Market Insight: Are We Going To Repeat 2008's Housing Crisis?
With the recent announcement of the largest Federal Fund rate increase since 1994, the media is buzzing about the real estate market changes and whether there will be a shift or even a “burst bubble” coming. Some are even drawing comparisons to the housing crisis of 2008 and wondering if we are headed that way again.
The Firefly team leverages our industry knowledge, real time data, and advice from experts in the real estate industry to get a solid understanding of what is currently happening in the market, and what logical predictions can be made for the future of real estate in Buncombe County and the rest of Western North Carolina. We recently spoke with Teela Waggoner of Movement Mortgage, one of our local lender partners, who provided excellent insight into how the federal fund rates, inflation and mortgage rates are related, and what that means for the next few months in our market.
To summarize, the Federal fund rate was raised by 75 basis points, with another increase expected in July. The Federal Fund only impacts short-term interest rates like those for credit cards and vehicle purchases. With inflation rates rising a full 1%, mortgage interest rates must also increase to combat inflation. As of Wednesday, June 15, rates were at 6% for primary residences with a conventional mortgage and 20% down payment.
With historic inflation rates, an economic recession is imminent. It’s expected that we’re nearing the peak of inflation and it should top out in August or September, at which points mortgage rates should start to ease as the economy goes into a recession by the end of 2022.
Here are some data points that compare now to 2007/2008, to give some perspective:
- In 2007 there were 3.7 million homes for sale. There are roughly 870,000 today (April numbers). The average is 2.5 million. This means there is still a home supply shortage.
- Today, there are 14 million more households and almost 3 million fewer homes – so there are people who need to buy homes.
- 38% of homes today are owned free and clear, which was not the case in 2007/2008.
- Lawless loan programs contributed to the 2008 housing crisis. Those loan programs no longer exist.
And here are some of Teela’s tips for home buyers in this market:
- Focus on your monthly payment rather than the interest rate. Your lender can help you determine your maximum monthly payment, and your agent can work to find a house that fits your needs.
- Plan for a future rate decrease. If you buy a home this summer, by the time rates decrease at the end of this year, you can look into a refinance with the equity that you’ve already built.
- Do not pay discount points. With interest rates dropping later this year, you won’t get your money back on the investment of discount points.
- Keep local appreciation rates in mind. Buncombe county real estate will appreciate! It may cool a little bit, but won’t go backwards. Check out Teela's Real Estate Report Card for Buncombe County.
- Pre-approved buyers – get approval from your lender updated. This is important for those currently house hunting!
In summary, Real estate is the safest investment right now, especially with current state of the stock market. And an economic recession is no reason to be spooked in terms of real estate investments. Historically (excluding the Great Recession in ’08), housing price appreciation hardly moves in a recession, and interest rates always fall. And one last thing to remember is that mortgage rates are market driven, and not driven by the Federal Fund rate. Inflation is the biggest enemy of any long-term fixed investment. So the higher the hike, the greater chance of it actually making an impact on inflation; which, in turn, will be good for mortgage rates.
