A guest post by Laurel E. Starks (Founder & CEO, Ilumni Institute)
Almost daily for months now, headlines are rife with opinions, predictions, and reports about inflation, the Federal Reserve’s response to it, and the consequences of failing banks. Of course, this broader economic landscape has impacted the real estate industry in myriad and historic ways. In late 2022, when mortgage rates rose dramatically, the housing market experienced a significant slowdown. Now, things are changing again. Here I will offer a bird’s- eye view of some of the economic factors at play — and how they may impact your cases that involve real estate.
How the Fed Sets Interest Rates — and Why
There has been much talk about the Federal Reserve tinkering with interest rates over the last year, raising the question: Why? And why now? Simply put, the Fed’s main job is to set the price of borrowing money. Lower rates encourage people to spend more money, which leads to economic growth. Higher rates, on the other hand, make borrowing more expensive, which in turn dampens consumer spending. Both strategies have their goals: Lower interest rates mitigate against recessions. Higher rates mitigate against inflation.
And curbing inflation has been the order of the day. (For the sake of comparison, last June the inflation rate was at a high of 9%, and the Federal Reserve’s target is 2%.) In response to post-pandemic inflation, the Fed has gone on an interest rate tinkering spree:
It appears that in many ways, this intervention is working. By intentionally trying to cool the red-hot economy, the Fed has nudged inflation down from historic highs. That economy includes the housing market, which experienced a historic boom in 2020 and 2021, with record-breaking price appreciation and lowest-ever inventory.
Federal Fund Rates vs Mortgage Rates
Although the Fed’s interest rates are not directly correlated with mortgage rates, they do set the tone. Mortgage rates are influenced by many factors, such as the inflation rate, growth or decline in jobs, and the Fed’s monetary policies.
In most of its meetings in 2022, the Fed signaled that it would continue to raise rates until it saw a larger reduction in inflation. This has kept mortgage rates high (relative to the historic lows we saw in 2021). However, this is an unfolding story, and it’s difficult to predict what happens next. For example, after the collapse of a few banks, such as Silicon Valley Bank and Signature Bank, the
Fed moderated its approach, concerned with the overall stability of the financial system; at the end of the day, high-interest rates were one of the factors that caused those banks to fail. As The Washington Post puts it, the Fed has to “manage dual threats to the economy — inflation and banking stability.”
State of the National Real Estate Market
A summary of the national real estate market comes with a significant disclaimer: Real estate is hyper-local, and these are national trends. For example, The Wall Street Journal reports that housing markets in the western half of the U.S. have weakened the most in the past year, while markets in the east are still posting year-over-year gains. (Contact your Certified Divorce Real Estate Expert (CDRETM) for your local market trends and metrics.)
Mortgage Rates: Following the Fed’s decision to be more cautious in its approach to curbing inflation by hiking interest rates, mortgage rates are falling slightly, but are hovering around the low to mid 6%. These rates feel more palatable to consumers than the 7% rates we saw in November of last year. To put this in a historical perspective, rates had never fallen below 5% before 2009. In the 1990s, the average rate was 8.12%. In the 1980s, it was 12.71%! Still, mortgage rates are a huge factor impacting affordability.
Many economists expect mortgage rates to decrease below 6% by year’s end. Nadia Evangelou, senior economist at the National Association of Realtors (NAR) predicts, “if rates drop to 6%, 3.1 million more households will once again be able to afford to buy the median-priced home compared to the beginning of the year.”
Home Sales: As might be expected with the increase in mortgage rates, home sales have slowed year over year, but in general, they are beginning to stabilize. In February 2023, home sales ended a 12-month streak of declines, as home sales tend to move in tandem with mortgage rates. And as consumers get more accustomed to (relatively) higher mortgage rates being the norm, we may see an increase in activity this year.
Home Prices: For the first time in a decade, home prices depreciated slightly year over year. “Half the country is experiencing price declines,” says Lawrence Yun, chief economist of NAR. Many economists expect home prices to fall further this spring or summer. Selma Hepp, chief economist at CoreLogic, predicts that “home price growth rate will continue to decelerate and post annual declines this spring — nevertheless, depending on what happens to mortgage rates, median home prices should see some seasonal rebound.” In addition, in some markets, the number of offers over the asking price is increasing. This is a great sign for those who must sell and is a reminder that pricing homes well from the start is more important than ever.
Why It’s Not Yet Time to Worry
For all the hand-wringing over the real estate market, both from sellers who can’t afford to move and from buyers who can’t afford to purchase, there are solid reasons why we’re not headed to a housing crash. In the long run, people still buy and sell houses despite rising mortgage rates. Marriage, divorce, a new job, or a new child are all examples of major life events that require a move. The current market may be signaling a return to normalcy after such a boom rather than a bursting bubble.
Feel free to reach out if you have any questions about this or anything else related to the real estate aspect of your cases.
SHANNON ROSE/ROSE GROUP
DRE #01422955
JASON MITCHELL GROUP
DRE #01527423
8690 AERO DRIVE SUITE 115-361
SAN DIEGO, CA 92123-1757
