
yeah, when you yes, you can sometimes what's the play phrase?
27:37
Too clever by halfs? Bankings are pretty straightforward industry, and when you're too
27:41
clever by half sometimes I just go, I don't know that I see that.
27:45
Um, all right. In my last question, what's one bold prediction
27:48
for the future, You've already said the last rate height and should a lie,
27:51
so you can stick with that when that's a pretty that's a pretty good
27:52
answer, um for that question. But do you have any other bold predictions
27:56
for the future you want to stick with that on? I think I will
28:00
stick with that one, but I will ass as a sort of caveat,
28:03
I will say you know a lot hinges on of course, whether whether you
28:11
know how the how the economy evolves over the next twelve months. And so
28:14
that's sort of what I've been sort of thinking about in my own free time,
28:18
is how this might all work out. We've seen the Biden administration really
28:23
latch onto the idea that things are looking better right now. They're throwing throwing
28:30
around the word biden Omics quite a bit lately with the with the hope and
28:33
expectation that that things are going to look pretty good a year from now,
28:38
and so you know, my my expectation is that they will. Um.
28:44
But even you know, again, even though I think the risk of recession
28:48
has receded, I do think there's a real risk of inflation coming back,
28:55
maybe maybe next year. And so if that happens, I suspect that's going
28:59
to be uh, probably show up in those consumer sentiment numbers that we've been
29:03
talking about, and that could be a real problem for the for the current
29:07
administration. Yeah, that's uh, it's interesting, you said. I'm always
29:11
reminded that I, you know, was in a meeting with a board of
29:15
a of a financial institution right before the pandemic hit, and they asked about,
29:19
you know, AI models and credit and how you think about different scenarios,
29:22
and I go, well, you know, barring any kind of global
29:26
macroeconomic event that's kind of unforeseen, we take a lot of stuff into account
29:30
and then you know, a few weeks later, I went, yeah,
29:33
so what I said, there were some things we don't have in the model,
29:34
like this is definitely on the list. This is definitely on the list.
29:40
Um, so you know, you've always got your what you think will
29:41
happen, and in the world sometimes has different plans and throws you a curveball
29:47
for those predictions. But I like that one. I for for ourhen's sake,
29:51
I hope you're right on both of those. I like by like both
29:53
predictions. So well, we'll have you back some time and see how you
29:56
see how they hold up. But Kurt, thanks again for making the This
30:00
was a real pleasure and I learned a lot and I appreciate you making the
30:02
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