Market Update Recap: The Interest Rate Domino Effect
In recent weeks, the real estate market and national economy continued to send mixed signals. Lead Economist Polina Ryshakov and Senior Real Estate Editor Kyle Spearin release a video that sheds light on interest rates and other economic indicators impacting real estate.
What are the most important economic factors impacting the real estate market right now?
Two words: interest rates. Ryshakov expanded on current market conditions by saying “as usual, interest rates are probably the most important thing impacting the housing market because the housing market is most sensitive to interest rate changes.”
Therefore anything that involves decision-making on interest rates will have an impact on real estate. Although the Fed evaluates a variety of factors when considering what to do with interest rates, it boils down to unemployment and inflation.
Does the recent jobs report along with lower than expected inflation give the Fed the green light to keep raising interest rates?
On August 5, the employment numbers for July came out and showed signs of a strong labor market with 528,000 jobs added. Then inflation numbers came out at 8.5%, which was lower than expected. Here are some key takeaways from our conversation:
- Why does the jobs report matter? Employment numbers impact interest rates. Investors should be tracking employment numbers because it’s part of what the Fed uses to determine whether or not they should raise interest rates. In addition, Ryshakov noted “for investors in general, they should pay attention to construction, they should pay attention to just certain specific numbers with an employment report and wages. But overall, it’s important to know where the interest rates are going.”
- The jobs report is not as straightforward as it seems. Unemployment numbers actually rose and part time jobs were a factor in the overall job increases last month. Sundae’s Lead Economist went on to say “if you dig in you will see that full-time employment is down for a second consecutive month, which is not a great thing. So when you dig in and look for more indicators it does show some weakness.” This is reflected in investor sentiment.
- Prediction: interest rates will rise by 50 basis points (BPS) next month, not 75. “Even though the report looks very robust, they should be taking everything into consideration… I don’t think [the Fed] will raise it more than 50 BPS. There are some concerning indicators. That said, inflation is still there and I don’t think they should continue to be aggressive because there is weakness in the economy,” said Ryshakov.
Should investors who are worried about the market stay on the sideline?
Ryshakov summarized the answer to this question as follows: “if you see a good opportunity, definitely don’t wait around because you might not have that many opportunities.”
Supply will dictate what’s going to happen. It looks like inventory could be declining.In the last four weeks, new active listings have been trending down. We also don’t see days on market increasing. And, we’re still way behind where we need to be in terms of new construction. With limited options, investors need to capitalize on existing opportunities.
Some investors who want to take action still feel held back by the lack of easy capital that characterized the past few years. This is certainly a challenge, but Ryshakov put it into perspective “ if the interest rates are at 5% right now and the inflation is at 8.5, we’re borrowing at a negative rate.”
Here’s what we’re paying attention to moving forward
- Jobs and unemployment. Will the recent jobs report get revised? How will unemployment impact the Fed’s next interest rate adjustment decision?
- Housing starts and permits. August 16, we’ll get the most updated building numbers. These show us builder sentiment in the market and reveal more about housing demand.
- Existing home sales. Later next week on August 18, the latest home sale stats come out. Are prices dropping because of the market or is it just seasonality?