January 7th, 2021 3:56 PM by Gregg Mower
We made it to 2021 and what a start it has been. I am not going to talk politics here as money and Real Estate have no politics. What I will cover is where Real Estate prices and Interest Rates are headed and why. Now that we know who will be running the show in Washington, we know what the economic goals and aspirations will be. So, knowing where the economy is headed, we can pretty easily predict where Interest Rates and Real Estate Prices will be going.
To follow the logic here, we must first start with the Federal Reserve and its current stance on interest rates. The Federal Reserve (The Fed) has stated clearly that they will leave interest rates unchanged until inflation hits 2%. Then we must ask the question as to when we will see this magical number of 2% when current inflation numbers, measured by the Consumer Price Index, are .2% as of November 2020 reported by the US Bureau of Labor Statistics. Initially, we are looking pretty good with low numbers, but what drives these numbers up? One factor that could cause Inflation is if the value of the dollar decreases against foreign currency making imported goods more expensive. Another factor is when the demand for goods and services exceeds supply. Yet another factor for inflation is the increased cost of labor in the production of goods and services. Knowing these basic principles and applying them to an economic trend or monetary policy set forth by the Government can give us insight into where interest rates are headed.
Now we need to look at what we know about the new administration’s economic plan. It has been widely publicized that there will be more stimulus money coming from the government in the coming months. What does this do exactly other than provide Americans with the extra money? It is great to get this money in such trying times, however, there are economic costs of doing this. Costs relating to inflation include the devaluation of the dollar and increasing the National Debt. As we have read earlier, we know that the devaluing of the US Dollar can cause inflation. As far as the increases in the National Debt, I will not get into this as that has not been proven to cause inflation, we just know it must be paid back, maybe, as we have never seen it go down in modern times. Moving on to other known statements coming from the new administration it has been said that they want to raise the minimum wage nationally to $15.00 an hour. This would obviously raise the cost of labor and that would raise the cost of goods and services causing an increase in inflation. Raising taxes has been brought up on corporations and high wage-earning Americans and that makes the costs of consumer goods and services go up as corporations will have to raise prices to compensate for higher taxes. All these factors will have to be watched carefully as they happen to prepare for an increase in inflation and what you as a consumer to do.
Why am I so concerned about inflation? Going back to earlier in this article we know that The Fed will raise interest rates to combat inflation. They have even gone so far as to say when (at 2%), so we have to be on the watch for any signs of inflation as the stock and bond markets will react way ahead of anything actually being passed. For example, if it were announced today there was going to be another stimulus the markets would react to this news even though it has not formally passed the legal process and we know that there will not be any resistance now with all 2 of 3 branches of government being occupied by one party and we know that the Supreme court will not rule on economic issues only rules of law. Thus interest rates we can say pretty clearly, unless something changes from The Fed, will be more volatile these coming months and years.
Why did I spend so much time on interest rates you ask? Well, the answer is that the current state of Real Estate hangs in the balance of interest rates. Interest rates drive real estate investment as the lower the rates are the more of a home people can afford and when interest rates go up fewer people can qualify for it. If interest rates rise, fewer people will be able to afford homes, especially in California. This would effectively increase the inventory of higher and medium-priced homes and with this increase in supply and fewer demand prices will have to adjust to compensate. A good example of this would be if you can income qualify for a $450,000 home loan today with interest rates at 2.5% and if interest rates increase to 3.5% you can only qualify for $400,000 with the same income. What this will do is increase the supply of homes for sale as fewer people will be able to qualify for homes and eventually prices will have to come down to compensate for the higher interest rates. The good thing is that the FED said last year that they would keep interest rates low during the pandemic, so we still have time to prepare.
Are you looking to buy or sell a home in 2021? If you are looking to sell this year my advice would be to do it sooner than later as prices have settled a bit and will continue to do so. Interest rates have started to slip upward now that the election has been decided and I am not sure if anyone knows if they will go back to the lows we saw at the end of 2020. If you are a buyer and you have time to wait a bit you might benefit from the increased inventory in the Spring, as seasonally more homes come on the market after the Holidays. As a buyer, you also must pay close attention to interest rates and look for any news that might affect interest rates negatively as I believe we have seen the lows in the interest rate world, but rates will still be volatile in 2021, and you will have to pick the lows to lock in your rate. I see this year having a healthy Real Estate market with no real crazy ups or downs. If you are an investor in Real Estate, there will be better deals from mid to the end of the year as currently, we are at the top of the market for prices and low-interest rates. Also, if you are an investor and you are looking to sell this year you might want to pay close attention to any increases in the capital gains taxes as those were also on the new administration’s list to change. All in all, we know we are at the top of the market for Real Estate and low-interest rates, so buyers and sellers of Real Estate need to be savvy and pay attention to economic news that could impact their ability to buy and sell. Here at MAE Capital Real Estate and Loan, we can help you with all your Real Estate and Home Loan needs as well as be able to advise and walk you through the process of buying, selling, or refinancing Real Estate.