It’s on everyone’s mind. It’s clogging up our social media feeds, newspapers, cable news, and streaming sources. It’s inescapable.
It’s the Presidential election this November. Election 2024 has been a crazy train so far, and I fear things will only get crazier as November approaches. But November will come and go. The headlines will morph from who to vote for to what’s going to change.
Amid the political discourse, the Federal Reserve’s decisions on interest rates are being overlooked. The Federal Reserve raised rates from near zero in February 2022 to over 5.25% by May 2023. This was done to rein in post-COVID inflation, though it took a year longer than expected to achieve their goals, largely due to trillion-dollar deficits from Washington, D.C. The pain of higher rates is finally hitting Main Street. Rents are sky-high, layoffs are increasing, and the economy is barely growing. Many smart folks are calling for a recession any minute now.
Fed Chairman Jay Powell has indicated that the FOMC voting committee is very likely to begin cutting interest rates in September. If they do, they will most likely cut rates a few more times before year-end. This decision will have a greater impact on the economy of 2025 than the outcome of the Presidential election.
The double whammy of high home prices and high mortgage rates has had the Fed’s desired effect on the housing market. Single-Family home activity slowed dramatically over the last 18 months. Single family housing starts are down 20% in the last five months, returning to levels not seen since October 2007. To meet demand, apartment buildings have been constructed everywhere.
There is evidence that the hottest apartment rental markets, like Nashville,TN, and Phoenix, AZ, are facing occupancy issues due to overbuilding and rent inflation, which are leading to rent reductions.
Since COVID, new households have been pushed into a rental agreements. While I can’t empirically quantify it, I believe we are on the verge of a wave of potential home buyers if mortgage rates change.
Nationally, mortgage rates have declined in the last few months. I expect real estate market activity to fuel a massive increase in economic activity next spring.
- The Fed has not started cutting rates yet and mortgages are barely over 6%. If they cut a total of 1% in the next several meetings (my estimate), mortgage rates have a chance of getting back below 5% by next Spring.
- Single-family housing starts are at 17-year lows. We are not building enough houses to meet the demand that will engulf the market as lower mortgages.
- Renters will become owners as apartment leases expire next spring and summer.
- Homeowners who were reluctant to surrender their current low mortgage rates will have a reason to sell and upgrade to something else. Existing housing prices will move higher in some markets, while apartment rents will decline.
- Changes to real estate commission laws will save sellers money.
None of this will be affected by who wins the election. Look beyond November to the opportunities that lie on the other side of the Fed’s interest rate hikes. Lower rates will reverse many of the challenges that have kept the economy from reaching its potential in the recent years.
