July Fed Meeting Update

During the July 26^th press conference, the Federal Reserve Chair, Jerome Powell, announced that interest rates would increase by .25 points. As directed by Congress, he said, “The Federal Reserve’s job is to get inflation under control and restore price stability.”

They are looking for more moderate growth to reach 2% inflation. With headline inflation at 3%, data suggests that they are going the right way; however, Chair Powell stated it isn’t enough data to pause hikes.

Inflation is dropping due to higher interest rates, the labor market, supply chains improving, and energy and food prices coming down. During the press conference it was very clear that until job reports, employment compensation index reports, and inflation are all showing improvement, September’s Federal Reserve meeting will see rates either be maintained or increased.

Chair Powell said, “Don’t expect rate cuts this year, but maybe next year.” He also projected that inflation won’t be 2% until 2025. He feels confident in forecasting a soft landing versus going into a recession. There is a pathway based upon disinflation and the labor market. As a result, consumer confidence is rising.

The challenge in the housing market comes when 91% of Americans have a 3% or better interest rate on their current mortgage. The motivation to sell is greatly reduced causing the supply of homes in the market to remain extremely low.

This highly competitive real estate market has forced many first time buyers out of the market. Investors have been buying so much real estate that Case Shiller has reported that housing is recovering without homeowners. Simply put, homeownership continues to decline and investors continue to buy.

Here is the opportunity. Investors who need to borrow will see their margins shrink as interest rates increase. First time buyers who haven’t been exposed to unicorn interest rates will perceive the slightly elevated rates of today as normal. It will continue to open the lane for first time buyers to get on the property ladder and start building wealth.

For the rest of us, the opportunity is in the fact that interest rates are temporary. Replacing the inventory of homes for sale will take time. With high demand and low inventory, prices will continue to increase. Purchasing the home now, while values are increasing, allows the opportunity to refinance when rates improve.

Consider the math in a purely hypothetical scenario. As we know, there are no guarantees of future increases in value or decreases in interest rates:

You take out a mortgage for $300,000 with 10% down on a $330,000 purchase at a 7% interest rate for 30 years. Your Principal & Interest is $1,996. If appreciation is a steady 3%, and you refinance in 2025 at 5% with a new value of $371,350. You have built over $20,000 in equity and your new P&I is $1,595. Plus, in this example, you no longer have a monthly private mortgage insurance premium or second loan HELOC to pay anymore. While you have paid $9,600 in interest, you are still way ahead of renting for two years without any interest and tax write-offs.

Strategizing with a professional who understands our local market conditions is key.   For a complimentary buyer consultation, please give a call, text or send an email.