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It may be time for real estate professionals to brace for the industry’s future as the Federal Reserve figures out how to address inflation in the United States.

Amid the uncertainty surrounding the long-term impact on the housing market, experts claim further increases in the cost of homeownership could be on the horizon, potentially pricing more buyers out.

“The extremely low [mortgage] interest rates over the last few years have had so much to do with the price boom just going and going with no end in sight,” says Todd Teta, chief product officer at ATTOM Solutions. “Any change in that could price enough buyers out of the market to end or significantly slow down the market.”

Despite the speculation surrounding the inflation trajectory for the rest of 2021 and heading into 2022, the Fed’s balancing act for raising interest rates could also mean an uptick in mortgage interest rates, which have bobbed up and down near record lows for the past year.

Housing Impacts
Brokers agree that it’s only a matter of time before real estate professionals start seeing the effects take hold of the market, specifically higher mortgage rates.

“If we see an increase in interest rates, we have a long way to go before we get off of historic lows, but it will knock out some viability because the interest level will drive up monthly payments for buyers,” says Candace Adams, CEO and president of Berkshire Hathaway HomeServices New England, Westchester & New York Properties.

Mortgage rates currently sit at 2.87%, but August forecasts from the Mortgage Bankers Association (MBA) suggest a steady increase in rates above 4% in 2022 and 2023.

Elevated prices for building materials are also likely to persist amid continued supply chain and labor issues plaguing the building industry, according to experts.

“Construction costs have gone wild,” says Anthony Lamacchia, CEO of Lamacchia Realty. “Everything costs dramatically more than it did a year ago and that’s hurting builder profits and buyers’ ability to do more to their home.”

That coupled with potentially higher home prices on the horizon are likely to scare many sellers from listing, which Lamacchia claims could lower inventory even more.

As agents interact with their clients, Adams suggests encouraging them to get off the sideline and at least start their housing search now before rates start ticking up.

“I anticipate that when the market shakes up a little bit, you’ll see more products come to the market, so [buyers] will have a much better selection and still-low interest rates,” Adams says.

Lamacchia echoed similar sentiments.

“You have to just be straight with your clients and show them the data so they can see how prices are rising,” Lamacchia says, adding that he has buyers expressing concerns over a potential market crash.

“Inventory is too low for prices to crash,” Lamacchia says. “The demand is high, and inventory is lower than ever. It’s better now to be a buyer than it was six months ago.”

Not So ‘Transitory’
The Fed has spent several months maintaining that higher inflation is a temporary impact of the pandemic, but experts at The Mortgage Bankers Association (MBA) don’t think that will be the case.

Instead, the expectation is for interest rates to remain high for the rest of the year, rounding out to just under 5% heading into 2022 and potentially carrying on into the first half of 2022, according to Joel Kahn, MBA’s chief economist.

“If you look at where we’ve been in previous years, pre-pandemic, we didn’t see the level of inflation that we’ve seen of late,” Kahn says.

Despite forecasts of further economic recovery, Kahn expects persisting supply chain challenges to drag inflation along for different goods.

“When you have this imbalance of demand and supply, you’re going to have maybe a little more inflation added on to goods and services, and then that’s going to get passed on to consumers,” he says.

Home prices and rent surges could also throw a monkey wrench into the equation.
Although single-family home prices don’t directly show up in inflation indexes, Consumer Price Index (CPI) and personal consumption expenditures (PCE) will reflect surging rent with about a six-month delay, according to Mark Palim, chief economist at Fannie Mae.

“That enters inflation numbers with a lag, so we think that’s going to lead the reported inflation numbers to remain higher than they have been in recent years and to remain higher than the Fed’s 2.5% target next year,” Palim says.

The Fed’s debate over how and when to address inflation is ongoing, with officials reportedly mulling over when to start pulling back—or tapering—on monetary policies.
Hypothetically, the consequences of a misstep during the balancing act of raising rates could yield a pair of adverse scenarios for the housing market.

For example, the consequences for allowing higher inflation to get out of control and not raising rates quick enough could potentially lead to an overheated market.

The last time that happened was during the 1970s and 80s, before former Federal Reserve Chairman Paul Volcker spearheaded interest rate hikes to double-digit heights to tame the economy.

“As inflation started taking off, the Fed was reluctant to raise short-term interest rates for a variety of reasons which was too slow to raise interest rates, and you saw inflation take hold in the economy,” Palim says.

Economics experts speculated in recent CNBC reports that inflation could be nearing a similar trajectory of the 1960s when the Fed lost control of inflation expectations—and catalyzed the overheated 70s and 80s economy.

According to Lamacchia, mortgage rates were also in the double digits, an outcome that today’s market couldn’t handle.

“It would crush the market, and we would see prices go down,” Lamacchia says. “I don’t think it’s going to get that out of hand, but if they keep giving government money away, we might have a real serious problem.”

On the other hand, the Fed raising interest rates too soon could lead back into another recession, according to Dr. Lawrence Yun, chief economist at the National Association of REALTORS®.

“If interest rates are just too high, then, of course, that’s going to lead to economic recession, job loss and loss of confidence, which would hurt housing,” Yun says.

Palim says that’s what the Fed wants to try and avoid. Ideally, if the economy is poised to overheat, he says the Fed should start to raise interest rates at a pace that would slow business investments and consumer borrowing and spending.

“The inflationary pressures come out of the economy, and you don’t have to do a sharp increase and push the whole economy into a recession,” Palim says. “That’s the balancing act that the Fed is trying to achieve.”

Jordan Grice is RISMedia’s associate content editor. Email him your real estate news ideas at jgrice@rismedia.com.