Here we are in the middle of 2023, had to believe. This year has been one of the slowest Real Estate Markets we have seen since 2009. We are experiencing record inflation for the 21st century of the like we have not seen since the early 1970s. This tells us that the cost of goods and services has risen faster than most people’s income streams have. What does this mean for Real Estate now and into the second half of 2023?
Based on the history of inflation you see the Stock markets go up due to the fact that the valuations of companies tend to go higher with inflation. We have seen this throughout history and this time is no exception. What you must be cautious of is when companies’ costs rise so high and the demand for those goods or services decreases thus income for those companies will also decline. After this companies will have to lay off salary-based employees to keep up with the rising costs and when this starts to happen you will see the economy fall into a recession or worse depression.
Inflation is such a killer of economies in many ways not just with the higher costs of goods and services but also with the availability of money with higher interest rates. Over the last year and a half now we have seen interest rates move from historic lows for 30-year fixed-rate mortgages from the 2%-3% range to now a 7%-8% range. What this has done is cut out a whole segment of the population’s ability to qualify for a new home loan. In California, we have starter home prices hovering around $500,000 on average for the state. What the higher interest rates have done is cut the people that could have qualified for this house. For example, the payment on a $500,000 house with 5% down at a 3% interest rate is $2002.62 principal and interest at 7.5% Interest rate the payment would be $3,321.27. At the 3% rate, an average borrower would have to make right about $7,000 a month to qualify for the mortgage. At 7.5% the borrower will have to show around $11,500 a month. This shows you the power of interest rates and buying power.
That said you would assume that Real Estate prices would have to come down to accommodate the higher interest rates. We saw this occur in some markets but not nearly enough to make up the difference. Today we see Real Estate prices staying relatively steady. The reason for this is interesting. Since so many people refinanced or purchased their homes with lower interest rates, they are reluctant to sell their homes as the can’t qualify for a move-up home, and in some cases, people couldn’t afford the house they are living in if they had to do it all over again. So, we are seeing people holding on to the lower interest rates and not selling their homes as they would have to qualify for a new home under the higher interest rates. With people not selling their homes, we are experiencing a supply shortage of homes on the market and with that low supply of available housing prices have remained steady even with the higher interest rates.
The next hammer to fall, unfortunately, is going to be employment layoffs. This is going to happen due to inflation and government spending that fuels inflation with an oversupply of money. In the second half of 2023, I see consumers holding on to their hard-earned money as the average consumer feels that something is going to happen, they just don’t know what. There are many factors that could fuel inflation, but the biggest unreported issue will be the worldwide devaluation of the dollar. When the world drops the US Dollar as the worldwide reserve currency, all the goods we buy from overseas will cost more and more. This is something that no generation of Americans has ever seen, the closest we got to this was the great depression. The way America got out of that was World War 2 by producing Ships, Planes, Autos, Guns, Ammunition, and such. The largest difference between then and now is that we produce very little in the US, we outsource to China and other countries. History tends to repeat itself, so shouldn’t be preparing for a war? If you are paying attention to the world and not preoccupied with all the social issues going on in our country, you will see how close we are to this prophecy coming true.
I don’t like to be negative, and I truly believe in America and the American way of life, however, I must be a realist with what I know and have seen with history. As the US Dollar becomes less valuable in the world markets this will cause further inflationary pressures on our economy. The only way out of this at this point is to figure out a way to re-set America’s debt to the Central Bank or get rid of the Central Reserve Banking system altogether and start with something new. How this could be done I would not know, but I do know it will be a very painful process to every American. With the BRICS nations and a new world reserve currency on the horizon, America is going to have to do something fast, very fast as that is supposed to launch in August of this year, and over half of the world’s nations have agreed to sign on this new asset-backed currency. Our central Bank is going to try and compete with this with a new Central Bank Digital Currency (CBDC). The problem with this is that even our own citizens don’t like the idea of this as Americans don’t like the idea of being watched or controlled in the name of some made-up government issue like climate control. For more on this please I urge you to do research on this as this CBDC is supposed to come out in July of 2023.
What will a CBDC do to interest rates, housing, and inflation? This is something that remains to be seen but rest assured it will be a rocky ride going into the end of the year. I always say if you can own Real Estate do so as Real Estate will have value. I believe that once people see the changes happening there will be a flight to quality investments like real estate. I will bet the Stock Markets will struggle, to say the least. Interest rates will be dependent on how much inflation we have as interest rates will rise as inflation rises. So, if you are looking for advice as to when to buy Real Estate my advice would be to buy as much as you can now, if you can find it, and hold those properties that you hold currently. Keep an eye on the world and what is going on, and research other sources other than your mainstream media that most of us have grown up on as we are not being told the truth to keep the masses under control for as long as they can. Not that one individual can do anything, but the power of the masses can make changes.
As we wind down 2021 we are still in a pandemic era with uncertain times ahead. From an economic viewpoint, we currently are under a low-interest-rate environment with high inflation (6.2%). Before the pandemic, this would be an easy fix with the Federal Reserve (the Fed) raising interest rates to combat higher prices. Under the pandemic era, things seem to be working in opposite directions from an economic approach as there is an uncertainty of new COVID variants coming out and the Government overreacting to them by shutting the economy down again. With higher interest rates you will see a slowing in the housing markets as fewer people will be able to qualify for the already high prices of homes. This brings up a question of right or wrong to raise interest rates and should the Fed raise them now or later?
To see the future, we have to look to the past in how the economy works. Contrary to some trains of thought the economy is consumer-based, meaning that the consumer is driving what the Federal Reserve does not the other way around. What we have seen from the past is that the Fed has bought Mortgage-Backed Securities (MBS’s) starting in 2008 to help recapitalize the housing industry. This means that as the Fed buys MBS’s mortgage companies have the ability to sell their mortgages to them freeing lenders up to lend more, in simple terms. So as the Fed buys fewer Mortgage assets the ability to sell mortgages to them becomes tighter thus forcing lenders to raise their rates to slow the number of loans they take in. This is what “tapering” is as you hear this on the news channels. So, the Fed announced that they are going to taper their buying of these MBS’s at a pace twice of what they said back in November so lenders will generally have to raise their rates to slow the number of loans coming in so they can inevitably sell to recapitalize so they can lend more. I know these concepts are confusing but this is what it all means as you hear financial people talk about “tapering”.
The other area of which the Federal Reserve controls to slow inflation is to raise their funds' rate. The Fed Funds Rate is the rate at which banks can borrow money from the Federal Reserve. We learned that the Fed is not planning on raising this rate this month but plans to through 2022. What this means is that the banks will be able to borrow at 0% still from the Fed making banks ability lend stay at the status quo. This begs to question with a 6.2% inflation number currently and the Fed’s goal of 2% inflation is not raising the Fed Funds Rate going to cause inflation to continue to rise? Time will tell, but one thing out of all of this is for sure is that interest rates must go up it’s just when and how fast. Is the Fed going too slow or not aggressive enough in the fight against inflation? This is the question up for discussion and time will tell. From my perspective, I would say they are moving too slow and will have to be more aggressive in raising interest rates in 2022.
Why do I think that rates will have to go up significantly in 2022? I see many factors here that the Fed has glossed over that will keep prices going up into 2022. The major factor the Fed glossed over is wage inflation. Wage inflation is a good thing for those working folks, however, if inflation rises faster than wages then workers are worse off than before even making more money. One of the factors that I believe the Fed is missing in their outlook is that the continued demand for goods and services is going to continue to rise into 2022 at a faster rate than they think. The Fed believes that inflation is, in the most part, due to lack of supply or goods being hung up at the ports and not making it to consumers as fast as demand wants it. I believe that the demand will continue beyond the current supply issues into other supply issues into 2022. This means that once the ports catch up with the goods coming into the US the demand will still exceed supply thus the continued inflationary trends. Once this is realized in interest rates will have to go up to slow demand and could rise far faster than people have seen before. The longer the interest rates are held low the faster they will have to rise to offset inflation.
So now that we see interests going up what does that mean for Real Estate? In a higher interest rate environment, fewer people will be able to qualify for homes. For example: If you qualify for a $400,000 loan at an interest rate of 3% if the rate moves to 4% now you may only qualify for a $350,000 home loan. The same concept flows over to people buying cars and trucks and companies that buy heavy equipment. Couple this with an “Infrastructure Bill” that is poised to go through congress, the demand for these goods will be on the upside further pushing inflation. So as the Fed thinks that inflation will calm down on its own, I believe with the Government spending more and more money that inflation will continue to rise so interest rates will have to as well.
In Conclusion, I see the Real Estate market tapering, so to speak, with interest rates on the rise. There will be continued demand for housing, but fewer people will be able to afford housing. Housing prices will stabilize in 2022 and if inflation is left untouched or not acted upon aggressively you will see housing prices go down if interest rates are forced to go up at a faster pace than everyone is anticipating today. Housing itself has been a major cause of inflation and that is not generally looked at by the Fed as a major problem, but, as housing prices rise the perceived wealth of people increases and they have taken out equity due to this. When reality is that the increases in housing prices are the precursor to all price increases except for the price of oil. Simply put, when people have seen their equity in their homes rise, they tend to take it out for home improvements and the purchase of other goods and services and that is what we have seen over the last few years. So as home prices stabilize, and interest rates go up the demand to take equity from their homes decreases thus the demand for goods and services will also decrease. Another factor that is missing in all of this is the price of fuel. If the price of fuel continues to go up, then it will cost farmers more to bring food to market so we will see continuing inflation in the food sector if prices of oil are not contained. So, with certainty, we can say that interest rates will be on the rise through 2022 and it looks like wages will continue to increase as there is more demand for labor than there is the supply of it currently. Home Prices will stabilize and move lower if interest rates go up too high. If you are looking to buy a home in 2022 it could be a great time to buy as demand slows down and prices may adjust down a bit. Interest rates may be a bit higher but if you can qualify go for it. You can never go wrong owning Real Estate especially your primary home.