With the craziness in the market, I at least wanted to ease everyone into it with a relaxing picture 🙂 I wrote last week about rate increases coming down the pipe, but like everyone else I was surprised by the last federal reserve meeting and how quickly they changed course. The Fed has been touting for the last year or so that inflation is “transitory”, but their latest meeting challenges this assumption. What did the Fed say/do that will impact real estate? How will mortgage rates and prices be impacted?
What did the Federal Reserve say in the last meeting?
I am a big believer in that you need to put your money where your mouth is! The Fed is saying one thing but putting their money somewhere else! The Federal Reserve on Wednesday considerably raised its expectations for inflation this year and brought forward the time frame on when it will next raise interest rates.
As expected, the policy making Federal Open Market Committee unanimously left its benchmark short-term borrowing rate anchored near zero. But officials indicated that rate hikes could come as soon as 2023, after saying in March that it saw no increases until at least 2024. The so-called dot plot of individual member expectations pointed to two hikes in 2023.
“This is not what the market expected,” said James McCann, deputy chief economist at Aberdeen Standard Investments. “The Fed is now signaling that rates will need to rise sooner and faster, with their forecast suggesting two hikes in 2023. This change in stance jars a little with the Fed’s recent claims that the recent spike in inflation is temporary.”
“If you’re going to get two rate hikes in 2023, you have to start tapering fairly soon to reach that goal,” said Kathy Jones, head of fixed income at Charles Schwab. “It takes maybe 10 months to a year to taper at a moderate pace. Then you are looking at we need to start tapering maybe later this year, and if the economy continues to run a little bit hot, rate hikes sooner rather than later.”
Long and short, the “market” has called the Federal Reserve’s bluff with an admission that there is now a concern from inflation.
What does the change in tone at the Fed mean for Real estate?
Although “liftoff” of a federal reserve tightening policy is still at least a year and a half away, the tone of the meeting made it clear that there is an uneasiness about the drastic gains in inflation and they are worried about inflation expectations and the market getting ahead of itself. My interpretation of the recent meeting is that the Federal Reserve is beginning to internalize that inflation might not be as transitory as they had stated.
With the change in tone of the recent Federal Reserve meeting there will be two primary impacts on Real Estate:
- Mortgage rates higher: There is no way for mortgage rates to go other than up. I think over the course of the year rates will end ½ to ¾ of a percent higher than where they are today. This will make housing relatively more expensive.
- Real estate sales slow: As rates head higher, real estate sales will also moderate as the market’s “feeding frenzy” becomes a bit more normalized.
Based on the recent Federal reserve meeting, many (including myself) are no longer convinced that the Federal reserve believes inflation is as transitory as they are stating. If inflation is not an issue as they keep wanting everyone to believe, then there is no reason to even think of raising rates. Yet the Fed is stating that they are going to raise rates even faster than they stated at their last meeting. The Fed through their actions is signaling something drastically different. The markets will begin pricing in higher rates and inflation likely is a bigger issue than the Fed wants us to believe. Both factors will drastically cool the real estate market.
The slowdown will occur sometime in the next 18 months if not sooner. Keep an eye on Labor Day and the jobs data shortly thereafter. This is when supposedly the economy will start getting back to normal. I am expecting some fireworks in the economy that the Fed is beginning for foreshadow.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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