As of Wednesday, November 2nd, The Federal Reserve approved a fourth-straight rate hike of three-quarters of a percentage point. The Fed has only hiked the rate three-quarters one other time in history. This shows how concerning the issue of inflation has become in the US economy. Inflation is like squeezing toothpaste out of its tube. Once it’s happened, it’s hard to reverse!
Now, no one knows exactly what will happen, but, as a real estate professional, I’d like to offer you my opinion and educated guesses on what we’re going to see. After the rate was hiked at the end of September, pending sales dipped. That could mean, this new hike will cause even more noticeable price drops in November.
This aggressive strategy from the Fed may continue until Quarter 2 of next year. In addition, the interest rate may get to 8% and remain between 7 and 8% for most of 2023. So why would the Fed let this happen? Let me tell you why this is not necessarily a bad thing. Let’s say your friend bought a house for $800,000, back when the interest rate was only 3%. And your friend pays about $3,500 per month on their mortgage. Good for them! Time passes and now the interest rate is over 7%. That has stopped people from purchasing, causing the home prices to drop. So now, you could buy a similar house for only $760,000. But, the rate is still 7%, making your monthly payment about $4,800… You think, “That monthly payment is so much higher for a similar house as my friend, I am definitely not buying now!” So, home sales will continue to slow, and the prices will continue to drop.
Eventually, the Fed will be ready to stimulate the economy by lowering the interest rate. I think when the price stabilizes, the same home your friend bought will be around $680,000 but how low will the interest rate be? My opinion is that I think the interest rate will settle around 6%, meaning the market will be mutually advantageous for both buyers and sellers. Many people are hoping the interest rate will drop to 3% again, but I think that is not likely. Even if the interest rate drops to 5%, the payment on a home similar to your friends will be around $3500 again. It will be a crazy hot market again!
The Fed has not worked so hard to deflate the prices, just to let it heat up so quickly. If that really DID happen, and we saw low rates, that probably means we are in a bad recession similar to 2008 again, which is not likely. As our economy changes, the interest rates will always be fluctuating up or down. So, if you are a seller thinking about selling in the next 2 years, I’d recommend doing it sooner rather than later. If you are a buyer, you may find yourself in two different situations.
First, if you must buy now, due to a life circumstance, consider a Variable Rate Mortgage or a 2-1 Buy Down Loan Program. If you need more information on these options, reach out to me and I’ll be happy to explain. But, rest assured the interest rate will lower and you can refinance later on. Second, if you are watching and waiting for the perfect window of opportunity, I’d recommend entering the market as soon as the interest rates dip below 7%. Again, you always have the option to refinance. This gives you the chance to have less competition and find the property you really want.
Those are my thoughts! Will my predictions come true? We will find out. If you have any questions, or would like to discuss your financial situation, let me know and I will be happy to talk you through it. Thank you.
