The Fed bumps up rates again — the undeclared recession is here

After years of historically cheap mortgage money, the housing market is bracing for yet another rate increase.

The Federal Reserve (the Fed) once again increased their benchmark rate during their July 2022 meeting. This follows several rate bumps the Fed has conducted since March 2022. Most recently, the Fed bumped up their benchmark rate by 0.75 percentage points in June 2022, at the time the most significant rate bump in decades.

The July 2022 rate bump is yet another 0.75-point increase of the Federal Funds rate, from 1.75% to 2.5%. Since rising from zero in March 2022, the impact on mortgage interest rates has been significant, with the average 30-year fixed rate mortgage (FRM) rate rising from near 3.0% at the start of 2022 to over 5.5% at the end of July 2022.

When the Fed anticipates inflation rising higher than their 2%-3% benchmark, they raise their benchmark interest rate. This action induces a routine business recession, cooling off the market before it overheats and boils over.

However, inflation has quickly gotten out of control in 2022. Thus, instead of turning down the heat on the economy before it boils over, the Fed is playing catch up, throwing ice on the pot and hoping they can coerce the coming recession into what the Fed chairman optimistically refers to as a “soft-ish landing,” according to MarketWatch.

By some measures, they may already be too late: with the Bureau of Economic Analysis (BEA) reporting negative gross domestic product (GDP) in both Q1 and Q2 2022, the recession is essentially already here.

Even undeclared, the recession is impacting the housing market

And yet, you would be reading about 2022’s formally undeclared recession from firsttuesday even if the latest GDP report had been positive.

That’s because no matter what direction GDP is heading, the housing market is already in a downturn.

Editor’s note — GDP is helpful for measuring the output of large corporations, but it is not helpful in measuring the incomes or livelihoods of regular people, and is at times divorced from the housing market’s performance, as stated in a recent interview with economist Dirk Philipsen at Vox.

Rising interest rates have caused buyer purchasing power to descend to new lows, with 26.6% less mortgage money available to mortgaged homebuyers in Q2 2022 compared to a year earlier. In other words, without a boost to incomes or savings, homebuyers are limited to paying 26.6% less money for a home today.

The impact is already being felt on home sales, with California home sales volume peaking prematurely early this year, in March 2022. Typically, the seasonal sales cycle sees home sales peaking mid-year following the busy spring buying-and-selling season.

While home prices have yet to decline due to the sticky pricing phenomenon wherein prices tend to rise quickly but are more resistant to fall due to seller preconceptions, they are heading that direction — fast.

On a monthly basis, California home prices barely increased in May 2022. This leveling off follows months of significant increases, signaling reduced purchasing power and slowing sales volume are quickly catching up to home values.

Home prices will fall like a feather — gradually at first, and for an extended period of time. Expect prices to find a bottom around 2025, at which point the economy will be in its first stages of recovery from the 2022 recession (or, rather, 2020 recession encore).

Unlike during the 2020 recession, government intervention during the presently undeclared recession will be minimal as the Fed continues to fight inflation. Further, without a leg up from the Pandemic Economy, which kept jobless homeowners and renters housed during the 2020 recession and recession hangover, there will be no extra help for the housing market this time around.

Real estate professionals who wish to weather the coming storm will turn their focus to actively producing. This means expanding your marketing plans and growing your practice into adjacent forms of income generation, like: