I called this episode “The Good, the Bad, and the Ugly”. As you may know, I’m referencing the movie, but I’m really referring to “The Fed, the Putin, and the Inflation”, and how those three will affect the real estate market.
Let’s start with a quote from Elon Musk from CNBC news. According to the article, Musk said, “I think the official numbers actually understate the true magnitude of inflation. And inflation appears to be likely to continue for at least the remainder of this year.”
In some cases, Musk said, “Tesla suppliers are requesting 20% to 30% cost increases for parts from 2021 to 2022.”
The important thing to note is that people like Musk and a whole bunch of other CEOs are saying inflation is going to continue throughout the year.
The Fed has already confirmed that interest rates are going to continue to go up this year.
But what does this have to do with real estate?
Let’s start with the ugly, inflation. As inflation keeps on going up, the only way to try and push it back down, based on the US’s and the world’s experience, is to raise rates.
Let me tell you why.
Sometimes I think we get confused as to what really happens. Some people think that as the Fed increases rates, mortgage rates automatically follow, but it isn’t always the case.
This article from Pocket explains what influences mortgage rates.
It says, “When mortgage lenders have too much business, they raise rates to decrease demand. When business is light, they tend to cut rates to attract more buyers. […] Price inflation pushes rates as well. When inflation is low, rates trend lower. When inflation picks up, so do fixed mortgage rates.”
That’s what’s happening right now. The low rates have been around because we’ve had a lot of borrowing and spending. Plus, wages have gone up over the last few years. And there’s the oil price.
There has been a surge in global oil prices, and who can you blame for it going up so high?
Look at what this Wall Street Journal article says, “[...] governments often finance war by printing money or keeping interest rates too low. So whether the immediate burst of inflation precipitated by Russia’s attack persists depends crucially on whether the Federal Reserve and other central banks have the means and inclination to push inflation back down.”
And we know that the Fed is trying, right? That’s the Good in this episode, the Fed is the good one here.
Things get a little bit worse, according to Mykola Volkivskyi, the former advisor to the Member of Parliament. He says “Today, Europe and the World are facing a sharp rise in food and energy prices. And things will get worse because it’s going to hit the consumer.”
We’ve been globalized. When something hits a place that previously did not touch us, such as Ukraine, it now does.
Here’s something I discovered when researching. This is why you are seeing oil prices go up.
Newsweek quotes Kaufmann - “‘The quantity of oil that the U.S. imports have little to no effect on the price we pay for crude oil,’ Kaufmann said. ‘There is one global market for crude oil. That global price sets the price for all crude oils, plus or minus a couple of dollars depending on transportation costs and the quality of the crude oil.’”
“‘Suppose the U.S. was self-sufficient in oil and that oil was selling for $70 a barrel, as it was before Russia invaded Ukraine,’ he said. ‘The invasion raises the price for crude oil on the global market to $110,’” the article continues.
This is why we are being affected on the oil side; in case you didn’t know.
Let’s go back to the Fed. They met early this May and decided to raise the rate, which in essence is going to cause investors to raise mortgage rates.
This article is my favorite because Paul Krugman from NY Times says, “Higher rates will operate largely by hitting the housing market. And over the long term, one big problem with America is that we aren’t building enough housing.”
This guy is brilliant. I need to be friends with him.
“The Fed doesn’t directly determine mortgage rates. Banks deciding how much to charge for loans pay a lot of attention to what they think the Fed will do in the future,” Paul continues. “If they expect short-term rates to go up, they’ll start charging more for home loans right away because they don’t want to tie up their money since they’ll be able to get more later.”
What Paul is saying is that interest rates are going to affect us [the housing market] a lot more than you think.
It’s going to slow down purchases because it’s going to push out those buyers who can’t afford the rate increase.
All of a sudden, in a lot of markets, we’re going to start seeing fewer buyers. It doesn’t mean we’re going into a housing crash, though. It’s more of a slow landing.
In some areas, like Miami and Phoenix, we’ll still see multiple offers. In parts of California and other areas, we’re still seeing that as well.
That won’t affect the market that much, at least not enough to cause the market to crash.
Yet, depending on where the interest rate goes up, I don’t know what will happen. But if it maintains where it is currently, or at least doesn’t shoot past 7%, the housing market will be fine.
That is “The Good, the Bad, and the Ugly”. Inflation is “the Ugly”, the war with [Putin] is “Bad”, and “the Good” is the Fed.
I know a lot of people feel like “How is the Fed good [in this situation]?”
Look, there may be another way to curb inflation, but raising rates is the way we’re going about it right now.
Let’s see how this goes.