Moody’s Analytics Chief Economist Mark Zandi predicted a correction was coming in the housing market, something that many first-time buyers hoped for but, so far, hasn’t happened. National Association of Realtors said the home prices increased about one percent in April and May, but increased as much as 15.4% in New York and Northeastern cities like Boston, Providence and parts of the Northeast. Zandi said he sees a real estate correction due to the rapid climb in mortgage interest rates now at about six percent nationwide on 30-year conventional mortgages, the reduction in home prices has not yet happened. With inflation running at 40-year highs, most homebuyers are refusing to unload real estate assets, leaving prices high and inventories low, both mitigating factors against a significant drop in real estate values. Zandi sees high mortgage rates bringing down home values.
When inflation raises anxiety in consumers, they tend to hold on to real estate assets, knowing, among investment instruments, it’s the best hedge against inflation. “If we stay around six I think that the market will adjust of affordability is exactly whey he sees a correction in the near future. But because inflation continues at around 10%, it’s doubtful that real estate investors will cash out anytime soon. “If it goes much higher that that we’ll get a more significant pullback in the housing market,” said Zandi, thinking that as rates rise, the market will eventually cool down. No one has a crystal ball, so Zandi predicts things based on past performance, something not always predictive of the future. Back in the late 70s under former President Jimmy Carter, the housing market soared in values while watching the highest interest rates in U.S. history, jumping to 17% in 1980.
Real estate pricing is usually a local issue, depending on supply-and-demand. When you look at real estate prices in 1979 to 1980, prices rose to unprecedented levels while interest rates hit record highs. Zandi knows only what common sense dictates when it comes to real estate. Fed Chairman Jerome Powell, 69, said June 14 that its not a good time for first-time buyers, thinking that that interest rates and home prices were too high to make a good investment. Powell forgets how real estate prices soared in the late 1970s precisely due to high inflation. All that matters for real estate buyers, whether first-time buyers or not, is that they can afford their mortgage payments. “If you are a homebuyer, or a young person looking to buy a home, you need a bit of a reset,” Powell said. Powell doesn’t get that inflation drives investors into stable assets like real estate keeping prices high for the indefinite future.
First time buyers needs to get their down payments together and secure their financing, through pre-qualification letters to impress sellers when they put their bids in to buy homes. In a risking market, high numbers of investors put more demand into the system, keeping prices high, especially when it comes to multiple offers. Inflationary cycles typically erode asset purchases in speculative investments like the stock market, instead pushing investors into tangible assets like real estate, precious metals and investment grade jewelry like diamonds. “We need to get back to a place where supply and demand are back together and where inflation is down again, and mortgage interest rates are low again,” Powell said. As long as President Joe Biden boycotts Russian oil and prosecutes a proxy war in Ukraine, inflation will continue hitting double-digits. Powell admitted he had no control over geopolitical events.
Powell can’t control for Biden’s war in Ukraine and all the crippling sanctions applied to the Russian Federation. Biden can’t understand that as long as he prosecutes a $54 billion proxy war in Ukraine, inflation will continue to rise, especially in the energy sector. Today’s first-time homebuyers don’t have a prayer as long as Biden continues to wage proxy war against the Russian Federation. Zandi and Powell aren’t considering the effect of runaway inflation on the price of real estate. It doesn’t matter how high interest goes until it creates recession and high unemployment, eventually leading to deflation, where not enough consumers have the resources to spur business activity. Recession, expected in Q3 or Q4 could have the effect of slowing consumer spending, leaving decreasing, not increasing prices. Biden can’t have it both ways: Low inflation, low interest rates and slowing real estate values.
Moddy’s Analytics Chief Economist Mark Zandi sees a real estate correction on the horizon. Zandi doesn’t realize that real estate, not precious metal or investment –grade art, stays strong as long as the market doesn’t plunge too far into recession. Inflation creates a sellers market because there’s no better hedge against inflation than real estate, even in a rising interest rate picture. Institutional investors like Blaskstone and Brookfield continue to invest in real estate because other investments get more mercurial in a recession. “I think this is a business model that works. I don’t think they’re going to sell. They may not buy in the this environment, the may wait to see things shake out,” Zandi said, contradicting his own logic that real estate values should decline in a rising ,rate market. As long as demand is high, it’s doubtful real estate prices will come down anytime soon.
About the Author
John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He’s editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.
