Fed Plans to Raise Interest Rates Despite Continued Drop in Home Sales
By Kristi Waterworth
Well, kids, the numbers are in. According to the National Association of Realtors, existing home sales are still down. So far, we’ve had five months of this type of flailing. Reporting by HousingWire states that it’s the slowest pace since February 2016. February: one of the traditionally worst months of the year for selling a house, that’s where we are now.
I won’t lie, I’m pretty concerned. Not just for myself, as I’ll be in the market next year, but for the economy as a whole.
Trade Wars, Pressure on the Fed and Housing Supply, OH MY!
Sorry about that header, but what did you expect from me? Anyway. I’m worried in a big way. People are continuing to hole up in their houses, refusing to sell for any amount of money despite a large and solid demand for homes. The median existing home price has jumped to $269,600, a full $11,500 in average growth since the same time last year. Inventory sits at just 4.3 months worth of supply, barely enough to be considered balanced by some models (but it’s clearly not balanced based on actual sales figures).
Those numbers explain one another, really. There aren’t enough houses, so prices are going up, so buyers snatch them up before they can’t afford to do so, causing there to be too few houses, which pushes the prices up, which causes frantic buying, and so forth.
I’m not saying any of this is related to the trade war we’ve unofficially entered with China, but I’m not saying that it has no influence. When times get scary, Americans go to land. We always do. It’s the mindset that you “own” your house and that means you’ve got something should the worst come. Two things on that:
You don’t really own your home. Your bank can call in your note at any time for a myriad of reasons. Unless you have the actual deed in hand, you’re making payments and thus are at the mercy of your lender. Oh, and don’t forget, your government can force you to sell your property to it should there be a vital need, like you live on a highway that has to be expanded and you happen to be in the way.
Even if you own your home, it’s not really a safety net. Ok, serious talk here. If the economy explodes because of China or everyone in your city riots or whatever thing it is that you’re imaging comes to pass, having that deed doesn’t really do much for you. Let’s say it’s Bizarro World and China has decided to come across the Pacific and pwn us. You have no guarantee that it will honor your land claim, it largely doesn’t within its own boundaries.
But yes, I get it. Your house feels like a safe haven, even though that’s really a lie we tell ourselves. It’s a security blanket at best. But one you can paint or nail stuff up in as you please.
I haven’t gotten to the best part yet, though. So supply is sitting at a precarious 4.3 months and the Fed, by all accounts, is planning on raising rates again when it meets in September. Its goal is to achieve a balanced economy, which is nice and all, but certain people in the government seem to think the Fed needs to light a fire under the economy because hyperinflation is fun?
The political pressure that’s being put on the Fed is top level, so the only thing it can do at this point is to stand up defiantly and raise rates another quarter of a percent. I’d be ashamed if it didn’t. Ask any refugee from Latin America how hyperinflation has worked out for them.
Rising Rates, Shrinking Housing, and the Future
At the heart of this situation, though, is still the number of housing units available. Things are going ok for the American public, but homeowners are still terrified to jump into the incredibly chaotic market. The NAR report noted that houses were on the market an average of 27 days before going under contract in July.
Now, I’ve been through some crazy summers, but that’s pretty extreme. You barely have time to get the word out that you have a lovely home for sale in the first 27 days. That sort of misery (because sales that are executed that fast are actually incredibly stressful) could be another factor keeping sellers from selling. Regardless of their reasons, though, it begs the question: how will this affect future markets?
First-time homebuyers are struggling to get into the market at all. Between increased down payments because super-low down payment programs have mostly disappeared and surging home values are necessitating a greater down payment and more income, this important group of buyers is just kind of out of luck in a lot of markets.
I was very surprised to see that NAR reported that 32 percent of buyers were first-timers. I expected a much lower figure, but I guess those houses are moving so fast they almost can’t be seen. However, sales are still falling all over, except for the West. Somehow it’s still seeing an increase in purchases, though it’s still struggling to catch up to itself from a year ago.
In short, we have a situation now where fewer first-time homebuyers are buying more expensive housing when the supply is falling. Tomorrow that means these guys are going to remember how hard it was to buy a house and the bidding war they got into with their friends from across town and how they won’t speak to each other anymore.
Look, buying a house is no picnic, especially when you’ve never done it before and are fairly cash-poor, but it doesn’t have to be this traumatic. These people are going to become the kind that only sells when they absolutely must because of how bad their first transactions were, further increasing the lack of properties available for purchase.
Rising rates will continue to heat the market up until it’s a blazing inferno and even the worst cobbled up shack is worth a million bucks. At the end of all of this, it’s going to be so expensive to get into a home purchase that there may be generations of potential buyers who end up renting for a lifetime. There’s time to break the cycle, so take a breath.
Wrapping It All Up
In the short term, we’re in a pretty bad pickle. But, if the Feds raise rates again, the existing housing market cools some and home builders are able to fill the demand gap with new homes that are priced so that first timers can actually afford one, we’ll be ok.
If you asked me today if it was a good time to buy, I’d tell you no. No, right now is a mess.
I don’t think it will always be a mess, not once America gets her grit back. That whole Russia thing (you know the one) really hurt our sense of safety and identity. We were duped and we know it now.
There’s one thing I learned as a student of history: Americans always figure out how to swing the pendulum back. Let the Fed go out and Fed it up, get trade back to normal with China, the EU, Canada and Mexico and slowly, we’ll bounce back.
It’ll be a different America, one with deep scars and gouges, but we’ll be ok. That goes for the housing market as well as our collective spirit.