Inflation, interest rates and buying or selling a home

There has been a lot of news in the past couple of weeks regarding inflation and interest rates.   The first question we need to answer is what is the Federal Reserve?  The Federal Reserve System (the Fed)  is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics led to the desire for central control of the monetary system in order to alleviate financial crises.  The two stated goals of the Fed are to stem out-of-control inflation in the economy and promote full employment.  Without getting into the weeds too deep it can be said that the tools used to stem inflation directly and negatively impact the unemployment rate in most cases.  That is, the way the Fed chooses to stem inflation is to raise the cost of borrowing money which can often result in putting people out of work.  Like it or not, what the Federal Reserve Bank does has an impact on our economy.

So what does this all mean to home buyers and home sellers?  I believe there are two main thrusts to this question.  One, higher interest rates now disincentivize those who are currently in a home from selling.  That is if you are in a home now and are paying a 4% interest rate on your home loan it makes little sense to move if you don’t need to then go on to pay 6.5% on a new home loan.  Last year there was a housing shortage with few homes to buy for those interested. This had the result in increasing inflation in the price of homes.  Two, new home buyers will continue to have fewer choices, and the cost to buy a home is more expensive independent of the actual price of the home.

Homeowners are staying put.  If you are living in your primary residence and are paying on a mortgage you acquired in the past 10 years or so you are sitting in a pretty strong financial position.  Your home is worth a bunch more and your loan is much lower than it would be if you established it today.  So why would a home seller list their home and move?  Well, because this may be a great time to do just that.  Higher interest rates create a circumstance where your buying power is just a bit stronger.  Investors have largely left the home-buying market due to an increase in interest rates (nearly 2% higher than a home buyer would pay).  Fewer are buying homes right now due to higher interest rates that are not expected to drop considerably ever again.  That is to say that 5.5% interest will be amazingly low looking into the foreseeable future.  People take new jobs, relocate and pass away and all of these folk need to sell their homes in a timely manner.  All homeowners in Northern Arizona have benefited from an extremely healthy market over the last several years.  With fewer buyers due to increased interest rates homes will be on the market for longer and longer periods of time.  When this environment exists negotiation between buyers and sellers is most possible unlike in the last couple of years.  Sellers are not losing money on any home they have owned for at least 5 years right not so there must be some flexibility in home pricing for those who must sell their homes.

For home buyers, there is a window right now where interest rates are at the historic average.  Interest rates are actually good if one takes out the artificially low-interest rates of the past 10 years or so.   I say with confidence, we will not see 4% interest rates in the future and we are unlikely to see 5% interest rates anytime soon. 6%-6.5% interest rates are now gold.  Take advantage of them.  If I am wrong then in the future refinancing is always an option.  If interest rates go up, you will wish you had listened.

If interest rates decline in the next few months (again I don’t expect to see them dip below 6%)   I expect another highly competitive home market with inflated home prices.  Buy your first home in Northern Arizona now.  I don’t see too many scenarios where this will have been a bad choice.