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Real estate options remain despite higher interest rates

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Tim Whitney

There’s high inflation, rising borrowing costs and economic uncertainty. So what’s next for real estate?

Let’s start with the latest Federal Open Market Committee statement from the Federal Reserve: “Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices and broader price pressures.

“Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The committee is highly attentive to inflation risks.

“The committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the committee decided to raise the target range for the Federal Funds rate to 3 to 3.25 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The committee is strongly committed to returning inflation to its 2 percent objective.”

Federal Reserve Chairman Jerome Powell warned the US housing market is likely to suffer a reversal in the wake of interest rate hikes. “We’ve had a time of a red hot housing market all over the country. The deceleration in housing prices that we’re seeing should help bring prices more in line with rents and other housing market fundamentals. And that’s a good thing,” Powell said.

When the Fed was sitting on the sidelines, inflation was running rampant with no end in sight. Now, if the Biden administration can curb its deficit spending for the next couple of years, we can expect that by 2024 inflation can be reduced to the Fed’s 2 percent target rate. Then they can start reducing the Federal Funds rate, which in turn will help calm financial markets and reduce mortgage rates.

In the meantime, there’ll be price adjustments in both commercial and residential real estate. Inventories will increase during the next couple of years, giving everyone more choices at lower prices.

If you need to buy a house now or want to invest in a commercial property, ask about owner carry options at below market rates and then refinance in a few years when the rates come back down. There are plenty of other creative financing options out there, so buyers shouldn’t let this recent bump in mortgage rates stop them from purchasing real estate.

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