Most of the articles I write start with something that happened in my office that gives me an idea. Today I’m sitting in South Carolina with a friend discussing the housing market.
There are many factors that affect the real estate market and today I will try to explain monetary policy. Monetary policy is the policy employed by a nation’s monetary authority to control either the interest rate on very short-term borrowing (which banks borrow from each other to meet their short-term needs) or the money supply. By managing the money supply, a central bank aims to influence macroeconomic factors such as inflation, the rate of consumption, economic growth, and overall liquidity.
In the past two and a half years, the monetary policy of the United States Federal Reserve has changed direction. These changes in direction have resulted in drastic changes in home prices. At the beginning of the pandemic, the central bank increased the money supply. Trillions of dollars were pumped into the economy and bank borrowing costs were at historic lows.
Lower mortgage rates meant more people were looking to buy their own home. Some were first-time buyers who could now afford monthly payments. Others either wanted to downsize or upgrade to a larger home.
When these buyers entered the market, the economic rule of supply and demand came into play. Home values are rising faster than ever in 2021. The median selling price for an existing home was $346,900 in 2021, up a whopping 17% year over year. If you bought in early 2021, you could benefit from both lower interest rates and increased home value. Sellers realized that the rise in market values allowed them to get more money for their home than they thought. Some only realized their advantage after receiving multiple offers for their properties.
The common thread of 2021 was timing. Buying with low interest rates before prices have risen was the ideal outcome. It was even better to be able to sell at higher prices while borrowing for a new home at lower interest rates. Overall, 2021 was good for buyers and sellers.
Now the year 2022 is coming. While house prices increased by 17% in 2021, the headline inflation rate increased from 3.2% to 4.7%. Not a desired rate, but manageable. The problem in 2022 is that the inflation rate is expected to exceed 7.9% in the first quarter.
The best way I’ve described inflation is as an additional tax. To deal with this additional tax, the central bank decided to raise interest rates and reduce the money supply. The result is that 30-year mortgage rates have risen from 3% to 5% in the last two weeks. With higher borrowing costs, the number of buyers should fall. The question is what will happen to house prices? I suspect they won’t go down, but the rate of increase will slow down. Also, keep in mind that this article relates only to monetary policy. Other factors such as demographics, labor costs, material costs and government regulation continue to affect prices.
If you want to sell your house today, you will get a higher price than last year. When you buy a new house, you pay more for the house and when you need financing, the interest rates are higher. General interest rates and house prices are like the weather: they change.
Bob Hollick is an insurance agent for State Farm in Washington. His column appears in the Observer-Reporter every other Friday.