The Federal Reserve hiked short-term interest rates by 0.50 percent recently in an effort to reduce inflationary pressures impacting Americans.
How will this influence the real estate market?
Let’s examine the statistics on interest rates and analyze their impact on market movement and inflation.
I found this article from Buffalo news quoting NAR Economist, Lauren Yun. According to them, “Lawrence Yun, chief economist for the National Association of Realtors, noted that the rate on the 30-year mortgage has risen far more this year than the federal funds rate.”
In the article, Yun says, "this implies that the market is already pricing in around eight to ten rounds of [Fed] rate increases this year. If inflation turns higher, then the Fed will need to be even more aggressive, and this will further bump up mortgage rates."
At the moment of writing this, the mortgage rates are already at 5.5%, and who knows how much it has gone up since. Some speculate it will end at the low sixes, but no one really knows for sure.
What we can take away from this is that the market is prepared. They already know, so it is less likely that we will see a rapid increase in the mortgage rate as we saw in the past month and a half or so.
Whether as a consumer, or a real estate agent, the important question is always how will it affect us.
CNBC says in an article that, “the average interest rate for a 30-year fixed-rate mortgage hit 5.55% this week, the highest since 2009, and up more than two full percentage points from 3.11% at the end of December.”
So, now, we can expect that the interest rates will continue to creep up slowly. That’s not the only thing, credit card rates are also going up. As well as auto loan rates and federal student loan rates.
And, according to NBC News, Gus Faucher says, "where we're more likely to see them [higher rates] show up now is short-term borrowing costs. So, one-year adjustable-rate mortgages, CD [certificate of deposit] rates may move up a little bit."
If you have your money saved in your account, you might see a little tick, but it won’t be very dramatic.
I still suggest, if you’re looking at real estate, right now is a great time to buy. Prices are still going up because they are being driven by the rate pushing up. A lot of these buyers that were kind of in the middle are saying “well, before the rate goes up higher, we better jump in.”
I think the Fed did it right with the timing. During spring and summer, people are more likely to decide to move. By waiting for this time, there wouldn’t be that drop that we typically see in September.
Now, this next part is interesting because we see correlations between migration behavior and inflation.
According to Redfin’s analysis, “An influx of people moving into Phoenix, Tampa, and Atlanta has led to rapidly rising home prices, one contributor to outsized inflation in those areas.”
If you go through this whole article, you’ll see that inflation has been different in all of these different areas.
And, here’s the inflation and migration for Q1 of 2022 from Redfin. You can see that inflation is much higher in Atlanta, Phoenix, Miami, and Tampa. They kind of outpaced everywhere else, and San Francisco is kind of on the low end.
In an excerpt from the Redfin article, it says: “Not everyone in the country is experiencing inflation the same way,” said Redfin Deputy Chief Economist Taylor Marr. “It’s having an especially big impact in places like Tampa and Phoenix, which are attracting the newest residents and seeing double-digit increases in prices overall and even bigger increases in housing costs.”
That makes sense because all of these different areas are different.
So when you hear on the news “Oh no! There’s a bubble.” “Oh no! There’s inflation!” “Oh no, there’s a recession coming.” remember that this is a massive country. And things affect, let’s say Florida differently than they affect California. And even different parts of California, like San Francisco, Los Angeles, and San Diego, experience inflation differently.
It is important to pay attention to these small nuances. This is why I love going to the local real estate agents of these areas and asking “Hey, how are you doing? How are the multiple offers there?”
It’s important to go local and go into a niche.
“In Atlanta, for instance, wages are up about 7% from a year ago but inflation is up 10%, and asking rents are up 22%,” according to Redfin.
I have a lot of good friends in Atlanta. Shockingly, inflation is even higher than wages. Wages can’t keep up, and the rent is so high.
Previously, we talked about how rent is as expensive as mortgages, and with the inflation, both are going to rise.
The common conclusion is that people looking for housing will think “if they are equal, why would I rent if I could buy [a house] as long as I have a down payment?”
If rent starts dropping dramatically, then it is logical for people to choose to rent rather than pay a high mortgage just to own the home they’ll live in. But that is not what we are seeing. What’s currently happening is that rents are going up in places like Tampa or Phoenix, where the housing market is relatively more affordable to own.
I thought it was a great correlation.
Redfin also mentioned some other things worth paying attention to.
“Phoenix home prices increased 27% year over year to $470,000 in March, and they were up 29% to $364,000 in Tampa and 22% to $368,000 in Atlanta–that’s compared with a 17% nationwide increase. [...] Sun Belt metros like Phoenix, Tampa, and Atlanta will remain attractive to out-of-town homebuyers. Pandemic-fueled remote work is here to stay, and people will continue to sell homes in pricey coastal job centers like San Francisco and Seattle in favor of comparatively affordable, warmer metros.” -Redfin
People are still going to work from home. People will continue to sell homes in pricey coastal job centers like San Francisco and Seattle. Why? Because they have massive amounts of equity.
For example, I am in California. And the amount of equity I have in my home is insane. If I sell here, why wouldn’t I move to a place that would lower the cost? Of course, I’m going to pay all cash for these things.
That’s the current mindset of the consumers right now.
That is also why inflation is tied to net migration.
If the trend is for people to sell their houses with high equity to purchase homes in metros with more affordable housing, then there is an overflow of cash. If there is an influx of cash, people are more tempted to buy things. This leads to higher inflation in those areas a lot of people move into.
And that’s why the Fed continues to increase the rate. They want to curb this.
These are important things to look at, and understanding that correlation is important when coming up with smart strategies for your real estate business.