What the Fed Said (and How It Affects Real Estate)

Supply and demand is the key factor driving prices up in the Greater New Haven area, but mortgage interest rates have certainly played their part. When housing prices were up 20%, buyers were not seeing any increase in their monthly payments because interest rates were so low. This was one reason that price increases did not deter buyers and demand remained strong.

And that demand is not going away.

Working, middle class people, residing in NYC, are looking to get their families out, so they can work remotely (or commute) and their children can just open the door and play in their own yards. Simple things that we take for granted here in CT feel like miracles to people who used to stop working, go down an elevator or 5 flights of stairs, then walk several city blocks just to get to a park (that is on the FDR Drive, with cars flying by at 100 mph). So, even if prices continue to increase, the monthly cost is still often less than an apartment in the city, both in lifestyle and finances!

This is one reason why we expect high demand in the Greater New Haven area to continue through 2022..

That said, interest rates matter to the pace of price increases and ultimately will affect demand when they hit a certain level. In addition, a functioning economy and, sometimes more importantly, people’s perception of the economy, influences their decisions on whether to make a major move.

So we know that the Federal Reserve is keeping interest rates down to spur economic growth and they are buying economic assets at a pace of $120 billion a month, to orchestrate a stable economy. This was an extreme (and I think, necessary) measure that allowed for a smooth market functioning during the recovery from the COVID induced, economic crisis.

According to Jerome Powell, the Chairmen of the Federal Reserve, the economy is not doing well enough to begin increasing the interest rates, but it IS doing well enough to begin slowing the purchase of economic assets. The Fed will reduce their purchases of Mortgage Backed Securities by $5 billion a month (which is equivalent to less than one day’s production by mortgage originators) and of Treasuries by $10 billion a month. They will re-evaluate monthly but anticipate stopping these purchases by the middle of 2022. They will keep their holdings for the foreseeable future.

So, why? According to Mr. Powell, the overall economic growth in the US increased by 6.5% in the first half of 2021 but the real GDP growth slowed notably because of the summer surge of COVID. This affected industries like Travel and Leisure.

In addition, supply chain shortages are affecting the automotive industry, housing builds and renovations and gas prices, among other businesses. Demand for these industries have only increased, causing prices to go up and creating an inflation rate over 5%. This is very high.

One of the main vehicles under the Fed’s control to combat inflation is increasing interest rates. The Fed’s official position is that increasing interest rates to slow inflation is unnecessary because the conditions causing the inflation are transitory. Mr Powell confused the issue by stating that supply chains are not under government control and that the issue is complex, international and may continue for a while. So is it transitory or is it going to continue for a while?

I believe he is really saying that increasing interest rates will do more harm than good to the economic welfare of the vast majority. Reducing the amount of money available to us, reduces demand - middle class people, unable to afford things, buy less. That is not going to fix the supply issue, just the demand issue. Also, while the supply chain issue is complex, there are someones somewhere making decisions. Oil supply has not increased when it easily can, for instance. Making middle class people poorer so they cannot afford gas, so demand goes down (and prices go down) is much more painful than if someone just increases production to meet demand. Also, the Fed not buying financial assets will, by definition, lower demand for these assets, affecting the bottom line for some of these industries, and hopefully putting a little pressure on them to increase supply. The Fed will re-evaluate monthly, so let’s see what happens.

So how did this affect housing?

• Housing prices are up and we see no indication of their coming down any time soon

• Homeowners have seen a LARGE increase in their net worth, spurring the economy, increasing demand on supplies and increasing inflation

• Interest rates are at historic lows, making the price increases barely visible to buyers

• This current market is a win/win for buyers, sellers AND the CT economy

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Inflation is the Wildcard. If the industry powers that be and other factors, keep supply down, the only solution will be hurting the middle class with higher interest rates. THIS, I believe, should be your impetus to act now if buying or selling!