ARE YOU FEELING OVERWHELMED BY ALL OF THE HEADLINES ABOUT RISING INTEREST RATES?

Why is there inflation and what is the relation between interest rates and inflation? Will interest rates continue to rise? These are all great questions but where to find answers? Maybe a Crystal Ball or asking a Zoltar Machine? Is Miss Cleo or Psychic Friends Network still around? Don’t fret! Maybe we can hopefully shed some light on what’s going on in the economy and the real estate market.

In order to understand, let’s go back to your Macro Econ class from Freshman year (hopefully you didn’t sleep through it!). It all starts with the Federal Reserve’s program to inject liquidity into the US Economy. The trillions of dollars put into the system increased not only the physical supply of money floating around but it also increased corporate and individual purchasing power. All of this spending makes up makes up 60% of our Gross Domestic Product (GDP), which is the overall output of goods and services of the US economy.

Much of this liquidity ended up in the real estate market, which is a reason why the market and property values have been going up for years. The Fed continued to keep rates artificially low which kept consumption and real estate purchases on a steady rise.

Once the pandemic hit, manufacturing and production slowed down substantially as companies and consumers tried to cut costs. At the same time, the Fed continued to keep rates low so more and more dollars continued to chase less goods creating an inflation in prices. This is basic supply and demand.

The Fed is now increasing interest rates because higher rates means borrowing costs increase, which results in people spending less. This will lead to decreased demand for goods and services which should cause inflation to slow down.

The last piece of this as it relates to the real estate market is that the inventory of homes available has been historically low. Sellers appreciate that they can sell their home for a premium but unless a seller is planning on moving to an area where property prices are lower, they would not be able to purchase something comparable to what they already owned. Throw in the pandemic and lockdowns and fewer sellers have listed their property for sale. This made a low inventory environment even worse.

This is a simplified version of where the real estate market is right now and how we got to this point but hopefully it gives you an idea of why things are the way they are now. The big question now is, will interest rates ever come back down again?

Apparently, some analysts are predicting lower interest rates at the end of 2023:

https://www.cnbc.com/2022/07/01/fed-could-cut-interest-rates-in-2023-analysts-say-after-rate-hikes-this-year.html

Basically, the Fed by raising interest rates is walking a fine line of trying to slow down inflation while not completely crashing the economy and pushing us into a recession. They’ve already raised rates by 75 basis points and will likely raise rates again by the same amount before the end of the year. If this continues through next year, the thinking is maybe after a year or year and a half of increasing rates, inflation will go down enough so that the Fed can start bringing rates slowly down again. 

Of course, a lot can happen in a year but there are still opportunities in this ever-changing real estate market. If nothing else, it’s very possible that property value increases may slow down enough to offset the corresponding higher mortgage rates. It’s also important to keep it all in perspective. Interest rates in the 80s reached as high as 16% and in the 90s they maxed out at over 10%. So to all the buyers out there, do not lose hope. This is still a historically low interest rate environment—you don’t even need to ask Miss Cleo!

Photo by Robert Linder on Unsplash