The housing cool off is exactly what the Federal Reserves wants and they don’t care about the long-term ramifications.
That’s right, they don’t care about the average homeowners and whether or not they are losing equity.
They are trying to stop inflation. And it will work, no matter what. That is their policy.
By raising rates they are able to manipulate demand for loans. The higher the rates for borrowing, fewer people will borrow. If no one borrows, people stop spending. When people stop spending, inflation slows down.
But how much is too much? What rate is too high?
The reality is this, they don’t know.
They are like a person driving a sports car down a crowded freeway at break-neck speeds, while looking only in the rearview mirror. They can’t see what’s ahead, only what lies behind and they won’t slow down until they see if the way they have been driving has caused any accidents behind them.
But why does the Fed need home prices to fall? Because home values, in a roundabout way, are linked to the inflation index. Here’s what puzzles me, however, home prices are not actually part of the inflation equation. In 1983 they stopped including home sale prices in the index and replaced it with Owners Equivalent Rent (OER). Instead of sales prices, they measure what the owner would have to pay in rent, if they were to rent the home instead of own it.
So, if home prices are NOT part of the equation, why so much pressure? Well, I don’t have time to write a white paper here (any you’d probably ignore it if I did), but I will summarize it like this: it’s really about the total amount of money people borrow and spend. When home prices are falling, people borrow less, pull back spending and that is what they need.
So if you are a homeowner and you are losing value, it’s part of the Fed’s plan. You will take the hit for this one. They know that “housing” expenses are the largest sector of the inflation index and if they can smash that number with an interest rate hammer, it will have the biggest effect. So, if they can cause it to fall fast enough they can say inflation is over, even if other costs are still skyrocketing.
I liken the scenario to a boss who needs to cut costs in his business. The company has 10 employees total and one of them makes $200,000 per year while the other nine make $50,000 per year. If he needs to cut quickly and save a lot of money, his easiest solution is to fire the worker making $200,000 (30% of the total company salary expense). Not only would it have the biggest impact on the budget, it would also save the other nine jobs. Housing is the big earner in our economy and it’s been fired by the Fed.
What does that mean for you?
If you are buying a home, once the Fed sees enough carnage in the rearview mirror they will begin to lower rates. When they do that, the housing market will begin to stabilize and recover. Buyers that have been sitting on the sidelines will reenter the market and you will have more competition compared to right now. If you have a minimum amount for a down payment, there isn’t much competition and you have a good chance of getting offers accepted that would have been ignored in early 2022.
If you are selling, it may be good or bad news. If you are selling and buying a replacement property, that’s good news because like two boats in a harbor, they rise and fall on the same tide. Make the move.
If you are selling to retire and need all the equity you can get, it’s bad news. Those days have passed and won’t be back for quite some time.
If you need to refinance? Good news, we can still get you the money because the mortgage market has not imploded like it did in 2007-2008. Will the rates be higher than last year? Absolutely yes. But you can probably consolidate higher interest debts into a lower debt loan and you should consider your options.
Did you buy a home during the pandemic that is now worth less than you paid for it initially? Consider your monthly payment. It’s likely much lower than your new neighbor who just got an amazing price (probably one so low that made you mad). If you are planning to stay awhile, relax and enjoy your home, in time prices recover. If you do lose your job and need to sell for less than you paid, let’s talk today about what that looks like. It won’t be pretty, but we can help you. Don’t exhaust all your resources and reserves, call my real estate team to help.
How are you being affected by the economy? I want to know your thoughts. Comment below or send me an email.
