Economic Pressure is Mounting

The wild stock market last week was one of several indicators that money is moving into different channels. The feds have definitely over inflated the money supply in the name of "COVID aid" and we are seeing the realities of that now. Inflation is reaching the levels we saw in the late 1970s and early 1980s. Volatility in the investment market is obvious.

What this means to housing is unclear as these conditions have sometime aided real estate and sometime harmed it. Harm can come if interest rates were to spike hard. This long period of below average rate has led a whole generation of homebuyers to presume that 4% is "normal." It is not, in fact the average over the last 50 years is around 6% and that has come down from 6.8% ten years ago. This long period has eroded the average. A healthy range for mortgage interest is 5-6% that provide ample access to the market and generates yields that are attractive to investors. But from the vantage point of anyone under the age of 40, 6% is high.

The real question is how will the real estate market react when rates start to rise to "normal" levels. It is safe to say that many people that qualify now will no longer qualify. Taking buyers out of the market will effect the positional strength of current sellers. Tat will lead to less offers, less competition and more room for buyers to negotiate. That alone is valuable, but it could remove enough buyers to create a glut in the market that could lead to a pricing downturn. Right now we have tight inventory. It is so tight I believe it is unhealthy, so perhaps some upward movement on rates with bring balance to the market. That sounded so Jedi, didn't it?

Buyers that are qualified now at less than $500,000 purchase price need to act soon. Even a 1/2% increase in rate will likely knock you out of the local market. The idea of sitting on the fence hasn't made sense for several years. Pull the trigger before the market unloads your weapon. "Weapon?" Yes the weapon is easy and inexpensive access to capital, ie. mortgages. The market may end up "unloading" the cheap money 'weapon'. 

This past month has been a train wreck to interest rates. That may settle down, but there is a great deal of uncertainty in the global financial markets and that generally doesn't bode well for lending. When things settle down, perhaps a retreat to cheaper rates is possible, but I am bearish on low rates. We should be closer to 'normal' and I believe we are headed back to 5.5% to 6.5% as a fluctuating range for mortgages.