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Deeper Issues on Inflation? 

Last week’s inflation numbers weren’t friendly and the market’s reaction to them wasn’t either.  Was it an overreaction?  We’ve talked about how we might have a couple quirky inflation readings coming out of the holidays, due to holiday spending.  That didn’t stop the Wall Street Journal from running their paper with the main, front page headline shouting “Inflation Clouds Rate-Cut Path.”  I know that headlines triggers you, because it triggers me – deep, deep down inside. 

Let’s dive into the reports to see if there is a deeper issue at hand, that would warrant concern.  Or if it was just skewed data and a subsequent temper tantrum from the markets. 

Inflation is proving to be sticky. 

Especially in the services sector.  We really need prices to calm down here.  The problem is that the services are less sensitive to higher borrowing costs.  So the Fed really needs prices in this area to chill out in order to hit it’s 2 percent target, however the only lever at their disposal – interest rates – doesn’t have much of an impact here.  Prices in the services sector came in last Tuesday showing more increase than they have in nearly two years. 

Neutral Interest Rates 

The Fed tries to manage how we spend by using interest rates to motivate or discourage us.  Low interest rates rush us to car dealerships and our realtors.  High interest rates keep us at home pouting.  But there is actually another option.  A neutral Fed Funds rate.  A rate that lets us act naturally, of our own free will if you will.  The rate that doesn’t nothing at all, it doesn’t stimulate or restrict economic activity.  Problem is we don’t know what that rate is.  I don’t just mean you and me, the Fed doesn’t have a formula of determining what rate will act as neutral.  In 2012, they said they thought it was 4.25% but that inched down over the next few years to 2.5%.  (The Fed Funds rate is currently 5.25 to 5.5%.)  In March of last year, Powell was straight up with the folks on Capital Hill and said “Honestly, we don’t know” when asked what the neutral rate is. 

Long Story Short? 

I personally don’t think we can dismiss last week’s numbers easily.  Between the services sector, which is really the ultra-core of inflation and the ambiguity around what the neutral rate truly is – I think this freefall of interest rates may have been celebrated a bit too soon.  Not to say rates won’t come down this year, I think they will but as I’ve said many a time – it will be a slow and bumpy road. 

Ok well, what’s the play then…? 

We are noticing that every house is its own market.  A couple weekends ago, I had two families looking in the 1M to 1.5M price range.  Luckily they found different homes they were interested in, I hate it when I have two clients making offers on the same place.  I’ve actually had three borrowers offer on the same house one time back in 2021.  The listing agent called me and said, “I thought I had it rough – you’re in a really uncomfortable spot!”  Haha.  Anyways, back on track.  One of those clients was in a multiple offer situation and we had to offer $100k over the list price.  The other client, same price range, same zip code actually – we were able to get a $60k credit from the seller to do a 3/2/1 buy down on a jumbo loan! 

There are two lessons here. 

  1. The house that went into a multiple offer situation was priced to sell.   The realtors strategically listed it just below what the market would support, they got 28 showings the first two days after it hit the market and the price got bid up significantly. The other house, it had hit the market way too high 45 days prior.  They had just done a big price reduction and we got them down even lower using that seller credit.  If you are looking to sell a home right now, pricing it properly is extremely, extremely important. 

  1. Let’s run the numbers every time, for every time.  Interest rates have moved since last weekend, the market has likely shifted again.  Don’t assume that because you don’t like interest rates that there aren’t buyers out there who have made their peace with them and are ready to start stacking appreciation and amortization gains.  Every house needs its own negotiation strategy. 

Will I see you on March 7?!  The Future is Female is a fundraising event for The Women and Children’s Center of the Sierra.  It’s not just for real estate professionals or investors – you and your friends are welcome to join us!  If you care about our local community, have even a luke warm interest in real estate but a stronger need for connection with other friendly humans, you’re more than invited to this event! 

It's from 2-6pm at The Elm Estate.  It’s informational, it’s always a super fun vibe and you can easily snag a ticket here.  All of the proceeds from this event go directly to the charity, as in 100% of your ticket. 



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