Not breaking news, but for those of you just waking up to the reality of 2022 the FED announced in their January meeting that they plan on raising interest rates in March. They also plan to taper asset purchases of mortgage-backed securities by 10 billion per month.
As the markets brace for impact, we have already seen some aspects of the economy “price in” the future hikes. What I mean by this is simple… Many investors are not waiting for the FED to make their move. Investors want to beat the FED to the punch. Luckily (in this case) for the real estate market, you cannot hit sell on your Robin Hood app and liquidate your real estate holdings. Due to that lack of liquidity, real estate typically lags behind the stock market in terms of market corrections.
In the past, as mortgage rates go up, the price of homes drop. Why? Because the amount a buyer can afford to borrow goes down due to more of the payment being consumed by interest being paid. So a buyer that could afford to spend 500k at 2.5% may only qualify for 450k at 3.5%.
Why will this time be different? How cheap you get can the money is only a small part of the equation. Here are the factors that are going differentiate this cycle from past cycles:
Inventory is at an all time low. Supply and demand is the number one factor in home pricing.
Rates have been so low, for so long. If you own a home and are reading this article, you have likely either purchased a new home or refinanced your current residence in the past 5 years. If you were on top of things, you likely refinanced in the last 18 months when rates absolutely bottomed out.
The FED does not have the luxury to raise rates to the level they need to be to fully correct inflation. A 5% rate on a 30 year fixed rate loan is still VERY CHEAP MONEY. In 1981 when the FED was battling a similar inflationary environment a 30 year fix loan at 15-18% was commonplace. To think the FED moving the needle 25-50 basis points 2-6 times this year (2022) will raise rates high enough to combat asset inflation (or even regular inflation) is pure wishful thinking. (what is a basis point? Click here for more info)
Millennials are the largest home buying generation in the nations history. Hold onto your avocado toast Batman! Yes, THAT generation everyone loved to rag on has morphed into a highly motivated buyer pool with the earning power to back up that foamy latte. In 2020 alone they accounted for an astounding 37% of all home buyers. Expect that number to continue to rise.
All things combined
Buyers of the last 5 years (and owners that refinanced), who are now potential sellers will become trapped in their current homes. Who in their right mind would sell their home with a 2.5% fixed rate 30 year mortgage for home that is MORE expensive and comes with an even higher interest rate? Maybe a new family (moving from a small home or condo), or perhaps a job motivated mover. In other words, anyone who is forced to move due life circumstance. Gone will be the days of “leisure” moves in a high interest rate low inventory environment. The problems compound each other and make moving across town for a home with marginal improvements no longer feasible. This will leave highly motivated and well paid Millennials to come in and pick up what little scraps there are on the table. Lack of inventory + motivated young families = future home price increase. Who knows, maybe the FED will prove us wrong and do the painful but right thing and raise rates to 7-9%. Until they do that, a couple basis points here and there will not change a damn thing. Perhaps another solution to the inventory shortage would be a revolutionary advancement in the speed and cost of home production…
Fun Millennial Facts
Imagine not knowing what a flat head screwdriver is lol. Before any of my millennial brethren send me hate mail: I am one of you and I come in peace…
Final Thoughts
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