By now we all know who the next President will be so what does this mean for interest rates and Real Estate? The first thing we all need to remember is that our government does not control interest rates it controls the information the Federal Reserve uses to determine the direction of the interest rate that the Federal Reserve (the Fed) controls and that is the overnight lending rate for Banks to borrow from the Fed. When the bank’s cost of money decreases it usually means that the banks will lower lending rates to the public. The Fed bases its decision on the direction of the overnight lending rate based on how the economy is performing. The President can’t control the interest rates, but he can control the economy so any changes that we might see happen will not happen until at least the 2 quarter of 2025.
The reason I say we won’t see any significant changes to the interest rates like we see in the Stock Markets immediately is simply that it takes time for an economy to go through changes. The Interest rates are set by the economy, not by policy. Policy can change the interest rates, but it will take time to show up. The Stock Markets rallied after the election as the Stock Markets are speculative in nature and the Stock Markets see the new administration to be more business-friendly and see that money will eventually open back up and flow more freely in a lower tax environment. We have to remember that the new President is not sworn in until January and it will take time to transfer power and get new people and policies in place. Then we probably won’t see the effects of the policy changes for months afterward. We are still in the same business cycle which means we must go through some pain before it gets better.
This current business cycle is one where we still have inflation and a contraction of the job market. This will not change overnight, so we need to be patient. Business cycles are generally not controlled by the government, but the government can have significant effects on it. The policies of the current administration will remain in effect until the new administration takes power. Once the new policies of the new administration take effect it could take months for them to show up in economic numbers that the Fed uses to control the rates. The wild card is that there are still 2 months of the current administration, and they still have the power to make changes to the economy in the short term that could last months into the new administration.
I do see economic hope on the horizon; however, we have to go through the business cycle we are in currently to get to the new one. This will probably be a bit painful as interest rates will still be in the 6’s and 7’s until we start to get to a place where they can go down. This place is where inflation is under control. We also must remember that Interest rates go down with negative economic news such as a recession. The Fed will lower interest rates if they think the economy needs to be stimulated, we are not there yet. This is why the Fed only lowered their overnight lending rate by .25% as was expected by the other interest rate markets. The Federal Reserve’s next meeting to determine if they will lower their interest rate will be in December. The time between now and then we will get to watch the data they will be using unfold in front of us and that is how economists make their predictions on what the Fed will do at their next meeting.
All this means that we will be in the business cycle for at least the next 6 months. In that time, we will be in this current cycle before any new policies from the government can take effect on the economy. So, I see employment softening still and I see inflation coming down as people don’t have extra money to spend on things to drive inflation up. I also see a softening of the Real Estate Market where it is changing from a seller’s market to a buyer’s market with the Real Estate prices slipping a bit in order for sellers to sell their homes. I do not predict a crash like 2008, but I do see a correction. I see mortgage rates dipping to the 5’s in the late 1st quarter of next year and that should bolster the economy. We will not see rates in the 2’s and 3’s again, in the near future, unless something drastic happens that is outside of the current business cycle. I hope this helps you with how this system works and you can plan for your financial future.
The Federal Reserve has lowered their prime lending rate down 50 basis points or a half of a percent aiming for a target rate of 4.75-5.00 from 5.50. Initial reactions in the interest rate markets are neutral which indicates that the mortgage interest rate markets have factored this half percent move down in already. Mortgage rates are now in the low 6’s and high 5’s currently. The Federal Reserve also talked about the labor market, and this was the single biggest reason for moving rates down .5% rather than .25%
The labor market is probably the most under-reported and misreported number out of all of them. Jay Powell (the Chairman of the Federal Reserve) said this in his comment today. He made mention of the job creation rate of being wildly wrong (overrated) and this is why they didn’t move rates on their last meeting as they had the wrong data. Jobs are important numbers to look at as more people working means more people buying stuff and with fewer people working the less stuff people buy. This is directly proportional to inflation, which is what they are trying to control. I have echoed this for months now as a mortgage professional we have been the slowest in history due to high interest rates, so our industry has laid off hundreds and thousands of workers. In addition, without money flowing in the economy employers don’t need employees in a slow consumer market so layoffs have been happening across America for the last year or so and this has not made any news as we are in an election year.
With the lower interest rates, you will see a gradual lowering of mortgage rates as the Fed continues to talk about future rate cuts. What people don’t understand is that mortgage rates will continue to go down in anticipation of further rate cuts in the future. If you are ready to buy a home now would be the time to get started before mortgage lenders get bogged down in refinances. If you have an interest rate in the 7’s you should start the process now to lower your payments. If you have equity in your home and you have high credit card debt you might want to consider a refinance of your home to consolidate those payments and lower your overall monthly expenditures. You can refinance your home every 210 days with any repercussions so start enjoying lower payments today and then possibly even more in the future.
Has the Federal Reserve Board gone too far with raising Interest Rates? The Federal Reserve raises interest rates to combat inflation. Yes, we have high inflation, but has it been caused by high demand for goods and services or is it normal demand with a diminishing supply of goods? This question is not a question the Federal Reserve (the Fed) has not addressed properly as when inflation started to be seen the Fed initially called it “Transitory” meaning short term, turns out they were wrong. So now after the Fed realizes their mistake, they are raising interest rates at a far faster rate than they would have normally.
When the Fed raises interest rates, they only control one rate which is the Federal Funds Rate or the rate at which banks can borrow from the Fed. The Banks, in turn, raise their prime lending rate to the public which affects business loans, Home Equity Lines of Credit, but not the interest rates for your typical home loans. The reason home loan rates increase or decrease when the Fed raises rates is the fact the home loan rates are driven by the FNMA, FHLMC, and GNMA and the bonds that are spun off of those securities. Wall Street will actually set the rates based on a perception of what will happen as a result of the Fed raising its interest rate. There is another factor at play here that needs to be addressed and that is the fact that the Fed has been buying mortgage securities since the pandemic started and now they are selling their holdings off reducing the “balance sheet” as some of you may have heard.
The Fed is raising interest rates to slow down the economy in the hopes that the demand side of the economy will slow due to the higher interest rates thus slowing the demand to borrow money and expand. This philosophy is fine and works if both sides of the demand and supply curve are addressed. The problem I see here is that the Fed is overreacting to situations they can’t control. The Fed has no way of controlling the supply of goods and services they only can control the demand side. The problem with this philosophy in this economy is that I see normal demand with a shortening supply of goods and services. So, by trying to slow demand they are missing the fundamental problem and that is the supply side of the equation. We all have heard about China and its lockdowns over the last several months. This is causing a supply shortage of consumer goods, auto parts, microchips, clothes, and retail goods. The Fed can’t control the loss of these goods in our supply chain they are simply making it harder for American businesses to catch up to the loss of goods coming from overseas.
As the Fed tries to fight inflation by raising the rates and ignoring the supply side we will see a recession in the near future as the economy will have to pay so much more for the money that is needed to expand American Business. Oil prices are also a major factor in the inflation equation as we can all see at the pump. The Fed can’t control the demand for oil by raising interest rates, so as prices for oil continue to rise so will the price of goods and services until the price of oil is addressed by increasing supply or at least showing the American people that the government is working on freeing up resources to increase supply inflation will continue. As inflation soars and the Government doesn’t address the supply side of anything we will continue to see inflation and eventually with rates rising so high we will see an economy stagnate to the point where there is no possibility of expanding the economy with high rates to borrow money. This is called stagflation and I would argue we have been in this state for some months now with it worsening every day.
On the Real Estate and Mortgage side of rising interest rates, the signs will be obvious. As interest rates rise the affordability of homes will diminish even further. As demand for Real Estate dries up due to high-interest rates you will see the demand for home goods diminish as well. As the demand for money drops off with the high rates mortgage companies will be laying off workers and so will home improvement stores, home builders, and appliance stores. This ripple effect will cause other industries to have to lay off workers and the economy will slow so fast that you will have high prices for gas, food, and all services that revolve around them. Eventually, the prices of homes will go down due to high-interest rates and people out of work not being able to afford a home. I don’t want to scare people, but the government has been out of control of the economy for over a year now and it is showing and will continue to decline if logical decisions are not made. My fear is that what should be done and what is being done is all somehow politically motivated. Janet Yellen, the secretary of the Treasury of the United States, admitted that she made a mistake with inflation by not raising rates soon enough. Now fast forward to today the Chairman of the Fed Jerome Powell is glossing over the supply side of the equation for some reason and that should scare you as that is the core problem with inflation, not the demand side. So, I see the Fed raising rates to where we see a deep recession with mass layoffs on the horizon if they don’t stop with the interest rates and move to the supply side. Again, politics get in the way with this as the current administration is responsible for the price of oil as they have shut off possibilities of America producing more thus having to look to foreign sources of oil. Although this may look grim we are all Americans and we will persevere and prosper. To counteract rising interest rates look for new innovative home loan programs coming soon to help those get into homes in a changing world.