One of the trending topics that are constantly discussed in the media is about interest rates and why they remain high. Yes, rates continue to go up and the fact is that they may continue to go up for quite some time. While you may not be aware of the factors that go into these decisions, or how they impact our finances, this topic has become increasingly important for home buyers and sellers. Interest rates heavily impact the amount of money it will cost buyers to borrow money from lenders. In some cases, a single-point increase can raise a monthly mortgage cost by over $100. Now imagine if your rates are 5% higher than your neighbors. That means for the same loan amount, you are paying $500 dollars a month more.
The higher rates can literally cost home buyers the opportunity to purchase a home as the amount of higher interest can push their income-to-debt ratio too high. In many cases, home buyers have less than $1,000 a month worth of wiggle room and higher rates are shrinking the field of eligible buyers. While it is possible to buy now and refinance later, the fact is that those with the option to buy now may not be able to afford such a steep hike. This has led many to wonder why rates continue to go up and if there is an end in sight.
The biggest reason for rate hikes has to do with battling inflation. Because the cost of goods and services skyrocketed in 2022, the Fed had to raise rates. The strategy is proven to work in the past as raising rates keeps consumers from borrowing money, forcing prices to go down as demand or ability to purchase goes down as well. Unfortunately, while the increase in rates has slowed inflation down, it has not done enough for prices to go down. This impacts everything from the cost of cars, homes, labor, and even goods in many ways.
While inflation has slowed down, the consumer market has remained strong and continues to spend at a record pace. Many believe there is a direct link between covid and consumer spending as consumers who have had to put off vacations, events, and other enjoyments are now willing to pay any cost for those enjoyments. Despite increases in prices for everything from concert tickets to cruises, consumers are still going and spending record amounts of money.
The Real Estate Market Remains Strong
If you have been following home prices, you’ve noticed that most prices are remaining the same and in some areas, even going up. That’s partly because of the inventory. With inventory so low, many homeowners are able to list their property at top value and get a reasonable offer within a month or two. Yes, buyers want prices to come down but if there is only a small number of homes available, they have to pay top price.
While higher interest rates are deterring many buyers or keeping them from being eligible to buy at inflated prices, the fact also remains that there are still plenty of buyers out there along with investors who know that they can easily rent out a property to cover a mortgage considering the cost of rent is also at record highs. Ideally, shoppers would like to see the rates go down more than the home prices, as even a 10% decline in prices would not lead to major initial savings. In the long-term, it still makes more financial sense to buy a home than it does to rent one and that’s the advantage home sellers are having right now and why their values are staying strong.
Consumers Are Still Spending
Go into any store right now and take a look at how people are shopping. Inflation has not slowed down consumer spending and in many ways, it has helped it go up. One of the key examples of this is with grocery stores. Instead of seeing a downtick in sales, grocery stores are setting record sales numbers. Part of the reason is that while people may not be able to afford to go out to restaurants as they have in the past, they’ve still got to eat. Therefore, they are buying groceries and cooking at home more often, something they learned to do more of during covid and have continued to do during the heights of inflation. If a family of four can save over a hundred dollars for a meal because they are cooking at home instead of eating at a restaurant, the grocery store is the one who benefits from that and they are.
Consumers are not slowing down on luxury or enjoyment items as well. Televisions, concert tickets, headphones, new furniture and more are still flying off the shelves and there’s no sign of things slowing down. When the Fed looks at whether or not to lower rates, they take consumer spending into account as it’s a major sign of whether or not people are able to afford the cost of inflation. If people are still shopping, the Fed realizes the increase in rates does not have the impact they were hoping and inflation continues to go up.
The Job Market Is Also Strong
Another important factor that is impacted by spending is that people are able to find work. Yes, there have been layoffs but not to the point that would greatly impact our economy and there is work out there for those who are looking for new opportunities. Because of that, businesses have either avoided layoffs or cut them down from expected numbers. For example, a company that would traditionally lay off 10,000 employees is only laying off half that amount because the consumer demand for their services or products is still very high and they need experienced labor to meet the demand.
Companies are investing their time and energy into quality over quantity in the workforce and while that’s not the best news for everyone, it does mean that there are jobs available that people can grab to cover their expenses. As companies continue to look for ways to cut costs, labor has become a limited option as sales remain high. Lowering the quality of service will lead to a major decline in sales, having the opposite impact that shareholders want which is also keeping employment numbers strong.