According to the September 22, 2022 Forbes article, there is a debate over whether the U.S. may have entered a recession as of this summer of late 2022. By definition, a recession it is where “there is a decline in economic activity (Negative Gross Domestic Product) for two consecutive quarters”. As Forbes mentions, the debate lies in the fact that there is still a strong labor market and corporate earnings growth, figures they are using to say we have not entered a recession. Please keep in mind that the global economy also bears weight in this equation as well.
What I can tell you however, is that due to the Feds consistent upward movement of the overnight rate, causing mortgage rates to rise, has one mission in mind, to bring down heated inflation, which had hit record highs not seen in 40 years. Our current inflation rate is at 8.26%, which compared to the rate of 5.25% this time last year, is now running 57.35% higher than our average of 3.26%. The last time we had inflation at this height was back in the early 80″s.
Fed Squeezes – Hoping Markets Will Shift
I figured it is best to just come out the gate with where we are at currently, since I am sure we are all watching or reading the news. We have seen the mortgage rates double to the high 6% range and the housing market slowing down, nationally. The Fed’s battle with inflation is not just the cost of goods and services, but it also has to do with consumer spending as well.
We have come out of a 2 year period of an influx of money coming in and home values appreciating to the likes we have never seen. Navigating the pandemic was not only a challenge economically, it also brought forth new avenues of growth, i.e., stock market, home values. In the bigger picture, there have been many contributing factors to the rise in inflation, besides the elevated markets. The cost of goods and services, much of which should be adjusting down, have not.
The opposite of inflation is deflation, which could be where we are heading, with the Fed ultimately trying to bring things back under control, economically speaking.
I sometimes refer to the last two years as a wild party. Many things were operating off the rails. Home values went up anywhere from 37-40% here in Sonoma County, with the national average running just above or below this. The stock market surged to over 35,000 points. Some were taking equity out of their homes to invest in the stock market. PPE loans that were given to businesses to keep afloat were being used for luxury purchases.
Not that all was negative. Growth and expansion are good under healthy economic conditions, not navigating a global pandemic with money being funneled in. My point is this, the phase of growth these last two years was not only enormous, but it was a temporary one, which was ultimately unsustainable. This is what has contributed to higher inflation and why we are now in a shifting market.
A Bit of Perspective
As this market continues to adjust, the “new” reality will be recognized by all. Home values will adjust down from overvalued pandemic prices. There won’t be any overbidding, unless you have priced it to do so. With the mortgage rates having doubled to now a 6.50% range, it has also increased what the previous payment at 3% was. See below:
(March 2022 – October 2022)
Example: $700,000 @ 3.00% = payment of $2,951.23
$700,000 @ 6.50% = payment of $4,424.28
Difference of $1,473.25
(March 2022 – October 2022)
In a nutshell, it costs 50% more per month for the same amount of money now, than it did in March of this year. If you compare to where we were at in January of 2020, considering home prices were lower (estimate $500,000 instead of $700,000) and rates that were at 3.7%, the payment for the same home is almost double from what it would have been 2 years ago. This leads to an affordability issue.
(January 2020 compared to September 2022)
Example: $500,000 @ 3.75% =$2312/month
$700,000 @ 6.75% = $4,540/month
Difference off $2,228 (almost double the payment)
This is why we are starting to see adjustments in home prices. The cost of many has been rising and is now adjusting the price of homes, very gently I might add. The aim is not to stop the housing market, but to bring it back into a better balance.
Surveys show that 78% of mortgage holders today have secured a rate of 4.00% or lower, making the thought of moving and obtaining a higher mortgage rate, challenging. But eventually people tire of fear and long for movement, which will once again add more movement to the market. If inflation is brought down to the target rate of 2.7% in the first quarter of 2023, we could see a reduction of the mortgage interest rate back to 4.5 -5.0%
How To Participate In This Market
If you are looking to buy a home and stay in it, this market will be a good onto get in on for two reasons. Number one, the competition will far less. Number two, serious sellers will be more apt to negotiate to a happy medium with serious buyers. On both sides of the transaction, it will involve parties that have accepted the current market reality and are willing to negotiate. It once again returns to positive movement forward, which is where we should always to to be heading.
For those selling their home, having a seasoned agent who truly understands this market we are in and adjusting into, as well as how to best get your home sold will be your best option.
For a seller, the one thing you don’t want to do in a shifting market is to be chasing it.
Heading Into 2023 – New Opportunities
As I have mentioned in previous writings, it is very difficult for anyone to predict the housing market. There are so many opinions and voices out there, it begins to be challenging to navigate.
As I mentioned, I am seasoned in both the mortgage industry as well as real estate for over 30 years. I do see values continuing to adjust a bit, as they have already been doing. They will have adjust in order to offset the current cost of money and out of the “pandemic pricing”. But with that said, I also believe that Sonoma County has leveled up as far as desirability, due to the influx of movement due to the pandemic.
In our housing market, we do have growing inventory as well as market movement. Though the housing market can appear to be splintered, meaning cash buyers vs. qualified buyers, I do see that changing a bit as well. Qualified buyers will have a better opportunity this quarter and heading into 2023 to purchase a home. If you can buy, you will also have the opportunity to refinance when the rates adjust down once inflation is under control.
I would also pay attention to the stock market, as it is fluctuating above and below 30,000 points in reaction to overall economic climate. Worth noting is that fact that over $413 billion dollars went into the stock market in 2021 alone, superseding the previous 18 years (2002 -2020) at $279 billion. The height of the stock market is also indicative of the amount of money put in these past 2 years.
I am an optimistic realist. You cannot be a Pollyanna when it comes to the markets. Seeing things for where currently are and how the publicized narratives affect the masses, can indicate future movement. More optimism, more expansion. More fear, more retraction. When it comes to a recession, view it as a reset. They are needed to get things back into balance and the quicker they do, the shorter the recession.
But before I close this out, remember this. Markets always move up and down. Growth is ultimately what everyone wants. With that being said, recognize that when markets do shift, a brand new set of opportunities are born. You just have to see them. This is not 2008 and history does not repeat itself. Our patterns and choices do.
We are in a time of adjustment and rebalancing. Just as nature keeps itself in balanced, our markets will do the same, which even though may smart as we move through it, will ultimately get things back into a better and more sustainable movement forward.