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If High Rates Bring Down Housing Prices, Will Low Rates Push Prices Through the Roof Again? Inflation Too!

If High Rates Bring Down Housing Prices, Will Low Rates Push Prices Through the Roof Again Inflation Too!

Pundits far and wide are 100% convinced that higher rates are the sole reason the housing market is softer now.

Higher rates are no doubt a factor, but there are other factors too including: (1) “The Narrative:” All the talk about a softer housing market clearly influences consumer behavior. Narratives also impact inflation and other asset classes; (2) Reverse wealth effect: When other assets (stocks, crypto, etc.) are down, consumers are less likely to spend on housing; and (3) Consumer Sentiment/Weaker Economy: Consumers are less likely to buy a major asset when consumer sentiment is down and/or the overall economy is weaker.

I still think there is about a 95% chance that interest rates will plummet sometime in the next six to twelve months in response to a recession, lower inflation, and/or the Fed’s stark realization that America can’t begin to afford higher rates.

In any case, if higher rates are the sole reason the housing market is softer, will the soon-to-be-here lower rates push prices through the roof again?

If that is the case, it is one more reason to buy now to take advantage of today’s slower market, knowing that a refi into a much lower rate is very likely.

Last Week’s Sky-High Inflation Report!

On July 7th, I wrote this blog: Is Inflation Over?

And then, less than a week later, we got the highest Consumer Price Index (CPI) report in 40 years – at 9.1%!

Holy bad timing, Batman! 😊

But, I still stand behind the gist of my blog and encourage everyone to re-read it.

Last week’s report was from data over the previous 12 months – so it will take a while for the high prices of the last 12 months to work their way through the rolling 12-month data.

Similarly, as prices fall, it will take some time for those prices to work their way through the rolling 12-month data.

Hence, we may still see even higher year-over-year inflation reports, and inflation may not actually “peak” until later this year (as Barry Habib of MBS Highway reminds us often).

The bond market apparently agrees with me, as bond yields only rose a little in response to the inflation news before falling back down.

If bond investors expected inflation to remain at 9%, they would not be happy with 10-Year Treasury yields below 3%.

Reminder: Higher Fed Funds Rate = Lower Mortgage Rates

Here is one more quick reminder, courtesy of Barry Habib today.

The Fed will likely only raise the Fed Funds Rate 0.75% this month, and rates rose in response to that news – but NOT for the reasons you think.

If the Fed was going to raise the Fed Funds Rate by a full 1%, like many thought they would, it would have been perceived as an even stronger effort to fight inflation.

And any action that will bring down inflation will likely bring down mortgage rates.

So, a larger increase in the Fed Funds rate would likely result in a decrease in mortgage rates.

This is another reminder that the Fed does not control mortgage rates in the way that many people think they do.

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