How does the economy affect current interest rates and real estate economics? There’s been quite a bit of misinformation and misunderstanding about our economy and how it is affecting the real estate and mortgage industries.
A layer of fear is affecting so many, I wanted to share some information that hopefully sheds light and encourages you.
As a consumer you need to understand how the current economy effects Long Beach real estate selling or buying of homes in the area. This is especially true in shifting markets where buyers and sellers are experiencing uncertainty and confidence is lacking.
The information below is based on historical trends and will help demystify some of the confusion.
What is inflation and how does affect real estate economics?
Inflation– Inflation is the arch enemy of interest rates. It devalues mortgage bonds (MBS-mortgage-backed securities) and causes people to sell bonds.
When people sell bonds, interest rates rise. In other words, inflation shrinks the future value of money. Investors are forced to raise long-term rates, including 30 yr. mortgages, to protect their expected future returns.
- We just received inflation numbers for June 2022 and inflation is up 9.1%. This is the highest since 1982.
Fed Raising short-term rates– The Federal Reserve is raising the short-term rates to curb inflation. This does not raise the 30 yr. fixed rate.
This does raise the rates on auto loans, credit cards and home equity lines of credit, etc. The last two rate hikes in June and July of 2022 helped bring down the 30 year fixed rate.
Because it shows that the Fed is trying to bring inflation down.
What are the current interest rates?
Current Interest rates– At market closing on 7/29/2022 the interest rates on the 30 yr. had settled at approximately 5.25% for best-case loan scenarios.
Do you think Interest rates are too high?
Rates are not high! The average interest rate going back to 1975 is 8.75%. That means the 30 yr. fixed is more than 3% lower than the average rate! I’m sure you wish you could lock in the interest rate in right now in the 2%s.
But those rates are gone and all you have are the current low rates and the rates in the future. Most mortgage analysts believe rates will drop more towards the end of the year and into the new year as the country gets deeper into the recession.
Do interest rates drop during a Recession?
Yes. Interest rates have historically dropped during recessions.
There is no guarantee but, we could see lower rates in the 4th quarter of 2022 and into 2023. This would mean these current buyers may be able to refinance soon to a lower rate but as I said no guarantee.
Did you say “Recession”?
Recession-Lions and tigers and bears, Oh My! We currently have three telltale signs from history that have indicated a forthcoming recession.
1. Although it has not been made official, we just had our second consecutive quarter of negative GDP growth.
This was the case in all past recessions. How can we be heading into a recession when unemployment is at a low? That is the misunderstanding.
2. Recessions don’t begin when the unemployment rate is at a high, they begin when they are at a low. Think of the Gulf war recession in 1990, Dot Com bust of 2001, and the great recession of 2007. Unemployment was at lows before all these recessions. It starts with hiring freezes, layoffs, and then snowballs quite quickly.
3. Inverted yield curve. This is when the long-term rates are lower than the short-term rates. We have been flirting with this for some time now.