Housing trends are changing by the week, and it’s time to start believing the Fed when they talk about resetting the housing market. Let’s chat about this today, and I’d love to hear your take in the comments.
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THREE THINGS ON MY MIND:
1) These rates don’t phase Chuck Norris (but we’re not Chuck Norris):
Sorry to state the obvious, but quick rate changes are poised to take more demand out of the market. This doesn’t bother Chuck Norris one bit because the man eats 7% mortgages rates for breakfast. But this is a massive deal for buyers in today’s market who are trying to afford a house.
The Redfin image shows the monthly mortgage payment on the national level is about 45% higher this year than last year. Yikes. It’s a good thing wages also rose by 45% (sarcasm). Seriously though, if buyers are paying about $750 more per month compared to last year, that’s a tough pill to swallow that’s going to lead to fewer buyers being able to play the game.
This visual from Mortgage News Daily shows another spike in mortgage rates over the past month. Keep in mind it’s going to take a number of months before we completely see the effect of higher rates in data for closed sales, but we should see it soon in things like price reductions, days on market, open house traffic, and stories from the trenches. Also, mortgage brokers may be able to offer a lower rate, so check in with your local professional.
2) Believe the Fed about wanting a housing market correction:
Look, it’s time to start believing the Fed about wanting to see the housing market reset. I don’t say this as a housing bear (really), but Fed Chairman Jerome Powell was blatant last week about a correction. It’s as if the housing market is the sacrificial lamb on the altar of Fed strategy to curb inflation. My advice? Start believing the Fed about their intent to change the housing market. The Jerome Powell quote below is from Lance Lambert on Twitter (highlights are mine).
3) The housing market will figure it out:
All that said, the market will figure this out. The truth is the housing market will adjust and adapt as needed because that’s what markets do. If rates continue to rise, we should expect to see fewer buyers able to participate, and the need for sharper price declines to meet buyers closer to what they can afford today. Bottom line. But remember, not everyone has the same story in housing. I find some expect for every single buyer to back off the market, but some buyers’ lifestyle and finances are going to collide with market conditions right now. In other words, there isn’t just one narrative that perfectly represents every single buyer and seller today. I don’t say this to gloss over blatant changes to affordability. I’m just saying the market isn’t the same for everyone.
MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.
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Questions: What stands out to you today? Any thoughts about Fed policy? Also, do you think there is another inflection point for rates (like we saw when rates went above 5%)?
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https://www.goodreads.com/quotes/search?utf8=%E2%9C%93&q=reagan+government&commit=Search
“Government exists to protect us from each other. Where government has gone beyond its limits is in deciding to protect us from ourselves.”
“The most terrifying words in the English language are: I’m from the government and I’m here to help.”
“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
“Government is not a solution to our problem government is the problem.”
and on and on and on.
Raising interest rates to combat government induced inflation to “manage” open market competition is NOT the solution.
The East Texas market has finally seen individual price drops for the first time in 3 years. (minor discounts for marketing effect)
Thanks Mark. Yeah, this is a mess. Policy created the mess of the past two years and now policy is attempting to get us out. It’s simplistic to think of real estate in terms of just supply and demand because governmental policy in the background makes a massive difference. Let’s keep comparing notes. Please keep me posted with how things are moving in East Texas.
Thanks for sharing your insights, Ryan.
I believe rates are going to continue to increase for the remainder of 2022. The bond market sees stubborn inflation from rents, gas prices are again going up (this time for several reasons) and we have yet to see full wage increase effects on prices. We also have not yet seen the full effects of Globalization retracing and Ukraine/Russia impacts on markets. The FED wants to see Core CPI down ASAP because it was late and is probably looking for a housing market decline to create a negative wealth effect (also hoping for a taming of stock market enthusiasm) to discourage consumer spending while there is so much M2 supply. I don’t believe it’s going to be enough. There is still way too much stimulus cash out there to make transfer payments and keep prices elevated.
I’m anticipating the FED will pause the hikes by December when the overnight rate is ~4.5%, pushing home loan rates up another 1-2%. Stock markets will then rally on the idea of a FED pivot into year end and worry the FED even more. The FED will then start unwinding Treasuries and MBSs off their balance sheet to make effective rates higher. By Summer 2023, FED rates and balance sheet effects will fully appear, crushing demand.
Low housing supply can save the market and maybe help us avoid >20% pullback, but if we get lots of foreclosures, supply increases, buyers get nervous, then look out below.
Sorry for the lack of enthusiasm at this time, but the FED has been lending near 0% and buying Treasuries for 10 years. We’re just due for a retrace and reset of FED balance sheet. Moreover, moderating retraces with monetary and fiscal policy seems to have been, at best, very tricky throughout history.
I’m going to closely watch Q3 corporate earnings as they start to come out in about 3 weeks. If earnings come down with interest rates higher, stocks will come down and people will think a softer landing is possible. If earnings stay up or increase, the FED will stay aggressive.
Thanks George. I appreciate hearing your take. And this is what I’m talking about. We need to believe the Fed when they say they are wanting to see the housing market reset or correct. Of course, we need time to see the trend and understand the full effect on the housing market, but we can’t be naive about what is in front of us right now.
On a somewhat related note, it’s worth mentioning that national housing metrics don’t perfectly describe every local housing market. This is where we want to watch local trends to understand local dynamics. In short, some areas are likely to contract more than others.
Good insights George – I also see a couple shifts on the horizon. Student Loan repayment will commence. Mortgage Forbearance has ended. China has ceased their lockdown. I would like to believe all of those factors will give the Fed some tailwind in their fight against inflation.
Thanks Geoff. I always appreciate your two cents. We have ideas, and now let’s see how these ideas unfold. This is where sensational clickbait YouTube channels do very well. They magnify potential issues that often end up as nothing burgers.
M2
my understanding is M2 has not been increased by the Fed in over 6mos; not ONE dime. Uh, when you up the money supply umpteen trillion in 5yrs and stop suddenly on the proverbial dime, then I think the Fed is delivering damages not even Ron Reagan could guess at.
I can’t speak to that, but I can clearly say policy affects the housing market. Here we are feeling it right now.
The market always keeps us on the edge of our seat. I knew eventually we would need to pay the price for the low interest rates over the past decade. I wish rates would have been increased sooner, but nobody wants that on their watch. I just hope that I’ve prepared myself financially enough to make it through this “correction”.
Thanks Gary. Yes, rates have needed to go up. What a mess to have them rise so quickly. You are running a solid business and I know you’ll continue to do well. I think we are all wondering about the future.