Is The Fed Trying to Tank The Housing Market - Or Just Slow It Down

    Agents in many of the markets we work in are telling us that they are now finally seeing a slowdown in the market.

    One agent who lists high-end homes in the Bay Area told me that he “used to tell sellers to remodel their kitchens, update flooring, repaint walls, and spruce up landscaping before listing the property,” but now he tells sellers to “just clean the toilet and get out.”

    So, is the market finally slowing in response to higher rates? Yes, but I will put this in perspective below.

    There appear to be three factors that are giving buyers less warm (as opposed to “cold”) feet:

    1. Concerns about the rampant housing appreciation we have seen over the last few years and whether or not it will reverse course;
    2. Higher rates and how they will affect both housing payments and the market overall; and
    3. The stock market correction, as buyer sentiment is influenced by how wealthy they feel and how much liquidity they have available.

    While I well understand buyer concerns, I don’t think they should be concerned about the housing market overall – and I will use the following article to explain: The Fed Wants to Cool the Housing Market.

    I am pro-housing, so I normally do not like to share articles with titles like that.

    But – I LOVE this article because it makes the point that the Fed is NOT trying to tank the housing market, but ONLY slow down the rate of appreciation.

    The article quotes an MIT research scientist, Anne Thompson, who wrote a paper with the famed Yale economist Robert J. Shiller, arguing that soaring home prices do not reflect a bubble!

    This Time Is Different

    In 1994, when rates shot up, home sales fell by 20%.

    But, this time really is different per Ms. Thompson who stated: “the correlation between house price growth and mortgage rates, while still strong, has been declining though over the past 20 years.”

    She further said: “I wouldn’t even necessarily call it a cooling, I’d call it a flattening of rates of appreciation, but not this year because there are still relatively low interest rates…mortgage rates have historically been much higher.”

    Ms. Thompson also made the case that “regional markets will remain stronger now because buyers have more flexibility on where they work and they have had strong wage gains amid a shortage of workers.”

    The article also notes the other factors bolstering the market that I highlight often: (1) record low inventory still; (2) very strong demographic demand that is much different from the 2008 era; and (3) the continued prevalence of cash offers from investors.

    5% Appreciation

    This is the primary point of this blog. Yes – we are seeing price reductions, as the article mentions, and fewer offers.

    BUT – the article makes the same point that Barry Habib made in one of his recent MBS Highway videos:

    We are not going to see depreciation, but only a slowing of appreciation. And – THAT is what the Fed is shooting for.

    The article and Habib both predict 5% appreciation in coming years – at least.

    As Habib reminds us often, 5% appreciation against a $500,000 house is $25,000.

    And – if a buyer only puts down $50,000, that is a 50% cash on cash return.

    So, even 5% appreciation is a gift, and now is no time to panic whether you are a buyer or a seller.

    Jay Voorhees
    Founder/Broker | JVM Lending
    (855) 855-4491 | DRE# 1197176, NMLS# 310167

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