Last year, mortgage rates were hovering below 3% after being brought down by the Corona Crash in 2020. But oh my, how things have changed.
Skip forward to the present, and interest rates are soaring as inflation crests past 8% - talk about a different era!
Unfortunately, the Fed has no choice but to raise the federal funds rate and essentially slow the money supply to try and get inflation under control.
By raising borrowing rates, the Fed hopes to stabilize the dollar's value. But, for consumers and businesses, the Fed’s actions signal the end of the easy money era.
Furthermore, the Fed's action causes a cascade effect on every other interest rate, causing them to rise, too.
Thus, the result is that people borrow less money due to increased borrowing costs and spending decreases.
And, when spending falls, inflation slows.
For the Fed, the push and pull of interest rates is a matter of weighing the pros and cons. But, their rampant money printing left few options.
A significant result of the Fed’s actions that many of us will now experience first-hand is higher mortgage rates.
Instead of paying sub-3% interest on a mortgage, many Americans can now expect to shell out nearly 5.5% or more on their home purchase; talk about sticker shock!
Therefore, mortgage rates topping 5% will hamper Americans' ability to invest in residential real estate since more of their payments will go towards interest payments.
Consequently, Americans will now have to shop for less expensive housing while there is an affordability and supply crisis in the residential housing market. Talk about a double whammy!
If there is any silver lining to the housing crisis exacerbated by the Fed’s actions, it is that the labor market is still experiencing major shortages in most sectors.
Resultantly, now is the time to request a raise or switch companies or industries so that you can increase your earnings.
If you have questions about investing during inflationary times and periods of increasing interest rates, please reach out to us to set up an appointment. At Lundeen Abrams Advisors, we are here to help, no matter the investing climate.