The Federal Reserve, housing prices, borrowing costs, and home inventories are on the current radar. And of the four, you might think the Fed is not part of the group but they are all tied together.
The Federal Reserve (the Fed) is the central bank of the U.S. and is responsible for setting monetary policy, controlling inflation, and maximizing employment. On the employment front, the Fed’s goal is to create conditions where employment can thrive without causing runaway inflation. The Fed must strike a balance between fostering job growth and maintaining price stability (inflation).
If a potential home buyer feels that their current employment is stable and can easily secure another position, this lends to a positive environment in the home-buying decision. If the Fed can control inflation, this means that borrowing costs, which are tied to inflation, could remain relatively low.
In the past few years, inflation has been on the rise topping out in June of 2022 but has been declining. During that time and up to today, borrowing costs (30-year fixed) for home buyers have nearly tripled from 3% to almost 8%. This has significantly increased the cost of a loan.
At the outset of the pandemic in March 2020, the Fed looked to stabilize the capital markets, which were under severe pressure as the country “locked down.” The Fed stepped in and through Quantitative Easing, was able to stabilize the markets and lower rates pushing the 30-year fixed-rate mortgage to a record low of 2.65% by the end of 2020.
Low rates created a boom for potential home buyers as staying at home meant working from home. This sparked a huge demand for housing. And with this huge demand combined with the lockdowns, inventories were depleted. As a result, it led to a low inventory environment and the frothy prices we are experiencing today.
So, we can see how all the above are tied together with the Fed.
Bottom line: Although home prices remain high, these gains will eventually cool off as all types of hot markets usually do. We will have cycles that are both negative and positive. In today’s market, you need the right timing and secure employment to take advantage of home ownership. Remember, it is not a right to own a home. It takes hard work, planning, a down payment, and the ability to repay the loan.
Source: Mortgage Market Guide
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