We have been monitoring the situation closely and it appears that the Federal Reserve is desperately trying to curb inflation, which has now risen to 8.5%. It seems they are taking a page out of their playbook from the 70s and 80s…

As a reminder, back then, in order to control inflation, when they raised interest rates rapidly—to about 18%! However, the difference between now and then is that now, we are a more globalized economy and have more tools to use.

But, the seeming frantic nature of their movements (some of the FED chairs are calling for increases that would put the rates at 7% by fall 2022) is very disturbing to the bond market. These actions show investors that the FED has basically been asleep at the wheel and didn’t act when they should have to prevent things from getting this bad!

Here is another dynamic—the rapid increase in rates is also pushing the country closer to a recession. The cost of borrowing money is now much higher. Consider this:

On the same home $500,000.00 with 20% down (meaning a loan amount of $400,000.00), we were around 2.5 to 2.75% on the 30-year fixed at the beginning of the year. Now we are around 5.25% (on average)

$400,000.00 loan amount at 2.5% = Principal and Interest payment of
$1,580.48

$400,000.00 loan amount at 5.25% = Principal and Interest payment of $2,208.81

This is a swing of $628.33/month in monthly payments! This is why clients who were tight at the beginning of the year have effectively been priced out of the market (this isn’t even considering the psychological impact of clients seeing a 5% rate after almost 2.5 years of sub 2% rates). This hasn’t dramatically affected some of our market areas, but let’s see what happens after the rate hike scheduled for May (next month).

We are keeping an eye on all of our clients and regularly re-evaluating their sales prices to ensure that they still qualify for the loans they were initially pre-approved for.

BUYERS AGENTS! This is a huge opportunity for our clients, especially builders! What will happen is that they will have homes that the clients are now priced out of they will need to offload! Builders are taking much longer to build homes due to all the shortages (especially recently with China’s ports on lockdown due to the Coronavirus).

We will keep you updated with all things rates so stayed tuned!