By now, conversations around inflation have been ubiquitous for almost two years. Buyers, sellers and agents have all been watching the index for how it would affect home prices, mortgage rates and the overall residential housing market - and for good reason. The annual inflation rate increased from 1.7% to 7.9% in only 1 year from February 2021 to 2022. It currently sits at 6.0%, higher than during most of the last two decades.
Another topic everyone has been keeping a close eye on is the Federal Reserve's strategy to combat inflation. The Fed’s aggressive interest rate hikes have certainly impacted the mortgage market, as the average rate on a 30-year fixed conventional loan increased from 2.98% to 7.08% in merely 12 months last year. The drastic increase has made it more difficult for an average buyer to qualify for a mortgage and potentially reduces the overall demand for homes.
The collapse of Silicon Valley Bank and the wobble of the entire US banking system two weeks ago are expected to have reverberating effects on the housing market. However, they may do more to slow down inflation than interest rate hikes. Any bank that is not classified as global systemically important has been impacted by changes in the market, potentially leading to less lending and slower economic growth, which could have a cooling effect on inflation.
Some experts argue that raising interest rates can actually be a form of economic stimulus. With higher interest rates, those with cash savings are now able to earn more on their money than they were in previous years. This extra income can help stimulate spending, including on big-ticket items like homes.
Lastly, the after-effects of the banking crisis may also play a role in increasing housing inventory in our markets, where prices are high and the local economies have large exposure to technology and banking. For example, in the Bay Area, the unsold inventory index already increased by 50% year-on-year last month. In the Los Angeles Metropolitan Area, inventory was up a whopping 62%. While we are not quite in a buyers’ market yet, the increased inventory is definitely welcome news to some wary buyers, who had to contend with historically low inventory levels. In the meantime, homeowners who purchased their homes in the last few years may be handcuffed by having historically low rates on their mortgages and less willing to put their homes on the market than otherwise.
Changing inflation and interest rates have complex effects on buyers and sellers. In the immediate term, we expect inventory to be the variable to watch - as sustained demand has mostly kept price levels consistent.
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