We know the Federal Reserve has lowered its target overnight lending rate to 3.75% from 4%. That sounds great to most people; however, is it signaling a slowdown in the economy, or is it responding to one? The answer to this might very well surprise you. We will also need to discuss where interest rates are going from here. There is a lot at play in the financial markets currently that is not being reported in the mainstream media.
Let’s jump right in to why the Federal Reserve, or the “FED”, lowered its rate in the first place. The Fed lowers interest rates to stimulate the economy, and this has been done for decades. The only interest rate the Fed has to work with is the Federal funds rate, or referred to as the overnight lending rate. This is the interest rate that member banks can borrow from the Fed to accommodate their reserve requirements or to loan more money to their customers. This is called fractionalized banking, where banks can lend out the majority of people’s savings held in their bank. The idea of lowering rates is to stimulate banks to lend more money, so if the money is cheaper, they can lend at lower interest rates. Lending at lower rates means lower rates for the consumer and businesses.
Ok, now that we understand how the lower Fed funds rates come back to the economy, we need to ask the question as to why they want to create more demand for money. The main reason is to stimulate consumers and commercial borrowers to borrow more money. By lowering interest rates, the idea is that people and businesses will borrow more money for expansion or to lower the payments on existing debt, freeing up more money to invest in the economy. When the economy has more money, the theory is that it will create more jobs by companies investing in expansion, and it will put more money in the consumer’s hands to buy more stuff. This demand side effect stimulates producers of goods and services to produce more, thus expanding the economy.
This is all theory and has proven to work in the past, as it makes sense. Will this strategy work this time, or will it not be enough or too much? If the Fed lowers rates too much, what we see is inflation. The reason we see inflation with low interest rates is that consumers will borrow more to buy more stuff, like houses and cars, and other goods and services. If supply can’t keep up with demand for goods and services, then the cost of goods and services goes up with higher demand. This is why it is a dance; every time the Fed does something with interest rates, it is basically an educated guess when they raise or lower interest rates. When interest rates come down, the Fed also must authorize the printing of more money so it can accommodate the demand for it, and with the supply of money increasing, it can lower the value of the dollar, and you get inflation, which is a killer to all economies. We have been seeing the devaluation of the dollar on the world stage over the last 5 years as the petro dollar is going away slowly (this is a discussion for another article). This causes the price of foreign goods to go up. The Tariffs that are being imposed on other countries on their goods being imported to the US are also something to be taken into consideration. In fact, the tariffs that this administration has put on other countries scared the FED into believing that this would cause inflation, and that is a reason they have taken so long to lower interest rates.
Next, we need to ask the question of where interest rates are headed in the future. This will depend on how the Federal Reserve perceives the economy as growing or contracting. If the economy shows signs of heating up and inflation continues to be outside of their 2% annual target rate, then they may not lower rates again in the near future. If the Fed sees the economy as slowing still, with higher unemployment and low growth, they will continue to lower interest rates.
What I believe will happen, based on my economic background of 40+ years, is that the data that is usually given to the Fed to make their economic decisions has been suppressed due to the government shutdown, and the Fed is running blind until the real numbers are revealed. The Bureau of Labor and Statistics (BLS)is where the Fed gets the data to make its economic decisions, and the BLS has been far less than reliable over the last 5 years, with huge data corrections in the numbers they issue for the Fed to make decisions. We have not had real unemployment numbers from the BLS since September, and those numbers were corrected later in the month to show a large number of people filing new claims for unemployment. What this means is that the economy is in far worse shape than what is being reported, and when the Fed gets wind of what the actual numbers are they will have to lower interest rates. I have worked in the mortgage business for 40+ years now, and I have seen many different market indicators, but this one has me seriously concerned. The last two and a half years in my business have been extremely slow, with no real money moving. This has been because the rates were way too low in 2020 and 2021and those who have those low rates have not wanted to refinance to a higher rate to take money out to help the economy. Then rates went from the 2’s and 3’s to 7% in a matter of months, effectively slowing down the economy and taking out a whole segment of people who now could not afford to buy a house. I think that Interest rates will have to come down significantly in the next 6 months once the FED realizes that the economy is far worse than they imagined. The wild card will be inflation numbers if jobs continue to be lost, along with higher inflation, which will give the Fed an almost impossible task. Look for a new Federal Reserve Chair next year as Jerome Powell will be stepping down sometime in 2026. One thing that will stay constant is change, so keep learning and make good financial decisions.
Some of you are hearing that we are in a “Seller’s Market”, but have no idea what that really means. It is interesting times right now and every Real Estate Market in America is different. I am writing this article from Northern California in the Greater Sacramento area, but the definition of a “Seller’s Market” is good for any market. The factors that make a Seller’s Market are many but the biggest factor is the lack of supply of housing for sale in the affordability range. The affordability will differ from town to town is based on the average income for the particular area. In in Northern California You can see the highest priced Real Estate Market in the world with Silicon Valley and the San Francisco Peninsula and drive 2 hours to the east and see some the most affordable housing in California in the Stockton and Central Valley. Real Estate markets are driven by supply and demand with a higher supply of housing the lower the pricing and the lower the supply the higher the price becomes with the same amount of demand.
Although the rules of supply and demand work in any market place, in Real Estate it is especially prevalent as people generally don’t have choice to buy or rent they always need a place to live. With most goods and services people have a choice as to purchase and item or not based on price, but if your job is in a Real Estate Market that has a low supply of housing and a high demand for that housing you will be forced to take housing at elevated prices. Even if you are renter you will be forced to pay higher rents in markets with a low supply of housing. Some markets with high demand for housing have implemented rent control to try to keep rents low in certain areas so people can afford to live there. This concept, although with good intentions for potential renters, is a horrible way to try and combat high rents as it will force corruption and landlords that can’t get market rents will tend to not do the necessary maintenance that would be necessary in an uncontrolled market to save money. You have seen this in areas in major cities that have tried this and what you end up with are areas that are run down and crime ridden. The solution is a supply problem and if you can build more housing and move the jobs away from high concentration areas you will fix the problem.
As for a “Seller’s Market” in Real Estate market you will generally have a high demand for housing and low inventory to choose from. Here in the Greater Sacramento area we are experiencing just such a market. What this does for a seller of Real Estate is insure that they will get the highest price possible for their Real Estate. As for buyers in this market they will be forced to make full price offers or even above full price offers to get the seller to sell to them. As a buyer, it becomes frustrating to look for a home to buy and every house you see in your price range has multiple offers and some are cash offers. If you are a Veteran and want to try to use your benefits you will have a very tough time to purchase, as if a seller takes a VA loan offer on their home they will have to clear the termite report and take the house to VA standards. If a seller has multiple offers on a house they will generally take the path of least resistance to them and the highest price. For example, if a seller has 3 offers to purchase their home and one is a cash offer (meaning they are not seeking a loan) and one is a conventional loan, and one is a VA loan and even if the VA loan is offered at more than the asking price the seller will look at the type of buyer that they will make the most off the sale from. With the cash offer, with no repairs being asked for verses a conventional loan buyer that may have no repairs requested either at the same price and a VA loan buyer offered above the asking price with repairs, it would generally be the cash offer that wins every time as it would be known that the cash buyer can perform whereas the conventional loan still has to go through the process and the VA loan buyer just becomes more of a hassle. Thus, putting the seller in control of who they sell their house to.
With the seller in control of who they sell their house to it becomes an art for a Buyer’s Agent to make an offer that will get accepted. Here at MAE Capital Real Estate and Loan our Agents are trained in the art of deal making and have special ways to convince a seller to accept the offer we provide. We are one of only a few Real Estate firms that can bundle our services thus sweetening the offer we can make to a seller. If we work with you on your home loan and represent you in the Real Estate Transaction we can reduce our fees and make the seller’s bottom line sweeter where other Agents will not have this as an option to help potential buyers. If you are a seller in this market and we list and sell your home and bundle our services with the purchase of the next house or home loan or both we can really save you thousands of dollars.
Back to what a seller can expect in this market when selling their home. Since the seller is in the driver’s seat, so to speak, they will be able to take the highest and best offers presented. Some techniques that are happening in this market is to set a date where the offers will be reviewed by a seller so the seller can pick the best one. Generally, when the house is listed on the MLS there will be a note to other Agents stating that offers will be reviewed on a certain date usually 7 days after it is put into the system. So if a house is listed on a Friday the Agent may suggest to the seller that the following Friday evening they will get back together to go over all the offers received during the week. If some of the offers are the same the Agent will suggest doing a “Multiple-Offer Counter Offer” where the Agent will send to all offers one final chance to send a higher or better offer than they originally sent in. Once those are back the seller will then pick the best offer out of the bunch. This technique is good for a seller but potential home buyers get really frustrated with this type situation as they find out that they didn’t get the house and they offered the highest they could. This should be explained to all potential buyers prior to even going to look at homes so they are prepared to battle for what they really want.
Another problem that arises in a Seller’s Market is the lack of tolerance from a seller. Although, it should be a given to be as courteous as possible in a Real Estate transaction a Seller doesn’t really have to be tolerant of the home buyer’s problems. So if a home buyer’s lender has requested that they want the seller to comply with work or to participate in closing costs, the seller might not have the tolerance for that and cancel the transaction and move to the next buyer and if a few weeks have passed then they might be able to sell the house for even more. This is especially prevalent with builders as they are professional sellers and have zero tolerance. In fact, most big builders have their own lending institution so they will steer you to their lender by offering incentives to use their lender as they make money from the sale and the loan. This is illegal per the Consumer Finance Protection Bureau (CFPB), but it is still common practice with builders.
So bottom line, if you intend to sell your home or property in the next 6 months to a year in a “Seller’s Market” picking your Agent is the most important part of the transaction as they will pay for their services over and over not just from keeping it legal but getting the best price and you not having the hassle of showing your home and answering all the buyer’s questions. MAE Capital Real Estate and Loan is here to help you list and sell your home, Land, or Commercial property. We can also bundle our Real estate Services with our Loan services to save you big dollars so weather you are a seller or a Buyer we are here to save you money. Give us a call at 916-672-6130 or click here to email us.