Inflation, Inflation, inflation means the Fed Has to Raise Rates.  – What can you do to afford a house in rising interest rate environment?

Mortgage rates and the 10-year Treasury yield have been going higher in 2018 because of inflation, higher wage growth, strong economic signs and strong earnings for corporations.

The Fed has been raising interest rates with four forecast for 2018, with the possibility of a fifth on the way too. Many people who are in the real estate and mortgage markets are advising you to buy a home now before rates and prices rise further, and inflation causes home prices to go up too.

But another way to look at it is like this: Higher rates make homes less affordable for many people. If homes are not as affordable, that could hurt demand, which can cause prices to drop. This is a different way to look at buying homes in a rising interest rate and inflating market.

There is no question that the housing market has recovered from the last downturn and we will see inflation. Since 2009, the stock market is up more than 200%, and the housing market is seeing an average of 7% price growth across the county. Unemployment is near 4% in 2018.

rate hikeThat is why the Federal Reserve has been raising rates. It wants to keep inflation down while keeping unemployment as close to full employment as it can. The Federal Reserve accomplishes this through monetary policy – mostly by raising and lowering interest rates, printing greenbacks and purchasing bonds. Overall the Fed has done a good job since the 2008 crash, but inflation was inevitable when the markets recovered.

If you are thinking about buying a home and worry about inflation raising prices, don’t worry too much. Most of the inflation we are talking about in this country is in the 1-3% annual clip. It is when we see inflation of 5-10% that people start to have serious problems affording homes, gas, groceries, and savings and investments lose purchasing power.

The Federal Reserve has been raising rates and causing mortgage interest rates to rise to keep inflation from going crazy. The Fed knows it needs to get ahead of inflation because by the time it is here, it is too late for the Fed to do anything effective because there is a delay in the effectiveness of a new monetary policy. Higher interest rates slow down the desire to borrow money and that reduces the production pace, investing and job growth. The rate of inflation eventually will drop.

Some experts say what the Fed would like to do if it could would be to have 2% inflation and 5% unemployment forever. That is the general goal.

As rates are rising, and inflation is higher than it was in a down economy, it is important to remember that higher interest rates and inflation are signs of a strong economy. A strong economy is the most important factor to determine the price you pay for a home. If the unemployment rate in your area is dropping and people’s wages are rising, this means home prices will continue to go up even if rates are going up. If people feel relatively flush with cash in a strong economy, they generally weather higher interest rates and inflation.

The bottom line is that inflation and higher interest rates are here. If you want to buy a home soon, hopefully you have been getting more work and rising wages like a lot of people. These factors will make it easier to buy a home. If your wages have not risen as much as you like, there is a possibility of picking up more work. The economy is strong and it is possible to get another part time job or to pick up more hours.

 

References: https://www.financialsamurai.com/should-i-buy-a-home-in-a-rising-interest-rate-environment/

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