The Fed raised interest rates, from 0.5 to 0.75, and now we see a divide in opinions regarding the housing market. On one hand, we see people saying, “There’s going to be a housing crash, so sell your properties now.” On the other hand, there are some people saying, “There is no crash. In fact, home prices are going to go up, so you should buy now.”
But I want to show you the middle ground, along with some data from Altos Research and Fortune Magazine. Then I want you to decide after seeing all the sides and the data, and let’s try to look at things objectively. Don’t let fear and emotions get ahead of you.
This is where we start: We don’t know what’s going to happen. We’ve never been here before. Everything in the future is an assumption.
First, let’s see what the Fed is saying about the current economic situation. Fed Chairman Jerome Powell did a press conference, and the video is up on YouTube, so you can watch the whole thing.
I watched this twice, and the one thing that was really clear, for me, in Powell’s message was “Let’s be quick in our response.”
He says, “Therefore we need to be nimble in responding to incoming data and the evolving outlook. And we will strive to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain time.”
Most of us are unsure of how to handle things during uncertain times. Some people start imagining the worst and making conclusions from all the anxiety they start feeling. The issue arises when others try to profit from your fear and panic by feeding your fears with fake news that is far from the truth.
But the Fed is telling us that, “Yes, we are dealing with inflation, but inflation we kind of caused during the effort to support everyone when the pandemic started." But they are doing what they can, keeping tabs on the situation and responding accordingly based on the data in order to tamp down inflation.
Powell also talked about unemployment at the conference. He says unemployment is going up towards the median forecast, which is 4.1%. (The actual unemployment rate as of June 16th was 3.6%.) And if we were to get inflation down to 2%, an unemployment rate of 4% is still historically low.
If you look it up on Google and compare the unemployment trend over the years, our current unemployment rate is still significantly lower. Yes, there have been layoffs happening recently, and they are trying to get a hold of inflation, but unemployment is still historically very low, and we are just magnifying the data out of fear.
Towards the end of the conference, Mark Hamrick, Washington Bureau Chief at Bank Rate, asks Powell about what the Fed’s outlook is for the housing market.
Hamrick says, “Given the years-long increase in home prices and now the sharp rise in mortgage rates and all that, and given the heightened sensitivity around the housing market, given the fact that it was a trigger for the great financial crisis over a decade ago, [what’s your assessment of the housing market]?”
To this, Powell responds that when the pandemic started, they kept the rates low to support the economy, especially with an unemployment rate of 14%. A lot of people wanted to move from the big metropolitan cities to single-family homes in the suburbs, and the low rates and high demand pushed home prices up.
In fact, Fortune magazine wrote an article about some of those areas that have overvalued housing markets, which are correlated with those suburbs that got an influx of people during the pandemic. Areas like Boise, ID, Dallas, and Austin are deemed overvalued by Moody’s Analytics, while most of California and Florida are relatively fine because, according to Moody’s, they can sustain that growth.
But Powell says, with inflation going up, that has to change now. They moved the rates up, and we’ve all seen mortgage rates increase, and now we are seeing a shift in the housing market.
“We’re watching it to see what will happen. How much will it really affect residential investment,” Powell says.
A lot of people are saying now that interest rates are going up and that it is affecting the price of homes, but that is not necessarily what we’re seeing.
They go so far in their speculating that there are two extremes in opinions regarding the housing market.
One extreme is people like YouTuber Meet Kevin, and in one of his videos, he says he sold $20 million of his portfolio because he has had zero tenants recently. He also showed the active listing data of Austin, TX (from Redfin), saying he noticed the inflection point and this is proof that the housing market is going to tank. To get ahead of the housing crash, he sold some of his properties. The thing is, he is saying this to sell his course on building long-term wealth.
Personally, when people try to sell me stuff while talking about how the housing market is going to crash, they lose credibility in my eyes. It is like, “Are you trying to scare me into buying your stuff?”
On the other end of the spectrum are people like Dave Ramsey, who says home prices are going to continue going up year over year for the next five years. While he shares some wonderful insights and tips for people looking to buy homes in his Instagram post, it is really impossible to predict anything for sure five years from now.
But Powell’s opinion is more in the middle. He says at the end of his conference that the Fed is trying to stabilize the market so more first-time home buyers can afford homes in the future.
And I want to remind you again, real estate is regional. Even during the financial crisis in 2008, there were some areas that didn’t tank—it was like 2008 didn’t exist in those areas.
“[We’re] not really sure how much it will affect housing prices. Obviously, we’re watching that quite carefully,” Powell says.
Powell also talks about supply, and he says, “There’s a tremendous amount of supply in the housing market of unfinished homes. Whereas the supply of finished homes—inventory of finished homes that are for sale is incredibly low.”
Altos Research provides statistics on that supply. According to their data, we went from 1,180,000 single-family residences in 2015 down to 396,463 homes as of June 10th.
Powell admits that in terms of real estate, the situation is complicated and needs to be watched carefully. “It’s still a very tight market. So prices may keep going up for a while even in a world where rates are up,” he says.
“I would say if you are a homebuyer or a young person, somebody looking to buy a home, you need a bit of a reset,” Powell continues. He says they are working to get supply and demand back in balance, push down inflation, and bring mortgage rates down.
“This will be a process whereby we, ideally, do our work in a way where the housing market settles in a new place and housing availability, and credit availability are at appropriate levels,” Powell concludes.
What’s our main takeaway from this? We’re currently in a situation where inventory is so tight, even interest rates may not even affect the amount that prices are going up.
Pay attention to the numbers and don’t let emotion get the best of you. Because if it does, if things go up and down in a day, it’s going to take you with it. We’re trying to take a look at the bigger picture here to understand what is really happening.
We don’t know what’s going to happen, we just know one thing for sure: where we’re at right now, there is no housing crash. And real estate is very regional. You saw the places that are said to be overvalued? Pay attention to those areas.
Can it all change? Of course, but right now, a housing crash doesn’t exist.
