Three Things to Know About How Federal Reserve Rate Hikes And The Fight Against Inflation Are Affecting Real Estate
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By Ryan Casey Stephens, FPQP®
Special Contributor
At the time of this writing, mortgage bonds and interest rates are nearing their second-worst levels since February and there’s a lot of room to the downside. We’ve generally enjoyed rates dropping each week since the first week of March, which spurred a burst of activity in our local markets. It’s not time to become discouraged, but there’s reason to be concerned about the possibility of rates increasing. Why is this happening, and how long will it last? Will we feel any lasting effects in our local real estate markets? We’ll get to the bottom of it in this week’s Three Things to Know.
An Unexpected Revelation
Last week’s CPI and PPI inflation reports revealed positive data that pointed to inflation cooler than expected over the previous month. I’ve often pointed out that as inflation goes, so go mortgage rates. Why, then, are rates heading back up? Much of it has to do with the way the market is digesting a startling discovery that arose when we were given the notes from the last Fed meeting. Remember, at the last meeting, the Fed chose to hike .25 percent, despite widespread fears of a national banking crisis. We recently learned that the staff that prepares the economic outlook for the Fed switched to predicting a recession in 2023 for the first time since this inflation battle began.
That revelation is the most prominent reason for today’s losses for two reasons. First, the Fed has traditionally not hiked rates into a foreseen recession. Once they know it’s coming they usually begin to ease up, so that the depth and length of recession are as minor as possible. We now know that the Fed had knowledge of the likelihood of recession this year and hiked anyway, and that’s creating angst in markets. Second, the move also signals that inflation isn’t falling as quickly as the Fed wants. That’s creating anxiety among investors since it appears the Fed isn’t able to use its levers to reduce inflation with the same power it once did.
First Thing to Know:
The fact the Fed decided to hike into a likely recession is bombshell information. Markets are in the process of coming to grips with it, but it’s resulting in worsening interest rates.
We’re Not Going to Lose All Ground
At this point, it’s natural to wonder, “How long are we in for?” The longest rising rate period this year lasted from February 3 to March 9, during which time the average 30-year mortgage rate rose from 6.1 to 7 percent. A spy balloon loomed over our nation, and Wall Street punished homebuyers then, too, because investors wanted a Fed rate hike pause and didn’t get one. While it’s possible to see another month ahead of rising rates, I don’t believe that’s going to be the case.
One key difference between now and that time period is that investors know the Fed will hike the rate at least one more time in April. Their messaging has been clear, and many experts predict they might continue to hike beyond that this year if inflation doesn’t fall more quickly. We also aren’t facing the imminent risk of global economic instability or hearing whispers of a bank crisis like we were then. I personally expect that by the Fed’s meeting and press conference on April 27 and 28 investors will have the time they need to process and adjust to this unexpected information, barring any new, dramatic headlines.
Second Thing to Know:
There are a number of things that occurred earlier this year that led to such a dramatic and prolonged increase in rates. Since we don’t face as many challenges now, we can expect this to be a shorter window of punishment.
The Realistic Risk We Face
It’s very likely that the rising rates we encountered in February and March muted the spring market. Applications for mortgages rose from February 6 to March 6, but they did so by so little that mortgage demand remained lower than it was in November 2022. Of course, we’ll never be able to measure how many buyers chose to sit out the pre-Spring Break house hunt, but it’s startling to realize rates kept this spring more depressed than the time period leading to last Thanksgiving. Pending Home Sales are up since January, but the pace of the recovery has slowed noticeably, due mostly to dismally low inventory nationwide. For all of our sakes, we need rates to begin to head lower so more North Texans will both list and purchase real estate.
Third Thing to Know:
If mortgage bonds don’t reverse course soon, we’ll risk prospective buyers remaining in hibernation until the summer, when traffic traditionally drops off again.
Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].
