So everybody is looking at the stock market (and we here at leofinance look more at the crypto market as a proxy) with the Federal Reserve hiking interest rates 0.75% yesterday.
But what is more on my mind is real estate, especially single-family real estate.
Let's look at what happens to an average home buyer's ability to finance as we go from the left-hand side of this chart at 3% to the right hand side of this chart at 5.23% (and rising after this week).
3%
5.23%
$27,742 of purchasing power just vanished!
Said another way, the buying power of random-home-buyer dropped by 14.5%.
Yes, salaries are up somewhat over the same time, but not enough to compensate for the interest rate sensitivity.
And if we somehow actually get to a funds rate of 3.5% like the Fed is projecting...
So yes, there is investor demand for SFR. There are miscellaneous cash buyers too. But the driver for SFR equity is always the retail buyer. And they are losing their ability to buy.
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I’ve heard from some folks in the business that offers aren’t coming in as readily as they used to 6 months ago. It’s happening.
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In Australia, they are expecting a drop of around 20% in the next 1.5 years or so - it might even be more because They went insane. In Finland where I am, there wasn't massive spikes up and inflation isn't running as hot as it is in the US, so I am not expecting as much volatility. However, it is going to be interesting once interest rates increase even marginally, because I feel that people have pushed out their loans to further extremes than they had earlier, with less savings in the bank in the lower end. So, some kind of collapse will arrive. I am glad I got in pre-corona (by a week) and collared the loan for a decade.
Yeah, this is a worldwide problem since pretty much all fiat currencies did the same thing over the last few years.
On the bright side, I'm looking forward to picking up some deals!
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Interesting
Do you think the fallouts of this are pushed further into the future because of the lack of supply of SFR? Covid had a lot of people sell their condos in the city and move out to the burbs, especially with Work From Home.
I wonder if the supply/demand dynamics are enough to keep the market hot for a while longer
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Yeah, it's hard to tell. I've seen good arguments on both sides of the supply issue, and supply is extremely localized.
Some places could be in shortage while others are in glut.
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