Now if you are new here, welcome – I’m so happy you decided to gross over to the less professional, more entertaining but still informative side of real estate news. I don’t pretend to know everything here and you will often get my opinion sprinkled on top of facts, but I will always differentiate the two. (That’s my journalism degree talking.) Our goal is for you to sound smart at happy hour this weekend, specifically about the real estate market, when your brother-in-law tries to spew unproductive nonsense.
If you aren’t new, you know the difference between the federal funds rate and mortgage interest rates. The good ole fed funds rate is the rate the Federal Reserve controls and they use it like a lever to manipulate mainly two things:
Inflation
The Labor Market
They are really only actively trying to manipulate inflation, but the labor market tends to fall victim to their ploys. The important thing to note here is that the Fed Funds Rate is the short-term lending rate. The rate on HELOCs and personal loans; credit card rates will also be influenced. Mortgage rates are certainly influenced but mortgage rates are driven by the demand for mortgage bonds. They are not the equivalent of the Fed Funds Rate.
Speaking of Credit Cards
The data tells us that Americans are using credit cards as their primary payment form more than ever before. Which is why we collectively owe more than 1.14 trillion in credit card debt. Credit card delinquencies – minimum payments that are beyond 30 days late - those are at a 15-year high. It’s all kind of a bummer. One that isn’t hard to figure out though. Inflation has been a nightmare, and our spending habits are also not for the faint of heart. Americans didn’t cut back on shiiiiiiiit as inflation peaked at over 9%. Airports and restaurants all remained full; consumer spending stayed strong. How? We swiped.
What does this have to do with housing?
Well, we all know the Fed stepped in. They started hiking their rate at an extremely aggressive pace. This, coupled with inflation, drove mortgage interest rates up. That trapped a lot of buyers in homes that didn’t fit their needs anymore. We called it the golden handcuffs. A family that typically would have moved up to a bigger, better home or a couple that was ready to downsize – both simply didn’t. The mortgage payments they would end up with given current interest rates were just too scary. They were trapped.
Just because they couldn’t move, that doesn’t mean they didn’t live it up. They did. On their credit cards, remember? Then they realized they had gotten themselves in a shitty situation. Luckily, they had equity in that home they hated. So they took out a HELOC or did a cash out refinance to consolidate their debt and improve their monthly cash flow. Not a bad hail Mary strategy if we are being honest.
Except one day, the house became too unbearable. They said, I don’t care what interest rates are – I need to move. They called a realtor and found out that because of their debt, they couldn’t afford to pay that realtor. They couldn’t even afford the down payment on a new home because there were no proceeds left on their departing primary.
Help is on the way!
Now that the Fed Funds Rate is falling, these ready to sell folks have a much better financial outlook. They can consolidate their debt. Jerome Powell said in his presser following the September Fed Meeting that he believes inflation will continue to fall, even as they continue to cut rates. This tells us more rate cuts are on the agenda at each upcoming Fed meeting and the cost of the goods people need will also be improving.
If borrowing costs are reduced at the same time that the cost of living improves, this will boost affordability for people to get into the home they really want. Which means they can finally list for sale the home they have been stuck in for the past few years. That home becomes inventory for other buyers.
That, my friends, is how the Federal Reserve is going to create inventory during this rate cutting cycle.
In other news, tickets for the Future is Female are now available! This event is not just for realtors and it’s not just for women. This is an educational event about investing. It’s open to everyone – you may already own a home, you may not. You might be a very savvy real estate investor with a huge portfolio. The content we will be sharing will benefit you all. And 100% of your ticket purchase goes directly to the Women and Children’s Center of the Sierra.
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