Frustrated homebuyers show why the Fed’s fight against unprecedented inflation is beginning to succeed

I have studied finance and financial markets since the 1970s, and I have never seen the Federal Reserve’s monetary policy receive such prominent news coverage as it did last year.

And for good reason. The Fed’s actions have far-reaching implications for companies, consumers, and the U.S. economy, especially now that the U.S. central bank is trying to control the fastest jump in consumption in decades. In short, the Fed is raising interest rates, hoping that doing so will bring down inflation sufficiently in the economy.

The housing market is the sector most affected by changes in interest rates and, therefore, is a key indicator of whether the Fed’s plans are succeeding. I only have to consider my son’s experience — or that of many other Americans — of finding a new home at a time when interest rates are rising to see why.

What is the Federation doing?

First, a little background.

The Federal Reserve has been raising interest rates at the fastest rate in its 108-year history. Today’s big policy actions are needed in part because the Fed and many others have taken a while to understand what causes inflation.

In the year With inflation accelerating to more than 4 percent in 2021 — double the Fed’s target rate — the outlook at the central bank and elsewhere marks a temporary setback following two years of a Covid-19-related slowdown. There was an assumption that inflation would automatically come down as supply chains worked themselves out.

Unfortunately, that estimate is flawed because it doesn’t know how much the government’s Covid-19 relief spending has stimulated what economists call “aggregate demand” — in other words, the total demand for goods and services produced in an economy. Put another way, consumer spending boosted by government subsidies created strong demand in the economy.

And consumer prices continue to accelerate. Russia’s war in Ukraine has especially exacerbated the problem by raising global food and energy prices. In the year As of June 2022, inflation was rising at 9.1 percent, the fastest pace since 1981.

While the Fed can’t do much about the war or other supply chain issues, it can address overall domestic demand. That’s where high interest rates come in.

Higher borrowing costs will choke off consumer purchases of homes, cars and other goods and services that typically require credit, while companies will support investment in factories and hiring, which should dampen overall inflation.

The Fed began its latest tightening policy in March 2022 with a target interest rate increase of 0.25 percent, which serves as a benchmark for other borrowing costs in the U.S. and around the world. Since then, the central bank has raised the target rate twice – by 0.5 percentage points in May and 0.75 percentage points in June.

On July 27, the Fed is expected to raise the rate by another 0.75 percentage points, although some observers have predicted an unprecedented increase of 1 point after the June consumer price report showed that inflation is still accelerating.

Why is the housing market important?

The trick to reducing inflation is to suppress aggregate demand enough to keep inflation under control without tipping the economy into recession. One of the main ways to see if this is happening is to look at housing, which is particularly sensitive to changes in standards and accounts for more than a quarter of all US wealth.

Buying a house or apartment is a huge expense, so almost all buyers must borrow a large portion of the purchase price. And in the year Just as record-low mortgage borrowing costs in 2021 spurred housing market growth by reducing the cost of debt servicing, higher rates will increase costs, discouraging home buying.

The average rate on a 30-year mortgage hit 5.81% in June, the highest level since 2008 and has been below 3% for most of 2021. The rate is currently 5.54%. On a $200,000 mortgage, a 5.54% rate translates to over $400 in additional interest each month at 3%.

Faced with such an increase, some house hunters — like my son — reconsider whether it’s the right time to buy back.

Housing begins to stand

In other words, a higher credit ratio will encourage individuals to invest in housing. The fallout from demand doesn’t just stop at home. When people buy a new home, they want to buy new furniture, lawn equipment, televisions, and so on. And buying used homes often requires hiring contractors and others to remodel the kitchen or build new closets in the kids’ room.

So if people are buying fewer houses, they’re buying less furniture, electronics and lawnmowers and they don’t need electricians and plumbers.

Declining demand for all these goods and services should take a meaningful bite out of inflation. While it’s too early to tell if this part of the Fed’s plan is working, we can already see the effects of rising mortgage rates in recent housing data.

Since the start of the Covid-19 pandemic in recent months, fewer new homes are being built, fewer existing homes are being sold and home buyers are walking away from signed contracts.

At the same time, consumers and investors begin to anticipate lower inflation in the next year or so.

What it means for home buyers

So as the Fed prepares to raise benchmark rates again, what does all this mean for American consumers, and especially my son and others looking for a new home?

For one thing, don’t expect long-term interest rates, including mortgages, to rise much, and certainly not a rate hike by the Fed.

Investors tend to price anticipated Fed policy changes into the market. So unless there’s a surprise from the Fed, like a full 1-point hike, long-term rates aren’t likely to change much. And maybe they’ll start falling soon because inflation has been subdued or the United States has slipped into recession.

And while it’s nice to know how much tighter monetary policy — ie, higher interest rates — will affect today’s stratospheric home prices, that’s hard to predict. Some buyers pulling out of the market should reduce demand and lower home prices, but sellers may decide to delay selling rather than accept a lower price.

The challenge for home buyers like my son and his family is to find a seller who can’t take their home off the market and offer less than what the home would have attracted just a few months ago to offset the higher financing costs. The more it happens, the more the Fed knows that rate hikes are working.

Related Posts

16 great country houses selling from £450,000 to £6m as seen in Country Life

Our regular roundup of some of the best homes for sale in Britain is a holiday-friendly county home in Sussex. West Sussex – £5,950,000 An unapologetically charming…

Seattle’s housing market is headed for a recession.

What goes up must come down. That seems to be the motto of the U.S. housing market right now, with some of the nation’s most expensive and…

Ant Anstead Is Selling The Laguna Beach ‘Dream’ Home He Bought After Splitting From Christina Hack – See Photos!

There are some big changes for TV personality Anstead. On Wednesday Celebrity IOU: Joyride The co-host has listed his Laguna Beach, CA home for $3.3 million. Garbage…

San Anselmo adopted new rules after the garden was broken

San Anselmo has implemented new rules for community gardens based on how the city’s amenities are managed. The City Council unanimously approved a new ordinance Tuesday to…

Property: A thriving housing market in Dunfermline and West Fife

Dunfermline continues to be the “hub” for first time buyers in East Central Scotland. ESPC’s latest property report figures show that house prices in the city rose…

FOR SALE: Take a look around this stunning Wirral property with covered BBQ area and fireplace

The family home is immaculately finished and close to the beach. This beautiful detached house is for sale at £1,225,000. In the popular Wirral area, Hoylake, a…

Leave a Reply

Your email address will not be published.