Last week the Federal Open Market Committee met from Tuesday into Wednesday and decided to increase the policy interest rate by ¾ of a percentage point. A couple of weeks ago the Fed had predicted increases per meeting would be ½ of a percentage
Why the change in plan? According to Chair Powell, it’s because inflation is proving more stubborn than the Federal Reserve had predicted (Federal Open Market Committee). The Russian invasion of Ukraine continues to push gasoline prices through the roof and COVID lockdowns persist in China which is disrupting supply chains worldwide.
What does this mean for the real estate industry and subsequently the home inspection industry? It is almost certainly going to mean a decrease in demand for home purchases. As the rates on mortgages increase, buyers become more cautious. This may mean an end to the ferocious seller’s market we’ve been experiencing. It may also push the number of new homes constructed upwards even higher.
Both newly constructed and pre-existing homes have a mortgage associated with them. But! Newly constructed homes are significantly cheaper to purchase, on average, than ‘used’ homes. The national average cost to construct a home is $282,299 while the median cost to buy a home is $428,700 (Crace). So as rates increase we may see more people willing to wait for a home to be built for that lower price tag.
Side note on comparing averages to medians. This paragraph is for people concerned about statistics terms. If you don’t care about statistics terms feel free to skip. The average home purchase price is $507,800, but that’s because relatively few people buy really, tremendously, expensive houses (World Population Review). Most people will be looking at a lower range so we compare the average construction price to the median home purchase price to get a better idea of what the ‘typical’ American will be spending.
Either way we’re going to be seeing more home inspections soon, and have in the Delaware area already, as sellers lose their command of the market.
Is this the last rate hike? Nope! Not by a long shot. With this most recent change, the federal funds rate is 1.6%. The goal for the end of this year is to get it to between 3% and 3.5% and possibly higher than that in 2023 (Federal Open Market Committee).
What if Russia halts its invasion tomorrow and China swears off COVID lockdowns? There will still be more rate hikes. The current total, or headline, inflation is 8.6% right now according to the Bureau of Labor Statistics (US Bureau of Labor Statistics). That’s really high. If you take out food and gas prices and do some seasonal adjustments inflation is still quite high at 6%. The current Federal Reserve goal is to get inflation down to 2% so we’re at triple desired inflation right now when not including food and gas.
On the long-term horizon, a new class of buyers could emerge over the next several years. Retail workers and other folks in the lowest wage sectors may make enough money to become homeowners. The lowest wage sectors of the economy are where the country has seen the most real wage growth over the last couple of years (Holzer)and if that trend continues employees in those brackets will have a better chance of saving up enough to buy a home. This won’t be happening any time soon, but it’s always nice to plan ahead.
Conclusions - “The Only Constant in Life Is Change.”- Heraclitus
Thanks for reading!
Crace, Miranda. Building a House: A breakdown of How Much it Costs. 02 June 2022.
Federal Open Market Committee. Transcript of Chair Powell's Press Conference June 15, 2022. Washington DC: Federal Reserve, 2022.
Holzer, Harry J. Tight labor markets and wage growth in the economy. Article. Washington DC: Brookings, 2022. https://www.brookings.edu/research/tight-labor-markets-and-wage-growth-in-the-current-economy/.
US Bureau of Labor Statistics. Consumer Price Index Summary. 10 June 2022. https://www.bls.gov/news.release/cpi.nr0.htm. 17 June 2022.
World Population Review. Median Home Price by State. n.d. https://worldpopulationreview.com/state-rankings/median-home-price-by-state. 16 June 2022.
Jocelyn Fulljames graduated from the University of Delaware with a Master's of Science in Finance in 2016