With the catalyst of capital markets being interest rates, monetary policy is a constant talking point in the news cycle. The Federal Open Market Committee (FOMC) board members meet eight times a year to discuss the state of the economy and determine monetary policy. Our current economic environment consists of overnight borrowing rates hovering around 5.25%-5.50%, an elevated core inflation rate of almost 4%, but with a counterbalancing resilient job market recently adding over 350,000 new jobs. It is a give-and-take situation, with some numbers from economic data showing strength and others showing some signs of weakness. But nothing at the moment should push The Federal Reserve to make any cuts at the March meeting. However, this elevated rate can negatively affect capital and real estate borrowing over time.
The federal funds rate directly affects mortgage rates. High interest rates have yielded significantly higher mortgage payments and increased rent. However, interest rates are not the only factor but a key to the price of homes for home buyers and renters alike. Landlords’ costs to buy a building will be higher than in prior years; thus, they will attempt to raise rents to compensate for the more significant financing payments. The same goes for a first-time homebuyer, a house with monthly mortgage payments at 3% they could afford a few years ago. Now that that payment is at 6%, they may be unable to afford it and look elsewhere. These elevated rates affect not just the buyer but also the renter.
Even with rates being higher than they have in recent memory, home prices have remained elevated, two data points being another jump of 5% in the Case-Shiller Price Index recently, and the national median home price has increased 3.5% from January . So, we have a two-pronged problem: high valuations with a high capital cost. In economic theory, interest rates and prices have an inverse relationship: when one rises, the other usually recedes. One place to look is the aforementioned Case-Shiller Price Index, which shows how demand directly correlates with average homes in the country. A decline in pricing has not necessarily been the case, as the Case-Shiller Price Index has shown more of a flattening out in prices rather than a decrease (July priced at 310 compared to sitting Nov 312).
Question: According to economic theory, interest rates and prices have an inverse relationship. Given our current market and economic condition, where we see elevated interest rates and high rent sale prices, which will recede first?
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