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Jay Thompson is a former brokerage owner who spent over six years working for Zillow Group. He’s also the co-founder of AgentLoop. He “selectively retired” in August 2018, but can’t seem to leave the real estate industry behind. His Inman column is published every Wednesday.
As Inman’s Jim Dalrymple reported, Federal Reserve Chairman Jerome Powell provided a brief take on the housing market in a June 15 press conference.
In his answer to a reporter’s question about his take on the housing market, Powell mentioned increasing mortgage rates, inflation, housing supply and demand, and more. That’s a lot to pack into a three-minute response.
As Dalrymple pointed out, perhaps the most telling moment of Powell’s commentary came when he said the following:
“I would say if you’re a homebuyer, or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together. And where inflation is down low again and mortgage rates are low again. So this will be a process whereby ideally we do our work in a way that the housing market settles in a new place and housing availability and credit availability are at appropriate levels.”
He did not, however, elaborate on what such a “reset” entails.
Equally telling, for me, were Powell’s mentions that they, the Fed, don’t really know how mortgage rate increases might affect the housing market.
Mentions, as in plural.
“How much will it affect residential investment? Not really sure.”
“How much will it affect housing prices? You know, not really sure.”
So while the Fed uses the biggest weapon in its toolbox to curb inflation — increasing federal fund interest rates — they do so while not being “really sure” about the impact to the housing market.
That may sound like the Fed is being run by clueless people. Why would they increase the Federal rate if they are “not really sure” what it might do to the housing market?
First, as mentioned, increasing the Federal Reserve rate combats inflation. Unchecked inflation is not a good thing unless you happen to enjoy taking wheelbarrows of cash to the grocery store.
The Fed has the unenviable job of trying to balance the economy into a “soft landing” without going too far in either direction and cratering everything. It is not a simple task, but it’s a task that must be done.
Second, of course, the Fed is “not really sure” what the future of the real estate market holds. No one can be sure. Not the Fed, not me, not you, not a gaggle of economists and policy experts.
The housing market is affected by many things. Sure, mortgage rates are a big part of it. So are supply and demand, consumer needs and expectations, the overall economy, the price of lumber, efficiency of the supply chain and many other factors. No one has a crystal ball that can foresee the future of the real estate market.
Things that impact the market can happen surprisingly swiftly. Who knew three years ago that a worldwide pandemic would erupt? That Russia would invade Ukraine? That North Korea would continue to test ballistic missiles? That a ship would get stuck in the Suez Canal and disrupt shipping across the world?
Balancing the world economy, of which housing is a large part, is a juggling act, and the simple fact is, sometimes the juggling balls drop to the ground, unannounced and unexpectedly, in a way that’s often impossible to foresee or predict.
Supply and demand
Many experts, some real and some self-professed, think the biggest impact to the current real estate market is the supply of homes for sale. Powell himself mentioned supply and demand several times in his thoughts on the markets.
My undergraduate microeconomics professor, Dr. Duck (yes, that’s his real name) drilled the importance of understanding supply and demand into his students’ brains. As insufferable as Daffy (yes, that’s his real student-generated nickname) could be at times, he wasn’t wrong. Supply and demand affect everything, including the real estate market we know and love and depend on for a living.
Right now, home supply is at record lows, while demand for homes is at record highs. This whacks the supply and demand curve and goes, I think, to the heart of Chairman Powell’s talk of needing a “reset.”
“Whacks” is my term, the economic term would be “equilibrium.” Right now, housing demand far exceeds supply, which puts the market out of equilibrium. To get the market back in equilibrium, either the supply needs to increase, demand needs to decrease, or both.
Supply is increasing. An article on CalculatedRisk (which if you’re not reading, you should start) shows a sharp increase in supply in 2022. In theory, rising mortgage rates should reduce demand. The combination of increased supply and reduced demand should, again in theory, return the market to equilibrium, or at least move it in that direction. Provide the “reset” Powell, and the laws of economics, say we need.
Therein lies the fear many in this business are facing. “Reduced demand” means fewer homes sold, and that tends to instill fear in those who rely on selling homes to feed themselves and buy goods and services. But let’s not forget that increased supply means more homes will be available to purchase, and the juggling act of getting and keeping the market in equilibrium goes on.
All of us play a role in “resetting” the market. The Fed does what the Fed does, hopefully getting inflation under control.
Agents are in a prime position to help people understand the real estate market and how local and world events can impact it. That’s not to say we should all rally around the campfire proclaiming “Now is a great time to buy!” Rather we should educate ourselves, and thereby our clients, on market dynamics.
Rates may go up, they may go down. But they’ll likely stabilize at some point. Ditto with home prices. Stability in the real estate market, in any market, is good for everyone.
Things will probably be choppy for a while, keep your chin up, your head in the game, and do what you do best — help people through what’s probably the most significant transaction of their life.
Jay Thompson is a real estate veteran and co-founder of AgentLoop living in the Texas Coastal Bend. Follow him on Facebook, Instagram and Twitter. He holds an active Arizona broker’s license with eXp Realty. Called “the hardest working retiree ever,” as the founder of Jay.Life, he writes, speaks and consults on all things real estate.
