Last week the Federal Open Market Committee met and increased the policy interest rate by ¾ of a percent. This is another aggressive rate hike by the Fed, but since inflation continues to increase it’s not surprising. Some people are even asking if it’s enough of a hike. This is the second ¾ of a percent increase in the last two months. Inflation is proving a tough opponent.
What does this mean for the real estate industry and therefore the home inspection industry?
We’re probably going to be looking at another shift to lower demand. A further shift to lower demand, depending on how you look at it. As rates on mortgages continue to increase, buyers will drop off. Increasing rates of inflation may also scare buyers away. On the other hand, we’re still coming down from a very tight seller’s market so this could mean an increase in home inspections. We also continue to see more jobs filled or added to the economy, which is a good sign for people buying homes.
Is this the last rate hike?
Nope. The goal is still 2%, but the distance to the goal has grown in the last month, unfortunately. Last month's total (aka headline) inflation was 8.6% and this June it’s 9.1%. Total inflation includes food and energy prices. Core inflation has decreased ever so slightly. It was 6% and now with June’s data it’s 5.9%. Core inflation does not include food and energy prices and has been seasonally adjusted. (From the Bureau of Labor Statistics)
Note on monthly inflation numbers: The month means over one year. So the June 9.1% means inflation has risen 9.1% between last June and this June.
A significant portion of the next meeting will depend on what happens in the world at large. Russia’s invasion continues in Ukraine, which continues to push food and energy prices up. Personally, I’ve seen estimates that Russia is about to run out of manpower and estimates that the war could go on for years. One notable difference between July’s meeting and June’s meeting is that the Fed no longer feels comfortable with a running plan. Chair Powell says in the press conference that changes and decisions will be made on a meeting-by-meeting basis.
Also, the Fed may wish to slow the hikes while the economy finishes adjusting for this and earlier rate increases. Next month we may not see another .75% increase. My apologies for how unhelpful that statement is, but it’s the nature of the beast. Times are chaotic right now and it’s hard to say anything about the future with certainty.
Longer-term plans?
From the Implementation Note issued July 27th, in July and August the Fed has, and indicates it will, let up to $17.5 billion worth of Mortgage-Backed Securities (MBS) mature. In September the Fed plans (and has planned for a few months now) to let up to $35 billion mature. A couple of years ago, back in 2020, the Fed was buying up MBS left and right to spur buying, to keep the economy going during the pandemic. Now it needs to let some of that debt mature and stay off the books.
What does that mean? It means fewer homes purchased, or at least some tighter lending standards. While many investors have probably factored lower federally held MBS into their plans, prospective homeowners probably have not. I say tighter lending standards because the government will not be buying as much housing debt as it was. If banks can't sell their debt, they may be less likely to loan their money to homebuyers.
According to FRED (St. Luis Fed Economic Data) the Fed held $2.72 trillion in MBS as of July 28th. In comparison, $35 billion is surprisingly little, only 1.3%. Also, if it’s the sort of thing you find interesting, then I heartily recommend playing with the report options in FRED, found in a link below. Chair Powell predicts the Fed will be shedding MBS like this for about two, to two and a half years to get things back in line.
Below is a graph of Mortgage-Backed Securities held by the Federal Reserve from 2020 to now.
And here is the entire timeline of MBS held by the Fed for perspective.
In 14 years the Fed has gone from zero MBS holdings to almost three trillion dollars.
In conclusion, we've learned a couple of things. One, we will most likely be seeing a slightly cooler real estate market with more room for home inspections. Two, the future is very uncertain. Three, inflation is still a driving issue. What does this mean for the markets? It means stay sharp and stay adaptable because tomorrow will be different from today. For some homebuyers it may also be a good time to make a larger down payment on a home since those dollars will have less buying power the longer this spike of inflation lasts.
Some of the above may seem like a bit of a downer so I would also like to leave you with this...
Fun Fact! As of June 2022, prices for food at home have risen 12.2%, but prices for food away from home have only risen 7.7%. That means you are almost- if you squint really hard- saving money by eating out more!
Thank you for reading!
Works Referenced
Bureau of Labor Statistics, U.S. Department of Labor, The Economics Daily, Consumer prices up 9.1 percent over the year ended June 2022, largest increase in 40 years at https://www.bls.gov/opub/ted/2022/consumer-prices-up-9-1-percent-over-the-year-ended-june-2022-largest-increase-in-40-years.htm (visited August 02, 2022)