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Inflation rate troubling; higher interest rates ahead?

Higher Interest Rates Are Coming Soon Condo Buyers !

For homebuyers across the country, it feels like a never-ending uphill battle. Tight inventory, multiple offers on ‘fixer’ properties, and Boston condos selling for well above the asking price (often tens of thousands over the asking price) – literally everything seems like an insurmountable hurdle. And now, higher interest rates are about to kick in.

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What to Expect for Higher Interest Rates

The median price for a home in January was $350,300, up 15.4% from a year ago, according to the National Association of Realtors. And that is in the middle of the winter. One of the strong reasons was to lock in interest rates ahead of the Mid-March rate increase by the Federal Reserve that is now considered a foregone conclusion.

The amount that interest rates will increase isn’t known but many experts are anticipating an increase of 25 basis points (meaning that prime interest rates will rise by 0.25% percentage points). Others say a 50 basis point rise is possible to aggressively go after the highest inflation rate that the country has seen in 40 years. Something to be very aware of is that expectations are growing that the interest rate will increase as many as five times this year. If inflation persists, the Federal Reserve will be forced to move aggressively.

To be clear, the Federal Reserve does not directly set the mortgage rate. The federal funds rate, which is set by the central bank, is the overnight interest rate at which banks borrow from one another. This influences the prime interest rate, which is what lenders use to determine how much interest people pay on credit cards, mortgages, and other loans. When the federal funds rate goes up, the prime rate tends to follow.

The Fed does more than just set the fed funds rate. It also gives economic guidance to markets. The trend is that when the Fed makes a press release with a positive outlook for the economy, interest rates tend to rise. When the outlook is negative, interest rates tend to go lower. A 40-year high inflation rate is a very positive outlook that the economy is growing (but way too quickly). Inflation is the enemy of mortgage bonds and, in general, when inflation pressures are growing, mortgage rates follow.

Interest Rates Return to the Future

An example that mortgage rates are not in perfect lockstep with the fed rate is that mortgage rates already climbed from 2.67% in January 2021 to above 3% by December. But even that remained in a historically low 3% range throughout the year. What we will soon see is mortgage rates move into the more traditional territory. The problem is that this is on top of all-time highs for home prices. The most reliable predictions are for mortgage rates to reach a range in the mid 4% up to 5% by the end of 2022.

This may be astonishing, but a 3.6% mortgage rate was a record low in 2019. Rates in the mid 4% to 5% are nothing unusual when compared to rates that were 15% and higher in the early 1980s. As recently as 2008, mortgage rates averaged 6.48%. In January 2002 rates were at 8.21%. For most of this century, mortgage rates have swung between the high 4% range and low 7% range.

What this Means for Homeowners and Homebuyers

Even with increases, the still low mortgage rate environment will remain favorable for some potential homebuyers and those still considering refinancing. However, rising home prices plus higher interest rates will eliminate many buyers from the market. Fewer buyers should lead to more stable prices and fewer bidding wars. The refinance market has already seen a 45% decline because most homeowners that could benefit from the historically low mortgage rates have already done so.

South Boston condo buyers that can lock in a mortgage rate before interest rates increase will save betweenb 0.5% to 1% off their interest rate. With the first interest rate hike coming in mid-March, moving sooner rather than later will be the most beneficial. A 1% jump from 4% to 5% on a $325,000 fixed-rate mortgage makes a $193 difference in the monthly payment ($2,316 per year).

Homeowners with an adjustable-rate mortgage or a home equity line of credit (HELOC) would be wise to refinance into a fixed-rate loan.

Moderate-income Boston condo buyers who were barely qualified for a mortgage when interest rates were lower will now be unable to afford a mortgage. Even those that had a cushion in qualifying will see it harder to afford a mortgage because their total budget will be impacted by inflation rising all consumer costs.

What do you think the interest rate hikes will do to homebuyers? Please share by leaving a comment.

Inflation rate troubling; higher interest rates ahead?

The Labor Department’s Producer Price Index increased by 0.9 percent in December.

Excluding volatile food and energy prices, the index advanced by 0.2 percent. Still, the gains were greater than expected.

They added to expectations that the Federal Reserve is not likely to cut interest rates over the next few months as the economy still shows some risks of inflation.

On the upside, they probably won’t raise interest rates, either, at least not until mid-2022. At least, that’s what I think.\

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Inflation is hitting the 3 big areas of household budgets

  • Housing, transportation and food are the three largest areas of the average household budget.
  • Inflation is pushing up these costs for consumers at the fastest clip in many years.
  • Accelerating prices may not last in many categories, but may prove more persistent in others like rent.
A customer holds a fuel pump nozzle at a 76 gas station in San Francisco, California, on Nov. 15, 2021.
David Paul Morris/Bloomberg via Getty Images

Inflation grew at its fastest clip in almost four decades last month — and rising costs are hitting the biggest areas of household budgets.

Inflation measures changes in the price consumers pay for goods and services.

It jumped 6.8% in the year through November 2021, the largest annual spike since 1982, the Labor Department said Friday. A consumer who paid $100 for a good last year would pay $106.80 for the same thing today.

That U.S. inflation reading includes prices for all sorts of items, like alcohol, fruit, airfare, firewood, hospital services and musical instruments.

Higher inflation was concentrated in a few areas like used cars and trucks earlier in the Covid pandemic — a cost burden many households may have been able to dodge. (Not all households need to buy a car.) Now, rising costs seem to be impacting a broader set of goods and services that are harder to avoid.

“In terms of core household expenses, you weren’t seeing it there [earlier this year]. You are now,” Greg McBride, chief financial analyst at Bankrate, said of inflation.

We’re going to have more inflation as wages and commodity prices rise, says Ariel’s Bobrinskoy
“You’re not seeing price declines to offset that,” he added. “The price increases are pretty pervasive.”
Housing, transportation and food are generally the three biggest expense categories for the average American household each year, according to the Consumer Expenditures Survey.

In 2020, housing costs (like rent and utilities) represented about 35% of the average person’s budget. Transportation costs (like vehicle purchases and gasoline) ate up 16% of the budget, and food expenses (groceries and restaurants) another 12%.

The three categories are seeing many cost components increase at their fastest pace in many years.

For example, the “food at home” index (i.e., groceries) rose 6.4% over the past year, the largest 12-month increase since December 2008. Some subcategories like meat, poultry, fish, eggs and beef grew by double digits.

Gasoline prices are also up 58.1%, their largest 12-month increase since April 1980. Household energy costs are up 12.2%. Motor vehicle insurance is up 5.7%.

Of course, some of these categories — like food and energy — are volatile; they’re subject to big price swings to the upside or downside. And not all consumers will be affected the same way. (Someone who takes public transit won’t pay inflated costs for gasoline, for example.)

While categories like shelter are up more modestly (rent is up 3% on the year, for example), some economists are concerned such prices will prove more lasting than other categories.

A landlord who raises rent by 3% (to $1,030 from $1,000, for example) isn’t likely to reduce that rent for tenants in the future. In that sense, inflation’s impact on a renter’s budget may be “stickier.”

“It puts a squeeze on the household budget,” McBride said of inflation. “Your pay may only go up once a year. But you’re getting hit with higher costs on one thing or another, month after month.”

Persisting inflation?

However, it’s not apparent that inflation will persist or continue to rise at the same pace.

Some financial experts think prices will moderate as pandemic-related distortions (like supply-chain bottlenecks and high consumer demand from pent-up purchasing power) ease.

President Joe Biden and White House officials sought to reassure Americans on Thursday that energy and other costs were starting to fall, a dynamic that wouldn’t be apparent from Friday’s inflation reading.

“That data is by definition backward-looking and so it won’t capture some recent price movements, particularly in the areas of energy,” according to Brian Deese, the president’s top economic advisor. He cited a nine-cent drop in gasoline prices nationally.

The headline inflation readings may also seem high relative to last year due to so-called “base effects” (meaning November 2021 prices are being compared to those in 2020, when they were being depressed by the then-prevailing pandemic effects).

“We believe that the passing of base effects and the easing of supply chain constraints by the end of the first quarter of next year should slowly bring inflation down to more comfortable levels,” according to Rick Rieder, head of the global allocation investment team at asset manager BlackRock.

“In fact, we think both headline and core [inflation] are likely to be in the 2% to 3% range by the end of 2022,” he added.

The Federal Reserve, the U.S. central bank, aims for long-term inflation of 2%.


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Updated:  1st Q 2018