The Fed Raised Interest Rates Again

By Lane Stone

Photo by Karolina Grabowska

Fed Chair, Jerome Powell announced another 0.75 percentage point hike and I wanted to dissect some of his comments and what they could mean for the real estate market.

There are 3 main factors that go into determining the mortgage interest rates, and the short-term interest rate set by the Fed is one. So naturally, you can assume the announced rate hike will impact mortgage interest rates in an upward direction, but let’s dig a little deeper into Jerome Powell’s comments:

“Ongoing rate hikes likely”

Even though it was acknowledged that the interest rate hike pacing would slow, which was why stocks responded favorably in the afternoon after the announcement, it is still likely we will see continued increases in rates. Fed Chair Powell, repeatedly said the goal is to, “Get inflation back down to 2%”. He mentioned the last inflation data was worse than expected, so a continued spike in rates will be issued until it progresses back down to the 2% inflation levels. As rates increase, expect mortgage interest rates to increase as well. Don’t be surprised if we see 7+% interest rates by the end of the year. Remember though, the historical mortgage interest rate average since 1976 is almost 8%, and rates will go back down… the Fed already confirmed that’s their desire once inflation is under control.

“Housing weakened due to increased mortgage rates”

We felt it here in Orange County. Buyer demand is down. We went from seeing 15-25 offers on a listing to 1-3. We went from seeing $100k+ above the asking price to just asking (or slightly above), and in some cases with overpriced listings, $100k+ below the asking price. As interest rates continue to rise, expect demand to slow down even more.

Does this mean a major crash in Real Estate home values? Not necessarily. If you look at the overall inventory levels, we are still below where we need to be. Are they increasing? Yes. But inventory still almost needs to double what we have now in order to make a major impact on property values. We’re not there yet. Remember above, I mentioned there were 15-25 buyers on one particular property, they haven’t gone away. They’re on the sidelines watching, resetting, and will be back!

“Hard to say what the economy would look like in 6-12 months”

Nobody has a crystal ball, but when the Federal Reserve is unclear, it’s really hard to tell potential homebuyers and sellers what to do. All we can do is provide information on past history. For example, in the history of real estate (including the Great Recession), nobody has lost money in Real Estate in an 8-year cycle. So homebuyers looking today are being informed that they have to look at their home purchase as a long-term decision. Can they see themselves living in the home for longer than 8-10 years if need be? I’ve never heard anybody regret buying and holding onto a home. I’ve only heard of regrets from sellers selling too soon.

Ask yourself why investors are still buying homes right now? Ask yourself why self-proclaimed gurus such as Dave Ramsey say now is the best time to buy in the next 5 years? Ask yourself why investors don’t care that they’re buying property at future valuations? Because they’re planning to hold long term and don’t care where prices are in 3 years, they care where prices are in 30 years (or more).

They think similarly to Warren Buffet, buy when others are not, and sell when others are buying. Knowing what you know today, if you could’ve purchased a home in 2010-2011 would you? Be prepared for the next “2010” and don’t get caught up in timing it.

“Don’t think we have to have a recession” “Too many areas of the economy or performing well”

We’ll find out soon enough if we’re technically in a recession. A recession is 2 consecutive quarters of negative GDP growth. Did you know we were in one during the pandemic? Recessions don’t have to last long, and looking back on one you may not have felt much of its impact.

Speaking as a 32-year-old millennial, I still only attribute my feelings and impact of a recession to “The Great Recession” which happened to be the worst recession in 80+years.

Take a look at the history of recessions, the lengths, and the bounce-backs. Many happen quickly and bounce back very well. During the last 6 recessions, Real Estate home values only truly went down in 2 of them: 1991 prices fell by -1.9% and 2008 prices fell by -19.7%. So in other words, a recession does not mean a housing crisis. It does not mean a housing crash. The 2008 recession was a Real Estate related recession. Is this one Real Estate related?

“Path to soft landing has narrowed, could narrow even more”

September’s data will be an important one to follow. If we see that inflation data came back worse than expected again, you can bet that the soft landing path narrowed even more. We do not want a hard crash landing as that would affect all aspects of the economy, including Real Estate. Before the 2008 Real Estate crash, there was this euphoric state where it felt like nothing could go wrong, housing could only go up, and everybody should be buying a home.

We’re in a different place today. Not just because the lending restrictions are tougher, but many of us are preparing for an economic growth adjustment. We’re not in a state of mind that everything is daisies and roses. What that means is we’re probably watching our dollars a little more, checking our budgets a little more, and have buckled up for the landing whether it’s hard or soft. We’re more prepared for the landing today than we were in 2008.

In Conclusion

We didn’t get as many answers and predictions as hoped, but we did learn that if the inflation data doesn’t improve, we can expect more rate hikes. But these adjustments that we’re seeing as the Fed increases interest rates show we’re preparing ourselves and bracing for impact. If a recession is on the horizon, this will not be 2008. Home values will not crash like in 2008 and we can still enjoy much of the price appreciation we’ve experienced over the past several years.

Buyers diving in today, be patient for a good deal, be prepared for it to be a long-term investment, but also enjoy getting a great investment during an uncertain time.


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