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How Does the FED and Russia Impact Housing?

WOW.. could the timing be more interesting?  Many will say the Fed is behind in its action to raise the Fed Rate and control inflation.  No one is probably thinking that more than Powell himself as Russia invades Ukraine. Let’s break down the impact on housing.

There were 3 rate hikes identified at the Fed December board meeting.  Then with the release of a 7.5% Consumer Price Index, there was word of increasing the number of hikes to 7. Bullard’s additional comments threw the 10 year into a panic and pushed rates above 4% last week as he noted 100 bps are needed to happen before July 1st.  The market became weary that the Fed knew what it was doing and what their impact on housing would be.

Note: this is atypical. Typically the 10 year treasury will go down as the Fed raises the short term Fed Rate to control inflation as inflation strips away the benefit of long term bond income.  In this case, it wasn’t the raising of the rate but the fear we were already behind the curve in a solution that the bond market didn’t like.  As the fear drove the 10 year above 2%; our 30 year fixed rates moved above 4%.  Watch this.  If the 10 year moves towards 2.5% our 30 year fixed will climb to 4.5% and impact our buyers affordability in a rising home price market.

If I look back 6 months the principle and interest payment on a $600,000 loan was almost $500 less than it is today.  That’s a 19% increase in payment without accounting for the approximate 10% home price increase that happened during that same 6 month period. Needless to say, the FED impact on housing is prevalent.

 

Back to Russia.  Okay… the Fed is behind the curve and planning on pushing up the Fed Rate as soon as Quantitative Easing is complete… i.e. March.  Without Russia, we might have seen some relief in the mortgage rates as the Fed started raising rates.  They still have Quantitative Tightening (QT) ahead which will push rates up… but for a minute we could see rates go down, then as QT kicks up, rates will rise until the Fed officially pushes the economy into a recession.

Note.. a recession is simply 2 consecutive quarters of GDP decline.  70% of the GDP is consumer spending.  Consumers are insatiable and putting an incredible strain on the lack of supply.  A little drop in consumer confidence and consumer spending WOULD NOT be a bad thing.

In comes a war… unbelievable in fact.  It’s hard to imagine with today’s world economy, instant new cycles and viral videos that we would get here.  But we did.  Now Russia who is the worlds biggest exporter of fertilizer and Europe’s biggest supplier of oil and gas, is under a number of sanctions and possibly more will be applied.  Ukraine is also not exporting as they are fleeing their homes for safety.  They supply the world with manganese for steel, iron ore, barley, corn and are Europe’s biggest supplier of Uranium.  Supply is further constrained.

In addition, China and Russia are very strong allies.  If China supports Russia with this invasion, look to Russia supporting China in it’s invasion of Taiwan.. the world’s biggest supplier of micro chips.

Extreme supply constraints is how Russia will impact the U.S.  And as stated before.. the timing could not be more interesting.  As the Fed was just about to raise the short term Fed Rate to control inflation; now their move will have little to no impact.  As the price of food, gas, rare minerals which are used to manufacture the products we consume, the houses we build, the cars we drive will continue to go up regardless.  The Fed’s action now has less impact.  In fact, if they raise the Fed Rate too much, all they will do is increase the cost to borrow, build and supply here locally.  It’s a hard choice they have to make, as we aren’t just talking about an impact on housing anymore.

Constrained supply with insatiable demand is not a good mix.  Russia could move us from going into a recession to a Stagflation economy.  Stagnating economic growth while pushing up the price of everything.  Look for higher rates short term as we work through this economic dilemma with days of uncertainty giving the 10 year a chance to relax.

When your buyers go under contract, LOCK!.  Don’t waffle on what will happen in March.. as the impact is skewed even more now with Russia.  If the payment matches the budget, lock in the rate.  Buy now not later.  House prices will continue to go up as builders will continue to be strained getting permitted homes started and started homes complete.  Investors will continue to soak up supply of single family homes knowing rents will continue to go up as buyers get frustrated and turn to renting.  Rent for a 1 bedroom in Denver is now up to $2,178.

New construction … I get asked all the time.  Should I lock?  Rates will go down if we get pushed into a recession.  Rates will stay high if Stagflation is where we go.  Again.. if the budget works LOCK IT.  The only hesitation I have on new construction is when will it close?  Get a firm date, as extending rate locks is not cheap.

Worried about rates going down after you’ve locked in?  Refinance.  Done.

 

REALTORS… These are your personal LENDING ADVANTAGES…


Have you lost a deal to another buyer-lender?  Why?  What did they have that you didn’t?  Don’t say cash… only 18.7% of our sales in the last 30 days were cash.  So if they came in with a loan, could you and I have partnered together to get your clients under contract?  Some lenders are limited in what they can offer; but as the highest producing Branch Manager at Fairway, I have a red phone on my desk to the top.  The Rueth Team wants to be your biggest advocate and your clients biggest fan.
What needs to be added to this list to give your buyers the edge? Let’s do it!

  • $1000 to the buyer and seller if we push closing due to the loan
  • Lock and go for buyers worried about rates going up.
  • 8-10 Day Closings
  • Waive Loan Availability
  • Waive Appraisal Deadline with an Appraisal Waiver
  • Appraisal Gap Insurance
  • Waive Inspection Objection … pass/fail
  • Protect $15,000 of their EM with our EM Guarantee with our TBD Underwriting
  • New build buyers want stability with our extended locks
  • Options Options Options… 3.5% down jumbos, 55% DTI jumbos, LLC investment purchases with 15% down
  • Cash buy/Bridge Funds

30 Yr Olds Will Be the Richest 40 Yr Olds

Generation X was the smallest generation and after we had hit peak homebuying years, the bottom was falling out of the housing market.  I was 40 in 2010 and many of us were rebuilding, finding jobs, recovering from losing a house, etc.  Many Gen X had to start over when they were 40.  Today 30 year old millennials are in a booming economy, filled with tremendous home equity and stock market gains.  Housing is incredibly strong with 3-5 years more of insatiable demand.  Then those 30 year olds will be ready to upscale when Babyboomers are ready to unload their homes.  We thought the silver tsunami was in front of us before the pandemic, but it was delayed on fear, lack of inventory, and the low cost of aging in place.

Why do I bring this up now?  In the middle of high inflation, low inventory and a Russian-Ukraine war? Because despite the impact on housing, there are opportunities in front of us.  Big ones.  As these 30 year-olds age into their prime spending years they will consume.  Consume nicer homes, vacation homes, investment homes, boats, cars, travel.  Consumer spending is still up despite the higher cost of everything.  It was up 2.1% for the month greater than expectations and in the face of 5.2% core PCE inflation numbers.

What are you doing today to grind in a way that is different than everyone else?  Not the negative grind quoted in yesterday’s market update by NAR, Freddie Mac, and Moody Analytics.  But the one that lifts you and your clients up.  The one that give you purpose and drive despite how hard this market is.  Grab a vision so strong you are there as these 30 year olds become 40 and want to take over the world.  Maybe you want to take over the world with them 😉

 

Nicole Rueth has been passionately advising clients on their wealth building and home financing strategies for over 17 years. Her path has been non-conventional and it is a benefit to her clients.  www.TheRuethTeam.Com.

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