Review of all things Real Estate: What they did (or didn't do) and what happened?

In this weekly article, I have lamented what appeared to be seemingly capricious action by the Federal Reserve Board regarding monetary policy (versus fiscal policy, aka government controlling its spending) to try to curb inflation and get it down to 2%.

I have expressed concern that it will take 12 months for changes to manifest and, since we have endured 12 Prime Rate increases in the last 13 months, it occurs that there hasn’t been sufficient interval time to analyze the changes.

The Fed met on Thursday, Nov. 30 and, for the second time in two months, they left interest rates unchanged. And what was the reaction? While still inconclusive in that there isn’t clear consensus, the headlines generally appear to agree with the Fed’s action (or lack thereof). Below are a series of headlines from various sources which I hope readers will find enheartening.

“The key overarching risk is whether the lagging impact of the Fed’s rate hikes since March 2022 will eventually tip the country into recession.” Bloomberg, by Ann Saphir and Michael S. Derby

“Federal Reserve policymakers signaled on Thursday the U.S. central bank's interest rate hikes are likely over, but held the door open to further monetary policy tightening should progress on inflation stall, and pushed back on market expectations that there will be a quick pivot to rate cut.” Story by Christopher Rugaber, AP Economics writer, Reuters

“Federal Reserve's preferred inflation gauge shows price pressures continuing to cool.” Story by Christopher Rugaber, AP Economics writer

“Markets rise after Federal Reserve hits pause again on rate hikes.” From CNN's Bryan Mena, Elisabeth Buchwald and Krystal Hur

NEW YORK (Reuters) –“Federal Reserve Bank of New York President John Williams said on Thursday that ‘the U.S. central bank is likely done with interest rate hikes, but he added that rates could rise again if inflation pressures do not continue to moderate.’” By Michael S. Derby

Dana Copeland, 35 year mortgage loan officer stated categorically at the Marketing Meeting that his company anticipated that the Prime Interest rate will go down by March 2024 (with associated mortgage interest rate reduction) and buyer competition will increase causing home prices to rise. He asserted that 39% of the first-time buyers will regret not purchasing a home before interest rates go down because increased competition will drive prices even higher.

Atlanta Federal Reserve Governor Raphael Bostic was quoted as saying that “he sees no need for more interest rate hikes.”

Bill Ackerman of Bloomberg, “US economy risks sharp downturn if the Federal Reserve doesn’t cut interest rates soon.”

However, not all the Federal Reserve Governors agree that Prime Rate hikes are over. Federal Reserve Governor Michelle Bowman says she still expects another interest rate hike.

Story by Reuters (Reporting by Lindsay Dunsmuir; Editing by Paul Simao). The good news is the article went on to say that she is in the minority of the Governors.

What these headlines indicate is there is a compelling reason for the Federal Reserve to not raise the Prime Rate unless inflation, which is heading in the correct direction, reverses course and starts heating up again.

As I have previously communicated, to write this article weekly I read a lot about the economy and how it relates to real estate. I can report that multiple economists estimate Prime Rate reductions will happen from April 2024 to November 2024 (with one indicating he thinks Prime Interest rate reductions won’t happen until early 2025).

To the point that Dana Copeland was making, mortgage interest rates rise and fall closely with the Prime Rate due to the mortgage interest rate’s alignment with the 10-year Treasury Bill. While not a direct connection they tend to follow each other’s movement.

Given the Fed’s decision to not raise the Prime Interest rate for two months in a row, mortgage interest rates are retreating from their highest levels in a generation, above 8% to 7 ¼% currently. That’s the connectivity to real estate and why it should be considered good news for real estate and the economy.

Need any more reason to get past the economic gloom and doom? “The Federal Reserve will cut interest rates six times in 2024 as the economy shows clear signs of cooling down, ING says.” Story by [email protected].

I like that optimism, it’s good to share some good news. Enjoy your holiday season.