The Calm After The Storm?

by Matt Dutton, Certified Residential Appraiser

October 2021 

Slashing Interest Rates

It has been a year and a half since the Federal Reserve slashed the interest rate in response, at least in part, to the outbreak of the Covid-19 pandemic. The Fed did this in order to keep credit available as many major sectors of the economy were shut down due to the pandemic. This decision was a spark that fanned the flames of the American housing market.

Locally, housing prices have spiked. What was previously a steady market that saw a modest increase year-over-year transformed rapidly into a seller’s market. Many months later, it is widely understood that this is a good time to sell and a tough time to break into the market. Many have asked us what happens next. Questions like “How long can it stay this hot?” and “When will the bottom fall out of the housing market?” are common.

What the Experts Are Saying

While we cannot predict the future – although we wish we could – the best indication is that the market has not cooled off yet, and it may not for some time. In September, the Federal Reserve announced that it plans to keep interest rates steady until the economy has fully rebounded. This decision has a deep impact that reaches well beyond the scope of mortgages. However, according to Bankrate.com, the Fed is a major buyer of mortgage-backed securities, which helps to keep mortgages low. As long as mortgage interest rates remain at these low levels, buyers have more buying power, which translates to higher selling prices. As selling prices rise, the market becomes more competitive, and these two elements feed off each other.

Forbes recently quoted Ralph B McLaughlin, chief economist and senior vice president of analytics at Haus, Inc., as saying that demand will go back to its usual cooling-off period in the fall and that price growth will slow throughout the year’s end. In the same article, Frank Nothaft, chief economist at CoreLogic, said that inventory is on a rising trajectory thanks to easing lumber prices and the construction of new sawmills in the US. Rising inventory, coupled with rising interest rates, would likely have a cooling effect. Nothaft anticipates rates will rise by about half a percentage point in 2022.

Bankrate Chief Financial Analyst Greg McBride was recently quoted in the publication as saying, “The Fed is inching closer to tapering, the process of slowly – very slowly – dialing back their bond purchases.”

What’s Next?

The pace with which the Fed eventually raises the interest rate will likely play a major role in any resulting turbulence felt in the housing market. In this region of the Midwest, homes sale at 100% of list price, or even more, are still common. Strong prices are the norm, and inventory does not appear to have caught up with demand yet. While a cooling period could potentially be right around the corner, it does not appear to have set in yet.

Here at Spurgeon Appraisals, we’ve had to adapt to a housing market changing more drastically than usual, but we believe this has made us more efficient and more experienced. More so than ever, we are prepared to assist you with your appraisal needs regardless of what the future brings. Contact us today for a free quote.