Save The Drama For Reality TV

Another plot twist in the real-life drama series playing out between President Trump and the Federal Reserve. I was calling it the Real Housewives of the Central Bank, and this really is shaping up to be a bad reality TV reboot – except now the show might play out in court. How will these theatrics impact the credibility of both offices, how does the melodrama move markets, and will the scandal sabotage your real estate strategy….?

Let’s get into it. 

Economic Credibility 

A little history lesson for those of you who only pay attention to the Fed as it pertains to interest rates on mortgages. The Federal Reserve was born as a result of a series of banking crises that made it painfully clear the US needed a more stable, elastic and coordinated financial system. That was back in 1913 and prior to that chaos reigned and the markets suffered as a result. The most notable banking disaster was the Panic of 1907 when bank runs nearly collapsed the entire financial system. 

Bankers and policymakers joined together to create a decentralized central bank. From day one, the Fed was designed to be independent. Why? To prevent short term political pressures, especially around elections because that would distort monetary policy. They wanted the central bank to instead focus on long-term economic stability rather than popular trends. You see politicians think in 2–6-year windows and favor lower interest rates which stimulate both the economy and approval polls. The Fed is designed to think in 10–20-year arcs so it can maintain trust in the dollar. 

Recent political attempts to fire Fed Governors, publicly shame policy decisions and stacking the board with loyalists all threaten this delicate balance. I’m urging you to take that seriously and I’m someone who benefits maybe even more than politicians do from lower interest rates. If the Fed begins to bend to political influence, we risk stubborn inflation, policy whiplash with every administration change (assuming we continue to have elections) and most importantly – a loss of market trust. 

When market confidence thins, the demand for the dollar drops, which weakens its value. Meanwhile a politicized Fed is dropping rates to maintain popularity and inflation becomes unanchored, so the dollar becomes even less attractive as a store of value. Why hold cash in dollars if it’s going to buy you less and less over time? 

How does this impact real estate? As in, why am I talking about it? There’s a vast range of how this plays out, especially when you consider that the US could lose its status as the world’s reserve currency. But to name a few tangible ones… 

A weaker dollar leads to higher import costs. That makes building materials and construction costs higher for a country that’s housing shortage is already a crisis. 

Currency instability would also create another panic, which could lead to rate whiplash as the next administration comes in and tries to undo the damage. That means mortgage markets, the buyers and sellers who have to deal with them get jerked around even more. 

When there is that kind of uncertainty, the market freezes. People don’t buy new homes because they are nervous. People don’t move. People don’t sell the home they do have because they are scared. It’s the basically the opposite of the wealth effect. When American’s don’t buy or sell homes, because it is a major financial move, because they are uncertain about their financial future because the markets are a mess – that impacts our entire economy because housing drives the GDP.   

Instead of going on and on, I’ll ask you this. What does Powell stand to gain by holding rates high? If we think the Fed lacks accountability and is in fact evil, please pipe in here and share what you believe their motives are? That could be a very interesting conversation. 

Last week on Real Housewives of the Central Bank 

A quick real estate-related economic rundown for you all. We saw mortgage rates drop about 30 basic points post jobs report and then even further once Powell signaled a September rate cut last week. We are seeing the data finally catch up to reality in terms of the jobs report indications of a weakening labor market. Both mortgage applications and inventory are on the rise, which should make for a super fun fall market. 

Next week... 

I’m doing a special episode of Property Pursuits with Dave Lass. We are going to review all the different narratives that have been circulated since the election and how they would impact the real estate market. We’ll discuss which ones played out and which ones turned out to be nothing burgers. It’s going to be fun, and you can join us live from anywhere at NOON PST on Wednesday.