This didn’t have to happen. The reckless behavior of the Federal Reserve and our politicians in Washington created a horrifying inflation spiral, and now the Fed is feverishly raising interest rates in a desperate attempt to get inflation back under control.
But everyone knows that rapidly raising rates is going to absolutely crush the housing market. When the Federal Reserve hikes interest rates, that puts upward pressure on mortgage rates. And as mortgage rates go higher, more and more potential homebuyers will be forced on to the sidelines. With fewer potential homebuyers in the market, that will put downward pressure on home prices. This is basic stuff that you would learn in an ECON 101 class, but Fed officials can’t seem to understand that what they are doing is going to be extremely destructive to the U.S. economy as a whole.
Do you remember the pain that we went through in 2008?
That entire crisis was precipitated by a collapse of the housing market, and now a similar scenario is starting to unfold right in front of our eyes.
In fact, something just happened that we haven’t seen in all of the years since 2008…
The average interest rate on a 30-year fixed-rate mortgage rose above 6 percent for the first time since the financial crisis, according to federal data released Thursday. The average mortgage rate for the benchmark home loan rose to 6.02 percent as of Thursday, according to Freddie Mac, up 0.13 percentage points from last week and 3.16 percentage points above its level a year ago. It’s the first time the 30-year fixed rate mortgage rate was above 6 percent since the week of Nov. 20, 2008.
When mortgage rates get really high, the wealthy can still afford to buy homes because many of them don’t even need mortgages.
But for the rest of us, much higher mortgage rates make a world of difference…
Already, it has ushered in a sea change in the housing market by adding hundreds of dollars or more to the monthly cost of a potential buyer’s mortgage payment, slowing what was a red-hot market not so long ago. Higher rates are forcing some would-be buyers to continue renting. Since the start of the year, the average mortgage payment has risen 38.5% to $2,306 from around $1,700 at the start of the year.
Demand for mortgages is drying up really fast.
Last week, the number of mortgage applications was 29 percent lower than it was during the same week one year ago.
And the number of applications to refinance mortgages has seemingly dropped off a cliff…
As mortgage rates rise and home prices remain high, home sales are slowing. With rates essentially double where they were a year ago, applications for home loans have dropped and applications to refinance into a lower payment have fallen off a cliff, down 83% from a year ago, according to the Mortgage Bankers Association.
If you work in the mortgage industry, I feel really badly for you right now.
Of course everyone involved in real estate is going to be feeling a tremendous amount of pain in the months ahead. According to the chief economist at Redfin, this is the “sharpest” downturn that we have seen since the meltdown of 2008…
“This is the sharpest turn in the housing market since the housing market crash in 2008,” said Daryl Fairweather, Redfin’s Chief Economist.
Billionaire Barry Sternlicht is even more pessimistic.
“The economy is braking hard,” the chairman and CEO of Starwood Capital Group told CNBC’s “Squawk Box” on Thursday. “If the Fed keeps this up they are going to have a serious recession and people will lose their jobs,” he added.
Sadly, he is right on target.
Even if the Federal Reserve stopped raising rates right here, we would still have a real nightmare on our hands.
But the Fed isn’t going to stop.
Fed officials have repeatedly told us that they are going to keep raising rates until inflation is under control, and that could take quite a while.
In fact, we are being warned that next week we could potentially see “the biggest Fed rate hike in 40 years”, and that would really shake up the financial markets.
So what can we do to protect ourselves?
If you are selling a home, I would recommend trying to sell it as rapidly as you can while home prices are still ridiculously high.
If you are looking to buy a home, I would recommend waiting until home prices come down quite a bit.
And something that we can all do is to prepare for the “serious recession” that Billionaire Barry Sternlicht says could be coming.
During the crisis of 2008 and 2009, millions of Americans lost their jobs. Without any income coming in, all of a sudden a lot of those people couldn’t pay their bills and many formerly middle class Americans also ended up losing their homes.
You don’t want to suffer the same fate.
So I have been encouraging my readers for a very long time to build up a sizable emergency fund.
A large emergency fund will allow you to continue paying your bills no matter what comes along.
And it will also keep you from losing your home.
In addition, I would encourage everyone not to take on additional debt at this time.
When hard times come, you will want your finances to be as “lean and mean” as possible.
Now is not a time to party.
Now is a time to batten down the hatches financially.
Very rough weather is headed our way, and everyone can see it coming.
The wise will prepare in advance, but those that are foolish will do nothing because they assume that our leaders have everything under control.