Fed, Inflation and the Future of the Housing Market

The fed met Wednesday and brought up some concerns about inflation that are reminiscent of the late 1970's.?I am sharing two articles, the first is today's news, the second is a short recap of what happened the last time we were in this spot economically as a country and how the fed dealt with it.??

Fed’s interest rate forecast signals willingness to sacrifice growth to stop inflation, strategists say

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When Volcker ruled the Fed, ‘people thought they’d never buy a home again’

What we see in the cover image is the All-Transactions House Price Index for Colorado from 1975-1995. You can see a turbulent early 80's growth pattern followed by slow and steady market until the early 1990's. Some of what is happening now is repetitive of what happened then. The biggest difference today is STILL the lack of houses for sale, which won't rebound any time soon. Homebuilders, who cut back on building after the 2008 financial crisis simply missed the boat. The pain of 2008 prevented any of them from forecasting the high demand for housing. This lack of new inventory for new home buyers leaves a growing group of buyers to fight over the same number of houses. It is the simple supply vs demand scenario from your economics 101 class your freshman year in high school.

If six months is considered a stable market, we have a long way to go before we see this housing market slow down.

What is counterintuitive is the fact that HIGHER RATES = HOTTER HOUSING MARKET. Yes, that is correct. There is always an added "buyer urgency" when rates increase. All procrastinators suddenly jump as the fear of loss kicks in. They feel the very real window of opportunity closing from both sides, with home prices rising and the cost to finance rising. The houses they were looking at are more expensive per month because rates have increased, and they are priced higher.

What happens now? The Federal Reserve officials expect to hike rates roughly six additional times in 2022. There has been way too much money printed over the course of the last two decades to NOT create inflation. As they work to subdue the fire that has been lit to keep it from growing out of control the current trend of higher prices and higher financing costs will continue. Inflation brings higher wages, higher home prices and higher rents. All of this simply results in "make more, spend more". Homes will remain affordable, just less so. As the home prices and mortgage rates reach levels that make renters too uncomfortable to buy, they will renew their leases. Once the rents, which ALWAYS trend to roughly 1/3 gross wages. The idea that one can rent and avoid the rising housing costs is not true--it never has been long term. Even as the economy struggled between 1975-1995 rents continued a steady increase. That won't change now.

Buy? Or Rent? From the data, even IF home prices slow and inventory finally increases, it SEEMS that the upside of buying still outweighs the cost to rent. Long term, buying a home has always been a sound investment. Will deals be had? Probably not. Not in current times. If home prices and mortgage rates, wages AND rent all increase, wouldn't you rather buy?