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.
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.