Recently, I received a video clip from a lender where he talked about the positive side of inflation. The theory is that as prices throughout the economy go up, so will home prices. He’s not the only person I’ve heard that from recently either. I think in the long run the lender is correct, but in the short-term I don’t think the housing market works that way.
The issue is that the Federal Reserve Board has one main tool to keep inflation in check, and that’s raising the short-term interest rates. When those rates go up, so do the long-term mortgage rates. When mortgage rates go up, the cost of buying houses goes up and demand slows down for two reasons. First is the practical reason that buyers can no longer afford what they thought they could afford. Secondly and just as important, buyers take a psychological hit. A buyer still might be able to afford the same house, but they may no longer be so hot to pull the trigger.
I’ve seen it before. Back in 2009 when interest rates rose from 5% to 6%+, the market really slowed down. Of course, at the same time the mortgage meltdown hit the market and lender requirements became very stringent for buyers, so that reduced demand led to inventory accumulation, which then translated into lower prices. Things are a bit different now.
Lenders are no longer giving loans to anyone with a pulse. If you have no money down and poor credit, you won’t be able to buy a house. You can’t get a loan simply by stating your income anymore, those stated income loans were quite literally invitations for lender fraud. Buyers are much more thoroughly vetted now.
As a practical matter moving forward, I believe potential home buyers are going to have less to spend on houses, as the price of goods in our economy goes up. They are spending more on gas, groceries and living expenses. Interest rates are going up. They simply aren’t going to be able to afford as much, and demand should take a hit. The question is how much of a hit, and what happens next?
Housing demand has been at historical highs. High demand, fueled in part by the COVID buying fever, along with a lack of available inventory, has led to dramatic price appreciation. Under the current emerging economic factors, we should see a little bit of a slowing in the market, especially as we head into the fall and winter months. Make no mistake, I’m not saying the sky is about to fall. What I am saying is that we may return to a more normal market.
I feel like this is a great buying opportunity. In my 17 years of real estate sales there haven’t been many times when the home buyers took their foot off the gas and things slowed down. Personally, I’d much rather buy in a slower market than when everything is getting bid up with multiple offers. As long as a home buyer is intending to keep their home for a long period of time and they can afford it, if they find something they like now is probably the best time to buy that home. Especially with interest rates still near 3% and the potential for a little less demand in the market.