The December FOMC meeting and real estate market conditions

What do they mean for the real estate and home inspection industries?

Season’s Greetings All,

The Federal Open Market Committee met last week so it seemed like a good time to check in on the real estate market. Is it still a madhouse? Below is a summary of what happened in the meeting.

Meeting Summary

• Interest rates were raised another .5%, or 50 basis points if you prefer.

• Changes to the Summary of Economic Projections (SEP), increased the expected inflation rate for next year from 4.6% to 5.1%.

• Inflation is taking longer to come down than expected

For the last several meetings the FOMC has raised the policy rate by .75% so this is a bit of a departure, but not entirely unexpected. While it has been taking inflation longer to come down than the Fed thought it would, it is happening. However, we can still ‘look forward to’ tight monetary policy for the next several months up to maybe a couple of years. Mr. Powell and the other members are looking for more sustained evidence of inflation going down. Unfortunately, from the press statement and Q & A session, they’d also like to see a softer labor market, higher unemployment with lower wage growth. Personally, I’m instead hoping for an end to the Russian invasion of Ukraine and whatever has to happen to bring food prices back down. For more on that and general market conditions see below!

General Conditions

• Inflation rate is 7.1% with the release of November’s data, down from 9.1% peak in June

• Core inflation is 6%

• Food is 10.6%, down from 11.4% peak in August

• Energy is 13.1%, down from 41.6% (Woah!) peak in June. The Russian invasion of Ukraine and production cuts in OPEC nations are still affecting oil supply and pricing, but Biden has been pulling from the Strategic Petroleum Reserve. So, we’re not feeling the pressure so much.

• According to the National Association of Home Builders (NAHB), homebuilder sentiment has been in decline for 12 months.

• Mortgage rates have been lower, in the last several weeks.

Inflation information was taken from the Bureau of Labor Statistics (BLS) and Federal Reserve Economic Data (FRED).

Inflation has been declining for 5 months now, which is good news. We’re back to a little higher than we were last year. Last year’s inflation at this time was 6.8%, now we’re at 7.1% so we are making progress, but it is a lengthy process. Core inflation, which is regular inflation without food and energy, is at 6%. There have been two peaks in core inflation this year, in March when core inflation was 6.5% and in September, when it was 6.8%. The lowest core inflation this year was in June and July when it got down to 5.9%. So, it would be nice to see some sustained lower core inflation rates.

Food and energy are both down from their respective peaks, but! With less growing in the northern hemisphere over the winter, we may see food go back up. Energy has come down, hallelujah! It has, however, been artificially lowered by Biden dipping into the oil reserves in a way no president ever has before, according to ClimateWire. We can’t count on that forever, Biden authorized releasing 50 million barrels last year, 180 million barrels in March, and another 50 in November according to a White House press release [link]. That leaves us with about 350 million barrels left in the reserve. Still, being able to afford gas has certainly made a big difference for me in my budget and I’m certain I’m not the only one!

What Does it Mean?

Mortgage rates are continuing to lower, even with a base federal rate increase, and that’s a pretty nice sign for those interested in buying a home! With prices slowing or falling and lower rates, we could finally be seeing that buyer’s market we’ve all been hearing is right around the corner!

In new construction, people have been less and less interested in a new-built home over this year. According to the NAHB, builders are feeling very motivated to sell. Some 62% are offering incentives, which include price reductions, mortgage rate buydowns, and even paying for mortgage points for buyers. Now could be a good time to buy new construction. If you’re a real estate agent, it may be a good time to start showing clients newly constructed homes.

Happy holidays and thank you for reading!