What economists are saying about inflation, mortgage rates and the real estate market

With inflation at a 40-year high, and the Federal Reserve’s raising interest rates yet again, there are growing concerns about the future of the real estate market. Economists say only when inflation calms down will interest rates stabilize.

National Association of Realtors economist Lawrence Yun indicated the short-term funds rate that the Fed directly controls has risen by 175 basis points. However, the 30-year fixed rate mortgage has risen even more – by nearly 300 basis points, driving mortgage rates

to their highest level in nearly 14 years.

“On the same $300,000 mortgage, the monthly payment has risen from $1,265 in December to $1,800 today. That’s painful and, consequently, will shrink the buyer pool,” said Yun.

More rate hikes are expected in the coming months. Elliott Eisenberg, Mlslistings’ partner economist, in a recent webinar with the multiple listings service provider’s subscribers, said, “This is just an economy that is growing too quickly, where there’s too much demand and the inability to supply the demand that’s out there. The Fed is going to continue raising rates, which will most certainly throw us into a recession sometime in 2023. When the Fed raises rates, about three-quarters of the time they drive us into a recession.”

Unless inflation reaches uncontrollable levels, Eisenberg does not believe the next recession will be a replay of the Great Recession, which lasted from December 2007 to June 2009. “The bottom is not going to fall out from the housing market.”

“A recession is not necessarily a bad thing,” according to Eisenberg. He acknowledged there will be buyers who will be priced out of the market and others will choose to wait in the sidelines. There will be fewer multiple offers, but the lack of supply is so profound that it is unlikely housing demand will fall drastically. In fact, fewer bidding wars means buyers will have more time to look for a house.

Additionally, today’s buyers are qualified, and households have substantial home equity. Eisenberg is confident stocks of solid companies like Amazon, Apple, Google “are going to come roaring back.”

Eisenberg is confident that demand for homes in Silicon Valley will remain strong. He explained the tech sector comprises a large share of the region’s buyers.

While their stocks may have dropped 20%, they still have high-paying jobs. They may have to look at a lower-priced home than they originally planned, but they will not be shut out of the market. Sadly, it is first-time homebuyers that will be priced out. Eisenberg expects home price appreciation to slow, but said it is unlikely that home prices will come tumbling down.

Brett Caviness, president of the Silicon Valley Association of Realtors, said, “We expect further sales declines in the coming months given affordability challenges arising from the sharp rise in mortgage rates. Homes priced appropriately are selling quickly. Inventory levels have increased, but we need more than double the number to improve affordability and widen options for homebuyers.”

On fears of a recession, Caviness commented the best thing buyers and sellers can do is to be prepared. “Even during the best of times, I tell my clients to always prepare for the unexpected. Make sure you save an emergency fund of three to six months’ worth of income, and keep your budget in line with your short- and longterm goals. Be flexible so you’re able to adjust your budget when needed. Additionally, real estate should always be looked at as a longterm investment. For those who are looking to get into a home and keep it for the long term, history has shown us it’s always better to buy real estate and wait for it to appreciate than it is to wait to buy real estate.”