Question of the week: What is the taxpayer protection initiative and how does it affect us?

Answer: It is a measure that has qualified for the November ballot that, if passed, repeals a 2017 ruling by the California Supreme Court that created a loophole in Proposition 13 that made it easier for taxes to be enacted in the state.

Last week the Question of the Week was about parcel taxes, and delved into property taxes in general for Californians.

In the response to the question, we mentioned that some taxes are able to be enabled, i.e. charged and collected, by a 55% majority, instead of the previous, and long standing two-thirds majority.

The two-thirds threshold was a result of Prop. 218 in 1996, in which voters clarified that any tax designated for a specific purpose, i.e. to fund homeless services, requires two-thirds of the votes to pass. The wording of Prop. 218 was such that it would apply to all specific taxes, regardless of whether they were put on the ballot by legislatures or by voters.

An ambiguous threshold has been in effect as a result of the state Supreme Court ruling in California Cannabis Coalition v. City of Upland. The actual ruling did not adjudicate the threshold by which taxes could be paid, instead it ruled when that vote for the tax could be held. Prop. 218 requires any tax being imposed by “local government” be voted on in a regularly scheduled election. The argument that won the court case was that the scheduling provision in Prop. 218 does not apply to initiatives put on the ballot by petition of voters. In other words, if a group wants to put an initiative on the ballot to generate a tax of $1 for every property to fund housing and care for 3-legged dogs and tailless cats, and it receives enough signatures to qualify for a ballot, a special election can be held for the initiative for voters to decide the fate of these poor deformed animals.

By a 5-2 vote, the court decided that a ballot measure initiated by organized citizens in not an act of “local government.” This distinction, that the definition of “local government” is only elected officials, not political action committees, trade associations, non-profit organizations, cracked Prop. 218, enabling other rulings to further puncture Prop. 13 and its original intention and purpose.

The special interest groups mentioned above seized on this crack and drove a wedge through it to further alter Prop. 13. If citizen-based initiatives are not acts of “local government,” then it would seem that other rules in Prop. 218 are also invalid when it comes to citizen-based initiatives; primarily the two-thirds of the vote requirement to pass taxes.

The court’s decision did not mention any other provisions beyond the timing of an election, and when inquired for clarification by attorneys involved in the litigation of the Upland decision, the justices declined to respond.

If one is qualified to be appointed to, and confirmed for, the California Supreme Court, one is certainly astute enough to know that the ruling in Upland would extend to other rules in Prop. 218, unless specifically protected by the decision.

Following the decision numerous tax increases were placed on ballots across the state, many sponsored by public employee unions, that needed only a simple majority to pass and enact the tax—because they were “citizen” generated initiatives. There were many challenges to these ballot measures and subsequent passes, and in 2020 the state Supreme Court upheld their validity, not by a decision in any specific case, but by refusing to consider any challenges to them. Essentially, by denying to hear arguments the court was establishing that Prop. 13 rules were not valid because Prop. 218, which was meant to harden Prop. 13 provisions, was only applicable to “local government” initiatives.

Confused? So are most voters—but the politicians and organizations that are always looking for more public funds are not.

Where we are today for new taxes in California:

• Statewide increases
  • A two-thirds majority of Legislature must vote to put a tax measure on the ballot
  • Requires 50% + one vote to pass

• Local Taxes (cities, counties, special districts
  • General taxes the go into the general fund 50% +1 and must be on regularly schedule election ballot
  • Special taxes (earmarked for specific purpose(s)) two-thirds voter approval required unless
  • Citizen initiative placed on the ballot 50% + 1

Last year Prop. 5 was put on the ballot to lower the threshold for taxes from two-thirds to 55%, but it was rejected by voters.

This brings us to the answer to the Question of the Week, what is the taxpayer protection initiative (TPI) and how does it affect us?

Primarily, the TPI will reverse the loophole created by the court and require at two-thirds vote requirement for local special taxes. As well, it will restore limitations on real estate transfer taxes which Prop. 13 prohibits, “any transaction tax or sales tax on the sale of real property.” Despite this, the courts have created a series of decisions enabling these taxes to be imposed.

Prior to Prop. 13, and continuing for decades post-Prop.13, transfer taxes paid on the sale of property was $1.10 per $1000 in sales value. Cities began imposing higher transfer taxes, some as high as $45 per $1000, which increased costs of sale for buyers and sellers. An example of the combination of the Upland case and cities looking for more revenue is Measure ULA in Los Angeles which resulted in taxes of 4% or 5.5% of the sales price on the sale of residential or commercial property for prices over $5.3 million.

How does the TPI affect you? As a property owner it protects your property tax basis and amount of taxes that can be added to your tax bill by requiring a super-majority approval by voters to increase those taxes. As a renter, it protects your landlord from paying higher taxes, which in turn becomes higher rents to pay for the higher taxes. As a consumer, it protects your costs for goods and services as merchants and vendors either own the property where their business is located and would have higher costs to pass onto consumers, or if they lease, it is very likely a triple-net lease whereby they are responsible for property taxes.

Property owners, and all Californians, should be very grateful to the Howard Jarvis Taxpayers Association, names for the person primarily responsible for 1978’s Prop. 13, for their continued efforts to fight of taxpayer, and property owner, rights and protections in a state where state and local governments have shown an inability to be financially responsible to the extent they see only solutions based on higher taxes from citizens and businesses.

The TIP does not yet have a number for the proposition, when it does my sincere hope is that all who receive the WR&MU, and an overwhelming majority of those who do not, vote “yes.”

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

Economic growth, wage growth, price growth, every economic indicator is moving up, some of which is good, some of which is not so good…

          GDP—the economy grew at a 2.0% rate in the first quarter, below 2.2% expectations, but well above anemic (no) growth at the end of 2025

          PERSONAL INCOME AND SPENDING—both up in March. Spending was up 0.9% for the month, energy costs primarily driving the increase, and income was up 0.6% per month. Not a great ratio as it shows Americans growth in spending outpacing growth in income, which leads to a draw down in savings or increase in personal credit.

          INFLATION—the Personal Consumer Expenditures index, the Fed’s preferred inflation gauge, was up 0.7% for the month and 4.4% year over year, the highest level since early 2023. The spike in energy costs is impacting other goods and services as the core PCE rate (food and energy stripped out) was up 0.3% for the month, but 3.2% year over year.

Rates for Friday May 1, 2026: It was no surprise that the Fed held its benchmark rate steady at its meeting this week, but given the economic news yesterday, as outlined above, odds are starting to climb for a rate hike before another rate drop. Rates react to the economic data and go up again this week.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30-year conforming                              6.12%          Up 0.125%

30-year high-balance conforming        6.375%        Up 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

It’s that time of year. On our morning walks through the neighborhood with Sammy we are picking up jacaranda blooms on our shoes, our cars are changing colors with the various white and yellow blooms falling off the trees on our street, and are doormat is not completing the job of getting all the flora detritus from the soles of our shoes.

Bring on your preferred allergy medicines!

Dennis

Question of the week: Should we move to another state?

Answer: This was a question a neighbor said they asked their tax preparer last week. The impetus for the question, of course, was the amount of taxes they were paying to the California Franchise Tax Board.

It is a question that thousands, tens of thousands, of families have asked over the years, and many have answered, “yes.”

Taxes are burdensome in the state with the, or near the, top of all states in individual income tax, sales tax, gas tax, utility taxes, and fees for licensing and registrations for those in the many businesses for which they are required. Ignoring that insurance is not a tax, but due to its necessity is like a tax, even before paying for groceries, clothes, dining out, dry cleaning, etc, Californians pay a lot of their incomes to the State of California, and the various counties and cities charging their own taxes.

So the questions become, would we be better off financially if we moved to another state, can we adjust to wherever that may be in regards to culture, weather, activities and entertainment available and general quality of life, can we leave family and friends we live near (the former may be harder than the latter in some instances)? If the answers are “yes,” the final questions are when and how.

Ignoring the non-financial factors in such a decisions, math can be our friend in determining the basis for getting to yes, or no.

Instead of comparing all the 49 other states (and ignoring Washington D.C. as an option), I looked at the ten states with the lowest personal income tax levels, since the highest amount of taxes most of us pay is income tax. Note that nine of the ten states have no (zero, zip, nada, none) personal income tax.

Besides income tax, I looked at property and sales taxes, to cover the three common taxes for every state. No income tax is a great advantage, but that generally means tax revenue for the state, and counties and cities, are coming from other sources.

One tax that many California transplants are shocked by is the property tax for their new state. The shock is generally not immediate, but builds over the years as only a few states have a Prop 13 type cap on property taxes to prevent extreme increases in the tax as property values grow. Prop 13 caps our property tax increases each year at 2% of the prior year’s taxes, regardless of the increase in value.

Consider the almost 50% increase in property prices we have seen in Southern California over the past six to seven years (see chart in last week’s WR&MU). Because of Prop 13 while your property may have increased in value almost $300,000, your property taxes only increased about twelve-and-a-half percent (12.5%)—if you were paying $5600 per year, your taxes went up to about $6300 per year.

Most states do not have caps on property tax increases, they reassess the property ever year, either using trending statistics or actual value assessments, and adjust property taxes accordingly. If in Nashville you purchased a home in 2020 for $565,000 your property tax to the state (not including county, city taxes, special assessments, etc), the tax would be $2825 per year. Assuming the property increased as the median price in LA County did from 2020 to September 2024, when the median value was $960,400, your property tax would climb to $4800 per year.

Is that enough to make a difference, doubtful since your income tax will go from, likely, almost 10% of your income to 0% of your income.

Below are charts that show the taxes the ten states with the lowest personal income rates, with the rates for property and sales taxes; as well as a chart that shows tax calculations based on:

• $150,000 in personal income
• $750,000 property value
• Spending $40,000 per year on taxable transactions

Note that Alaska and New Hampshire are the only states that have no income nor sales taxes.

Based on the tax rates and assumptions I made, the lowest amount of taxes you will pay for states with no income taxes is Nevada. The highest, due to high property taxes, is Texas.

For those who have never lived anywhere but Southern California with its near perfect weather twelve months a year, after year, after year…there are other expenses you may not know about when moving to states with seasons that are distinctly different.

Two of the states with no income tax, Alaska and South Dakota, have very severe winters, others have various degrees of winter, from bitter cold and major snow storms, to very cold, freezing rain and fog. Winter has costs that come to bear on your household. Winter clothing, storm windows, snow tires, salted roads eroding car parts, cost to clear snow and ice, heating costs—often oil, and other “winterizing” actions add costs that we are fortunate not to bear in our Mediterranean climate.

Quality of life, weather, friends, family, how you spend leisure and entertainment time, cannot be assigned monetary values, they do have psychological and emotional values that would need to be weighted against the financial savings you may benefit from a move to another state.

IMPORTANT NOT REGARDING RELOCATING!

For the several times relocating to different states has been a topic in the WR&MU, a strong bit of advice has been included: unless you have to, do not sell your current California home for at least one, and preferably two or more, years after you move.

You may have visited your new state and area several times over the years and think you know all you need to know about living there, but until you spend all day every day through every season you do not really know as much as you may need to. Take the above information about costs due to weather, have you lived through a major winter storm, a spring storm with severe thunderstorms, tornado warnings/sightings, 95% humidity, and the costs to endure the weather conditions? Visting an area is a lot different than living there. Shopping, entertainment, neighborhoods, religious centers, schools, medical care, are all factors you learn more about the longer you live there.

If you sell your home, move to Other State, relish that you can purchase the same, or bigger/better, home for less than what you sold your home for, and will be saving money on taxes and other expenses, your ability to return to California and buy a similar home that you sold will likely be very difficult, and expensive.

You purchased your home in 2000 after the crash with three kids in elementary school, for $400,000. One of your children has children and moved to Other State a few years ago.

You sell your home for $1.1 million and purchase your new home near your child for $500,000, with no mortgage. You have retired and your income is social security, retirement savings, and of course the “windfall” from the sale of your home.

It’s not working for you. You miss your friends, the weather is more than you expected, for major medical care you have travel and hour each way, you feel like you just don’t fit in.

A home in the neighborhood you sold in will cost $1.2 million. You have funds for down payment, but that reduces funds you were counting on for retirement. You cannot qualify for a conventional mortgage, but you can buy using a reverse mortgage with a large down payment. Adding to the issues, your property tax bill when you sold was $6,000 per year due to Prop 13, for the new home the bill is $21,000 per year with the assessments added to the base tax.

If you had not sold your home, and rented it out, earning some additional income, and rented when you first moved, if you want to move back you can and it will only cost you moving costs, and carpet, paint, etc after your tenants move. As well, you retain your property tax base.

Keep in mind, if you move to Other State and really like it, you can sell your home in California and buy a new home, or pay off any mortgage you may have, at a later date. Note: be in touch with your tax preparer to make sure you are within the time frame that enables you to sell your California home and retain your capital gains exclusion (must live in home two of the previous five years).

If you are considering relocating to Other State, call me to run your scenarios and options—we are licensed in most states.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

Rates for Friday April 17, 2026: Not a lot of rate moving data this week, we see rates drop for the third straight week.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30-year conforming                              6.00%          Down 0.125%

30-year high-balance conforming        6.25%          Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Long time readers of the WR&MU know that I am an avid reader and an amateur American history buff. Being the month of April, I am reminded of an excellent book by Jay Wink, April 1865: The Month That Saved America.

Since reading the book several years ago, I have become very observant, perhaps too much so, as to the number of major historical events that have occurred in the month of April. Besides those detailed in April 1865, in no particular order:

• The first battles of the Revolutionary and Civil Wars
• NATO was created
• First modern Olympic games
• Martin Luther King assassinated
• The Pony Express began
• First handheld mobile phone call
• The Titantic sank on its maiden voyage
• Thomas Jefferson, William Shakespeare, Leonardo da Vinci, were born
• Apollo 13 launched
• The internet was born
• The 1906 San Francisco earthquake struck

I got a bit caught up in making my list—there are many other events that I find fascinating, but in deference to your time and patience I shall refrain from continuing the list!

Dennis

Question of the week: Are condos getting harder to sell?

Answer: Maybe.

Likely.

The primary source of residential mortgages are Fannie Mae and Freddie Mac (henceforth, GSE, for Government Sponsored Entity), they fund approximately 70% of all mortgages in the United States.

The GSE are under the umbrella of the Federal Housing Finance Agency (FHFA), which provides many of the rules and regulations for underwriting and purchasing mortgages.*

*The GSE do not fund mortgages, they purchase them from mortgage companies, banks, credit unions that underwrite and fund mortgages using the GSE criteria. After purchasing mortgages, they bundle them into batches called Mortgage Backed Securities, and sell them in the financial markets. You can purchase MBS through your investment advisor or institution.

Recently FHFA rolled out new rules for condominium associations to follow if they wish to be eligible for funding from the GSE; if they do not follow the rules they will be on the “do not lend list.”

Keep in mind, these rules apply to all GSE mortgages in condominium complexes, whether purchase or refinance mortgages.

Since 70% of mortgages are from GSE, being ineligible for their financing greatly restricts the market for those selling properties.

Some of the new rules that will impact the ability of condo HOAs to remain, or become, eligible:

Higher reserves After decades of requiring HOAs to maintain 10% of their budgets in reserve, as of July 1^st they will need to carry a 15% reserve.

Budgeting reserves is meant to build a savings account that can be used for capital improvements and repairs, as well as emergency needs.

If a roof last 15-years and the estimated cost to repair the roof in 15-years is $1 million, the HOA will need to set aside a little over $65,000 per year to have the funds. Or, assess all the units at the time the roof is replaced for their share of the cost of the roof, to be paid at once or over a defined period of time.

If there are 20-units in a complex and their monthly HOA dues are $500 per month, the total collected by the association is $120,000 per year. This is used to pay insurance, maintenance, servicing of pools, elevators, landscaping, and management.

Of the $120,000 the HOA must now set aside $18,000 per year for reserves instead of $12,000, a 50% increase. The result will be an increase in HOA dues to cover the additional reserve requirement, along with increases for other costs.

Since the rule takes effect on July 1^st, if HOAs want to stay eligible this year they will need to increase their reserves from budgets already enacted, which may result in special assessments.

This rule can, will, push many associations from eligible to ineligible.

Questionnaire One of the aspects of becoming eligible is the completion, by the HOA, of a questionnaire. The questionnaire covers a wide range of topics, from total number of units, to how many unsold units if a newer projects, to percentage of units that are not owner-occupied, current reserve balance, to how many owners are delinquent in dues, to any repairs or replacements needed that exceed $10,000 per unit, to any litigation.

For many years, a “limited review” was available for some mortgage applications if the loan was considered a low enough risk in an established project. No longer.

A waiver from the questionnaire has been part of the loan approval process, however to qualify for the waiver, the complex would typically have a small number of units, or recently had a full review that passed with flying colors. Unfortunately for borrowers, it is not until a loan application is inputted into the GSE’s automated-underwriting system that we know if the HOA is eligible for a waiver.

Completion of HOA questionnaires add costs and time to transactions. Most HOAs have outside management companies that act as property managers and complete the questionnaires. Depending on the management company and the size of the complex, we have seen fees for completing the paperwork range from $300 to over $500, and take up to two to three weeks for completion. To “rush” the completion there can be an additional fee of several hundred dollars. Note, the fees are almost always paid by the borrower.

Insurance Lack of adequate replacement coverage in insurance policies has been a major factor in many HOAs across the country losing their eligibility for GSE funding. Raising coverage costs, especially in the California insurance market, means raising premiums, which means raising HOA dues, and reserve requirements.

One change in insurance requirements that may make it easier for staying, or becoming eligible, if a bit complicated, but it comes down to the replacement cost of the roof and how it is insured. The new FHFA rules allow for coverage what the actual cash value of the roof is today; i.e. the original cost minus the depreciated value.

The premiums for covering the current cash value is significantly less than premiums for covering replacement costs of a new roof. Think of insurance for the 2010 Honda Odyssey van being for the current cost of the vehicle versus insuring it for the value of a 2026 Honda Odyssey so if the car was totaled the insurer would payout the cost to buy the new edition.

Therefore, some HOAs may opt for the lower premium option, this not only makes it easier to retain/obtain eligibility for GSE mortgages, but also reduces increases to HOA dues.

Taking this route essentially kicks the financial can down the road, as if there is a roof incident through storm or other factor, the lower insurance may barely cover the cost of a new roof—resulting in special assessments or higher HOA dues to cover the difference.

Unit insurance Over the decades I have been in the industry, I have seen a dramatic decline in the number of associations whose master insurance policies cover the interior of the units. For those who own units in complexes where their individual units are covered for fire and other eligible claims, they likely pay higher HOA dues, but the higher payment is likely less than the premium for a HO6 policy.

The HO6 covers the interior of the individual unit and each owner must obtain their own policy.  The new regulations, effective July 1^st, require all new condo mortgages be listed as loss payees on HO6 policy for the unit in the transaction.

If you own a condo in a complex whose master policy currently covers the interior of your unit, and you want to refinance, you will need a HO6 policy to complete your transaction.

I have always encouraged clients purchasing condos to insist on complete financial statements, board minutes (to see what discussions have occurred regarding financing, capital improvement costs and funding options, etc), and a full physical inspection of the unit and complex—including roofs, basements and all common areas.

The latter to determine likeliness of major costs approaching for repairs or replacements, that will likely lead to higher dues or assessments. Unless, the balance sheet and income statements show the association has done an excellent job creating reserves to cover major improvements.

Last June, our question of the week was, “What should we look out for when buying a condo?” If this question were to be re-visited today, first on the list would be to see if a complex is on the GSE eligible list. Even if it is currently on the list, dig into the financials for the association, is the association strong enough to remain on the eligible list?

Is the association prepared to replace roofs, pool equipment, sprinkler systems, any major physical component of the common areas that inevitably will need to be replaced.

What are financing options for condo units that are not eligible for Fannie Mae or Freddie Mac financing?

If you have 20% or more for down payment, there are several lenders in the “non-warrantable” (lender speak for not eligible for conventional financing). The rates are typically a bit higher than for a conventional loan through a GSE, however, not drastically so.

If the down payment is lower than 20%, options are mainly a VA loan is you are a veteran, or FHA. For the former, an association must be approved by the U.S. Department of Veteran Affairs. For a FHA loan, if the association is not on the FHA approved list, it is possible to get a “spot approval” for a single unit. The spot approval process adds some time and cost to the loan approval process, but if the association can meet the guidelines, it can be worth the cost and effort for a down payment as low as 3% of the purchase price.

What if you own a unit in a complex that is not on the eligible list? Be flexible with your price and terms to make your unit as attractive as possible to potential buyers who will not be able to utilize conventional financing, i.e. typically 70% of the buyers on the market.

If you do own a condo unit(s), I encourage being engaged with the board of directors, ideally having a seat. Read the minutes, read the financials, go to meetings and ask questions. How engaged is the management company? Are they fulfilling their contract? Are they managing finances, repairs and maintenance?

As mentioned last June, owning a condo means you are in a business relationship will all the other owners, as well as the management company. The value of your unit, the desirability to buyers, is strongly subject to the governance and financial stability and oversight of the complex.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

Rate cuts are moving further away, not closer. That is the likely outlook based on economic data this week. February saw very strong retail sales, showing economic strength heading into the Iran conflict and subsequent spike in fuel and energy costs. Up 0.6% from January, taking out auto and gas sales, spending was still up 0.5%. A strong indicator of consumer sentiment is luxury spending, strongly gauged by going out to eat rather than saving money and eating at home, restaurant sales were up 0.4% from January and up 4.5% year over year.

Surprise! was the reaction today when the Labor Department announced that 178,000 jobs were added to the economy in March, the most new jobs in more than twelve months. The unemployment rate dropped from 4.4% to 4.3%, however a significant factor in the drop was the labor force shrinking by 400,000 for the month. A concern looking forward is that only 61.9% of those 16 years old and up are either employed or seeking work, known as the labor participation rate; this is the lowest since the fall of 2021.

Rates for Friday April 3, 2026: The Federal Reserve’s mandate is the lowest possible rate of inflation for the maximum amount of employment. Prices are going up in response to higher fuel costs, which counters the first part of the mandate, the labor markets appear to be getting stronger, or weaker, depending on what data is being analyzed. With the uncertainty about future costs for consumers, and businesses, the Fed is unlikely to put an increase for their benchmark rate in the near future. As we enter Easter weekend, mortgage rates drop after four straight weeks of climbing.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30-year conforming                              6.125%        Down 0.25%

30-year high-balance conforming        6.375%        Down 0.25%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Happy Easter or Passover to those who observe those holidays. For those with young ones in school, enjoy your spring breaks!

Dennis

Question of the week: Is 2% inflation a reasonable goal?

Answer: This week’s question comes from an interesting conversation I had with a few friends, my age (63) who have, like me, closely followed economics, politics, and have a pretty good historical knowledge base.

In January 2012, the Federal Reserve under Chairman Ben Bernanke explicitly stated that the Fed’s objective was 2% inflation (using the Personal Consumption Expenditures index, PCE) for the economy. Prior to this the Fed saw 2% or below as a desired rate of inflation but not a hard target.

The mission of the Fed is to support maximum employment, stable prices and moderate long-term interest rates, referred to as the “dual mandate.”

Historically, meaning prior to, up to, and a bit beyond my 1984 graduation with a degree in economics, the relationship between inflation and employment have an inverse relationship; i.e. lower employment drives up price as employers must pay higher wages which results in them charging more for their goods and services. Higher inflation results in fewer sales which leads to higher unemployment.

With this in mind, the Fed’s dual mandate is a balancing act of the highest employment that can be achieved in the economy with the lowest amount of inflation.

With that in mind, is 2% the right target for “maximum” employment?

This may get a bit wonky, as long time WR&MU readers are used to. Note that “nominal” rates, prices, etc are the actual price, rate, etc; “real” rates, prices, etc are adjusted for inflation. If a wage increase is from $10 to $11, that is a 10% nominal increase; if inflation is 2%, the real increase is decreased by 2%, so 7.84%. Confusing but “nominal” is the real price and “real” is the adjusted for inflation price.

There are several arguments for the “hard” target of 2% inflation. It anchors expectations. A defined target, in theory, enables businesses, households, and governments, to make plans for the long-term. Negotiations for wage increases can, should, center around the 2% target. If the 2% target is trusted, or believable, the expectations for higher prices are reduced, which decreases chances of spiraling costs.

Inflation does not just increase current prices, it also erodes value for savers, retirees and investing in fixed incomes. If $100 today is worth $82 in ten years at 2% inflation, that slow erosion of value is manageable; at 5% inflation, $100 is worth $61 in 2036.

The 2% rate is believed to be high enough to avoid deflation risk (falling prices), in which case consumer delay spending, debt costs are higher in real terms, and risk of long-term recession or depression.

As with 2% being the right target, the are several arguments that the 2% target may be too low.

One argument is that a hard 2% target is too restrictive, it requires nominal rates to be lower, and limits how far the Fed can cut rates during recessions. The lack of flexibility on downturns necessitates other actions by the Fed to drive economic growth, which have consequences in the future. If it lowers its benchmark rate to zero, which creates subsequent issues for growth, as it did between December 2008 to December 2015 and from March 2020 to March 2022.

Since the pandemic, we have seen fewer cheap imports, labor shortages in some industries and abundance in others, an aging population with many retiring younger than in past years due to explosion of growth in wealth and personal assets, and energy costs pushing prices up for all goods and services. Pushing a hard target against these forces creates false expectations for outcomes and future costs and rates of return; i.e. investors and markets anticipating moves to get to 2% inflation when several forces/influences are extremely resistant.

Government spending and debt decisions are independent of Fed policy and actions. What does happen, is the Fed reacts to these decisions and their consequences.

Government spending, and resulting borrowing, pumps money into the economy that is “empty.” Yes, it creates employment in the private and government sectors, and purchases of goods and services from the private sector. But…every dollar the government spends is either paid for with taxes from the private sector (government employees tax payments ultimate are derived from the private sector), printing money, or borrowing money. Adding money to an economy creates inflation as more cash is available to chase the same goods and services. The national debt is closing in on $40 Trillion, for fiscal 2025, the federal government collected $5.23 Trillion and spent $7.01 Trillion (I capitalize Trillion on purpose, many people have a hard time fathoming the size of the number).

Back to “other actions” the Fed must take to stimulate the economy if its benchmark rate is at zero. Adding money to the economy stimulates it, more money to spend, more money spent, more goods and services purchase, more companies and businesses hiring workers, who have more money to spend…  The action to take is to purchase debt; which since the Great Recession began in 2008 involved purchasing mortgages and U.S. Treasury debt to lower rates in those markets. Once that money is in the economy, the only way it slows growth is growing inflation reducing spending and borrowing power.

For the past two years, PCE has been between 2.6-2.9% (core rate taking out volatile fuel and food costs has been from 4% to 2.6% up to 3.0% as the price of oil has gone up and down and up). During that period the Fed was lowering its benchmark rate as inflation cooled.

The cost to the economy to push inflation down that final one- to a half-percent can be very costly in terms of higher employment, slower growth and even higher borrowing costs. The cost to go lower may be more than the benefit of getting there.

My opinion is that the 2% target is too low, or instead of a hard target, the 2% value should be a value to trend towards enabling flexibility to make decisions.

Mortgage rates have been dropping, slowly, since they peaked in 2024 and 2025 (after spiking due to inflation caused in large part—soft terminology—due to excessive and unnecessary government spending). The decline in mortgage rates has been much lower than the drop in the Fed’s benchmark interest rate, and looking forward, this is likely the case for the rest of 2026 and into 2027, absent an event that creates a recession or major economic event, such as the pandemic.

For those planning for future home purchase or refinance, my advice is to do so based on rates between 5.5% to 6.00%–I hope I am wrong and we see rates between 5.0-5.5%, but my tea leaves are not lining up that way.

Positive, not positive, however, as demand slows and supply increases, housing prices should slow, likely decline, off-setting the current rate environment and what it has done to affordability.

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Rates for Friday March 20, 2026: As expected the Fed held its benchmark rate steady at its meeting on Wednesday. In comments post-announcement, the chances of a rate cut this year is looking a lot less likely than it did coming into the year due to concerns of inflation rising due to higher oil prices moving through local, national and global economies. Rates have their highest one week jump since last April when President Trump announced his tariff agenda. The conforming rate is at its highest since last August.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30-year conforming                              6.25%          Up 0.375%

30-year high-balance conforming        6.50%          Up 0.375%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

For many years I loved the NCAA March Madness basketball tournament for the games, the trips to Las Vegas, trying to beat my friends in our annual pool. For the past several years, decades?, my enjoyment comes from not only the games and competition, but the guaranteed connection with friends from across the country at least once a year.

In college we started our first pool on the tournament, when there were 48 teams. After we graduated, my friends would mail their brackets to me, with the post mark having to be the day before the first games. I would make copies of everyone’s picks and mail them out so they could keep track. At that time the five of us in the pool would see each other somewhat regularly and depending on timing some, or all, of us would get together to watch games.

Fast forward to fax machines and getting and sending brackets and updates, and moving time stamp to before first tip-off of first game. As well, growth in disposable income resulting in annual trip to Las Vegas for the first rounds, before it became too crowded.

Now, forty-years after we first started our little game, we are married, have kids out of college, and have grown to seven players in six states and unfortunately gather mostly for weddings and funerals. Of the seven, four are original members and the two were added to replace two who have passed away.

Watching Georgetown throw away the ball with seconds left in the 1982 final after freshman Michael Jordan hit the shot to put his North Carolina Tarheels in a dorm room in Claremont, California, I had no idea how much the tournament would mean to me through the years, keeping me connected to many of the people watching and yelling with me.

For those interested my Final Four is Michigan State, Houston, Arkansas; then Houston beating Arkansas in the finals. My records of our pool going back to 1995 show that I am the biggest overall loser…but given what the tournament brings together, am I really losing?