What he said, what it means; and other real estate related items

Federal Reserve Chair Jerome Powell reiterated that inflation is still “too high” and that the path to bringing it down will be “bumpy,” in his Thursday, Oct. 19, speech at the Economic Club of New York.

He added that the Fed remains “resolute” in its commitment to returning inflation to 2%. He said that while inflation appears to be heading in the correct direction, he feels there might be a need for rate increases before the end of the year.

What is the significance of that signal? Well, the mortgage interest rate for conventional loans is already over 8%, and the markets do not like the remark. The concern from investors is that an increased prime rate will diminish the money supply and make credit tougher to get for businesses and consumers which is what the Fed is trying to accomplish. It will mean a slowdown in spending on goods and services, and the investor’s greater concern is that the economy will slow to the point of falling into recession which will have negative connotations for the stock market.

After Powell’s remarks several economists that I read revised their forecasts that the prime rate would not significantly improve in 2024 as many had hoped if the Federal Reserve holds to their practice of increasing vice decreasing the prime rate. It doesn’t bode well for real estate nor for the consumer in the commodities markets.

By the way, here’s a headline that I just read. The CEO of JPMorgan Chase said the Fed has been “dead wrong” for the last 18 months. Huh, I guess that I am not the only skeptic of the Fed’s monetary policy.

Another real estate article I read asked the question; what do buyers want? I feel that I have a pretty good handle on that matter, so I was a little bit surprised by the author’s answer. It wasn’t lower prices or even lower mortgage interest rates; there is reduced interest in fixer uppers due to the high price of mortgage money and high cost of materials due to supply chain inefficiencies and high cost of transportation due to fuel expenses that buyers are demonstrating less interest in fixer uppers; they want turnkey properties. Home prices are very high and buyers want a finished home for the money. Given the number of calls and contacts that I get on a weekly basis from property flippers – contractors and investors buying a distressed property then fixing it up so that the renovated home can be sold at an optimum price – there is a market for the completed turnkey properties.

In case readers are curious about the ALTOS Market Activity Report for 92028, as of Thursday, Oct. 27, the number is 48, which is relatively unchanged over the last eight weeks. It means that we are still solidly in the neutral market zone. A score over 56 is a seller’s market and under 30 is a buyer’s market. Even with the higher cost of mortgage interest rate money and that we are in the fourth quarter of the year, which is normally a quieter period for real estate purchases, buyers are still out there though some of the inventory is starting to accrue longer market times.

But properly priced properties are still selling. To that point, my latest listing, admittedly a lower end property in the Canyon Lake area, was on the market four days before we received an acceptable offer at full price.

The owners were made aware of the market and agreed that this market is to be approached with caution and to not seek an optimum return on their investment, just go with appreciation. And the strategy paid off.

They were also aware that the condition of the property matters now, and they went to work like Energizer bunnies cleaning up after hoarder tenants who left the place a wreck. They replaced broken windows, entirely painted the interior and exterior, trimmed trees, paid several thousand dollars to have the accumulated junk hauled away and pressure washed the driveway and exterior concrete and carport. They were rewarded with an acceptable offer within days of coming active on the market, while other properties are sitting. The takeaway is that properly priced properties in a reasonable condition sell.