Learn About the Variants of the Volatile Real Estate Market

    In the past year, the real estate market has been incredibly volatile. Since 2021, rapidly rising demand has caused real estate prices to soar to record highs. The result has been a seller’s market where buyers are facing asking prices that would have been unthinkable before the COVID-19 pandemic. The rise in prices is not limited to just housing. Due to record inflation after the pandemic, the cost of goods and services has skyrocketed across the board. With the United States Federal Reserve planning to further increase interest rates into 2023, there are no signs of inflation cooling off anytime soon. Record high inflation and soaring interest rates are only two factors that will affect future real estate prices. There will be many more to consider.

    One of the factors which increased real estate prices during the COVID-19 pandemic was record-high unemployment. According to the Counselors of Real Estate, nearly 40 million Americans filed unemployment claims for the first time in the spring of 2020. Market volatility grew to levels not seen since the 2008 financial crisis. That led to the implementation of stimulus policies designed to support consumer spending. At the same time, the United States Federal Reserve lowered its overnight lending rate to zero. With interest rates low, consumers began to borrow money in droves. Since interest rates were previously so low, consumers could still afford mortgages even though asking prices for properties had soared to record highs.

    After the implementation of those policies, we have witnessed record inflation. Prices of goods and services have not soared at this rate in several decades. That is partially due to a rapid increase in the consumption of consumer durables as opposed to non–durables. According to the Counselors of Real Estate, consumption of consumer durables (long-lasting items like furniture) increased by nearly 40% between the beginning of the COVID-19 pandemic and the spring of 2021. At the same time, the consumption of non-durables (eating out, etc.) had only increased by 14%. When the United States Federal Reserve implemented the stimulus policies during the COVID-19 pandemic, they anticipated an inflation rate of 2%. Throughout 2022, we have seen monthly rates of inflation exceed 8%.

With this in mind, the United States Federal Reserve has turned its primary mandate away from fostering maximum employment to fighting inflation. As a result, the United States Federal Reserve voted unanimously to raise interest rates to 3.15% in September. With no signs of inflation diminishing soon, the United States Federal Reserve could raise interest rates as high as 4.6% by 2023. According to the Counselors of Real Estate, the volume of real estate transactions is likely to remain high into 2023 despite these hikes in interest rates. The only question is whether a recession driven by record-high unemployment and lower household incomes will kill the demand for housing and lower the volume of real estate transactions.

There are many other factors to consider to determine where interest rates and inflation will trend concerning real estate supply and prices. The first of which would be a geopolitical risk. Events like the war in Ukraine and the ongoing COVID-19 pandemic in China undoubtedly have a massive effect on the supply chain and prices of goods. Russia and Ukraine are responsible for roughly 30% of the world’s wheat supply. In addition, most of the world’s metals like aluminum, nickel, and copper come from these countries. These are metals used in many industries. When combined with supply issues for electronics coming out of China, most economists project shortages for many goods and services within the coming months. With rapid inflation in prices for consumer durables and non-durables, it is unclear whether these price hikes and supply chain crunches will cause consumers to prioritize these needs over real estate.

    The real estate industry has experienced a supply crunch for several decades. According to the Counselors of Real Estate, one new housing unit had been created for every 1.2 jobs during the late 20th century. As recently as 2010, that imbalance had grown to one unit for every 2.6 jobs. Along with nearly 40 million Americans quitting their jobs and relocating, this is what likely led to the severe hike in housing prices during the COVID-19 pandemic. According to the council, nearly 4 million units both available for rent and for sale will need to become available by 2035 in order to accommodate the increase in demand. A supply crunch and increased demand would lead to further price increases, but the question of whether inflation and supply chain crunches for other necessities will kill demand for housing still remains unanswered.

    With growing uncertainty for the future in terms of inflation and interest rates, real estate prices will continue to fluctuate with these trends. With geopolitical risks around the world exacerbating inflation, the prices of many consumer goods and services will increase, and the demand for real estate could plummet. Economists anticipate future shortages of food, gas to heat homes in the winter, and other factors which will cause consumers to reprioritize in favor of their necessities. In addition, the upcoming hikes in interest rates from the United States Federal Reserve will render it increasingly difficult for home buyers to obtain affordable mortgages.

    Given real estate prices are higher than they’ve ever been and that real estate is an increasingly scarce commodity, buying a property could be one of the most secure investments to make at the moment. Real estate prices are still stable concerning the crumbling stock market, and housing has a record of being underbuilt in the United States for decades, so it will still be a valuable asset to hold onto in the future. The United States Federal Reserve is also considering raising interest rates as high as 4.6% in 2023, so this is the best time to secure a mortgage before interest rates spike.

    When navigating the real estate market amidst uncertainties with inflation and interest rate spikes, you don’t want to try it on your own. By consulting with a seasoned real estate agent, you can understand the market, determine accurate prices you should be paying for a home, and whether you should buy given current market conditions. Your real estate agent could also help you to obtain an affordable mortgage at the best possible rate before the United States Federal Reserve decides to hike interest rates higher than they were in September 2022.

    If you’re a buyer experiencing concerns with interest rate hikes and inflation leaving you unsure where to turn in the current market, I can help. I help Arizona residents navigate the real estate market, find a home suitable for their needs, negotiate a price they can afford, and help them secure an affordable mortgage. Most importantly, I help Arizona residents find a home suitable for their future and their families. Contact me below if you’re ready to find a home that’s right for your needs at the right price.