Let’s talk about inflation. The real estate market is up 20% nationwide right now. Stocks are up (with the exception of a few tech companies). Commodity prices are up. We are seeing prices of everything go up because of the Fed’s monetary policies. From the supply side, we are seeing low inventory. A lot of institutions are buying houses directly from Opendoor or Zillow Instant offers, away from small investors and regular homebuyers. This creates more demand for real estate and drives up prices even more. The market is hot. If you have a pre-approval letter, ready to shop for a home, you know how frustrating the market is. This is the biggest seller’s market in recent years. Here’s the scoop. The market is on pins and needles waiting to see what actually happens with longer-term inflation. Investors know that massive inflation is happening, but the Federal Reserve is taking the stance that everything is under control, “inflation will come down, we'll balance out at around 2% and we'll slowly raise rates.
Most folks in the investment community don’t believe the Fed has it under control. They think we’re going to see hyperinflation. Mortgage rates will be raised through the roof, and real estate prices will tank! Why? We already know the clear link between mortgage rates and home prices in residential real estate (cap rates in commercial real estate). The quick rule is that for a 1% increase in mortgage rates, we will see property prices go down by 10%. This happened in May 2018, when the Fed tapered interest rates and tightened quantitative easing, the market freaked out, where we saw real estate prices tank 10-12%.
Going forward, the Fed will decide whether to taper interest rates. If they do decide that inflation is rampant, they will start by reducing purchases of mortgage-backed securities (MBS). Currently, every month, the Federal Reserve is buying $40 billion of MBS, artificially keeping mortgage rates low. When they stop buying, mortgage rates are going to go up. The next few months will be interesting, as we go through a fork with two possible futures.
Future One - Controlled Inflation Path one has controlled inflation.
If we see inflation stable and the Fed in control, real estate prices should stay stable, and continue to trend in the slow and upward direction. Perhaps not the rate that we have seen in the past few months, but a normal and healthy 4-5% natural growth. Supply will start coming onto the market, as evictions and foreclosures go through to free up inventory.
Future Two - Hyperinflation Path two is hyperinflation.
If it comes September-October, we start seeing inflation ramp up and not down, and it happens to be long-term, systemic, lasting for three four-five years, the Fed has to raise rates much sooner than expected. This will force mortgage rates up fast. The taper is going to push rates up. If the Fed raises rates say 2% in the matter of a month, the market could go down by as much as 20%. How to prepare for this inflection point In the short term, it makes a lot of sense to get into the market before the Fed starts tapering mortgage-backed securities. Because once the Fed takes action, rates can easily go up by half a percent within a day. We believe that the best way to be ready is by just being prepared. If rates go up and you are already locked in on a 30-yr fixed-rate mortgage, you will weather the storm. Banks don’t issue margin calls in real estate. On the other hand, if you have short-term variable rate financing, rates might change and you should be prepared to have to start paying more on your mortgages.
Regardless of which type of mortgage you have, BetterCapital.us can help you keep track of their investments, operations, and cash flow. So that you can have a good understanding of how different mortgage rates will affect your existing investments. September-October 2021 is going to be an inflection point. Let's see what happens. If you're looking to buy after September-October, “Is inflation here to stay or not” is going to drive real estate prices. If all of a sudden inflation starts trending down, you can see a lot of people who are waiting to finally get into real estate. On the other hand, if home prices come down due to higher mortgage rates, keep in mind that it doesn’t mean that houses will be more affordable because of the higher rates.
For more information, you can visit Real Estate Calculators.
