The Fed’s dual mandate includes price stability.
Typically this means when prices, (including household rent) surges, interest rates must go higher.
But obviously raising interest rates means somebody loses.
EX. 1 Higher interest rates means home prices drop, meaning homeowners and landlords and homebuilders lose.
EX. 2 Higher interest rates means anyone holding long-bonds without insurance loses. SVB was just an extreme case of this.
What we know for sure, is that Fed policy is seldom/never neutral. It always picks winners and losers.
So who will the Fed choose?
Will it keep rates low & choose to benefit banks like SVB and benefit people who bought big houses when rates were low? (aka “the rich”)
Or will it raise rates & choose to benefit people who are primarily consumers and renters? (aka “the poor”)
.
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Soaring rents pressure US inflation, raising likelihood of Fed rate hike
U.S. rent prices rose by the highest amount in nearly 42 years in February, keeping inflation stubbornly high and opening the door to another likely rate hike from the Federal Reserve next week.
Rent prices climbed 8.8% year over year in February, the biggest annual increase since August 1981, the Bureau of Labor Statistics reported March 14. Overall shelter prices — rent and other categories including hotel room rates and a measure of homeowners’ lodging costs — climbed 8.1% annually and contributed more than 70% to the broader consumer price index’s 6% rise, according to the bureau.
It is understandable that landlords, large and small, are feeling increased pressure to raise rents. (I came really really close to making the mistake of buying an investment property at the top.)
Whatever long-term historic images we once had about making money in real estate may not be as accurate as they once were.
“After nearly a year, the housing sector’s contraction is coming to an end,” said NAR Chief Economist Lawrence Yun. “Existing-home sales, pending contracts and new-home construction pending contracts have turned the corner and climbed for the past three months.”
Yes it’s hard to get handle on what is happening nationally (although I have an educated guess.) Here locally it’s still kind of a seller’s market. Very few people are selling (prices up) and buyer’s seme to be in a hurry to buy before rates rise (prices up.)
Nationwide, after months of decline, the MEDIAN sales price rose suddenly.
That could mean all homes everywhere are appreciating, but more lilley means that only “homes for the rich” are selling.
Picture (exaggerated numbers below)
Last year 50 “regular” homes sold and 50 sold for over $1 million.
This year, 49 homes sold, the price went down but 51 sold for $1 million.
When the middle class is hurting and middle class homes are not selling the median home price still looks positive.
Here is an interesting chart.
The case shiller index attempts to control for such oddities as median home price vs typical home price. I don’t know it’s methodology but I know that it is widely-used.
MILD
After the S&L crisis, There was a housing “correction” of about 3% (Case-Shiller) and took about 15 mos to bottom.
Super-Bad
In the GFC (Circa 2008) The housing correction was about 26% and took 70 months to bottom (5.8 years)
Right Now
The current home-price correction is about 10 months old and has resulted in a 3% price drop. 10 months is way too soon to know anything in housing, but so far it is the most sever of the three.
