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.
It wasn’t too long ago that we were looking at multiple offers on million-dollar homes and fights erupting on homes in the affordability range. This was just in March of this year. We are looking at something dramatically different now with interest rates driving the changes. Those million-dollar homes are now sitting on the market longer and we are now seeing price reductions in that price range. While in the affordability range we are seeing the demand get sucked up quickly and houses are coming on the market at a much faster rate.
I will start with the analysis on the upper end of the market, those million dollars plus homes. I now can say without a doubt that the top of the Real Estate Market was March of this year. Since then, interest rates have risen above 5% which alone has slowed the market. In March of this year, you could still get a home loan with an interest rate in the 3’s, and now with rates in the 5’s that has cut the purchasing power of potential home buyers by a lot. What we have seen is that people were qualified back in March for one loan amount and didn’t realize that rates have risen as much as they did and while they were not looking they no longer qualified for the homes that were in their price range. Watching the Multiple Listing Service or MLS we are seeing more properties that were in pending status come back on the market with no fault of the seller but turns out buyers no longer qualify with the higher rates.
In the affordability range (here in California) is between $450,000-$650,000 we have seen more homes hit the market in the last several weeks. As potential home sellers realize that the top of the market has come and gone they are now putting their homes on the market. I believe that potential sellers have waited to market their homes until the top of the market and now that we are there, they are all putting their houses on the market at the same time. This is great news for potential home buyers that have been beaten out of the Real Estate market and decided to sit on the fence until this very thing happens. Demand will quickly be eaten up and inventory will continue to rise. As interest rates continue to rise this will cut a significant amount of potential home buyers from the market. So, if you fall into this price range of home buyer then I believe it won’t be long before we enter a buyer’s market.
As interest rates rise and inventory rises, prices will have to soften a bit to get buyers to buy. In addition to that, those sellers will be making concessions to get potential buyers to buy their home. A sales concession is when a seller pays for pest work to be done, the buyer’s closing costs, and other things to entice a potential home buyer to buy their home. This is what is commonly referred to as a buyer’s market. This will occur once the pent-up demand slows down and interest rates price home buyers from the market. This is not something we like to see; however, I believe this will not cause a manic sell-off as we saw in 2008 through 2011. The reason is simple we don’t have a money crunch like the last Real Estate correction. Money is still available but at a much higher rate and we have relatively full employment, and we are not seeing mass lay-offs as we saw during the recession of 2008-2011. This is not to say that it still can’t happen. The way this would happen is if the Federal Reserve continued to raise Interest Rates past the equilibrium point which is where we could be today.
If you are a home buyer today my advice would be to buy as soon as you can as interest rates will continue to rise. At MAE Capital Mortgage we have a “Lock and Shop” option for home buyers. The “Lock and Shop” is once we have you approved for a loan amount, we can lock in today’s interest rates. The lock period could be up to 180 days to give you the opportunity to look for the right home or if you are having a new home built it will allow time for the build. Doing this will cost you a little more than if you were to have a home a lock your rate for 30-60 days, but in a rising interest rate market, it could save you hundreds on your monthly payment. We are at a rare place in history where the Federal Reserve has already told us that they will have 2-3 more rate changes this year alone. That said the “Lock and Shop” option offered by MAE Capital Mortgage Inc. is an easy choice to do if you are shopping for a home to buy in the next few months.
If you are a Potential seller in this market, know where your house falls in the affordability range. The higher the value of your home the more difficult it is going to be to sell your home. If you are considering selling your home in the next 6 months now should be the time to get your home on the market to get the very best price. My advice would be to talk with a MAE Capital Real Estate Agent about getting your home on the market and devise a strategy with them to get the highest and best price for your home. Here at MAE Capital, we are no strangers to changing Real Estate Markets and how to market to the changes our Agents are seasoned pros and our newer agents have the energy and mentors to get you the very best price for your home. We also have a bundling program that when you list, sell and buy your next home with us and use our mortgage options we will buy your interest rate down so you have a lower than market interest rate thus a lower payment as our realtors will put some commission towards your closing costs on the new loan. This program is great and is not offered by any other Real Estate firm.
If you are considering buying or selling now would be the time to get on it. I can say that next month the Interest rates will be higher, and so will gas prices, and food prices. Inflation is here to stay for a while and the Federal Reserve has said they will be continuing to raise rates, we know that gas prices will continue to rise until we either produce more domestically or cut our demand, which is not possible. We also need to keep a watchful eye over geopolitical events as they could cause even more problems to our economy. We are living in a very unique time with a very unstable economy, high gas prices, high inflation, and a government that wants to spend more money and raise the minimum wage, and raise taxes, all of which will cause even more inflation.