Market Update! Moving into September of 2022, the Federal Reserve has yet again raised interest rates to battle inflation. What does that mean for the real estate & financial markets? We’re going to that and more in this video!
0:16 Rate Hike
1:36 Real Estate Market
3:29 Stock Market
5:08 Low Risk Savers
5:38 Top 5 Banks for Interest
6:43 People with Fixed Rate Mortgages
7:34 Inflation Rates
For the second straight month the Federal Reserve has raised interest rates by 75 basis points, marking the most aggressive tightening in more than a generation. The intention behind this is to slow purchasing and borrowing and in turn drop demand for products to rebuild supply and bring inflation back to the 1-3% inflation rates we have seen over the past couple of decades. The problem is that inflation (9.1%) has lowered purchasing power much faster than wages have grown (5.5%). The longer this persists, the more interest rate hikes we can expect in the future.
The part of our economy hit the hardest by increasing rates is the real estate market. At the beginning of the year interest rates for a 30-year fixed mortgage were sitting at 2.75%, which has more than doubled to today’s rate of 5.75% – the highest rates seen since 2009. This 50%+ increase in the monthly cost of a mortgage is causing economists to predict rising home values to level out. Additionally, many homeowners wanting to upsize are now opting out of the market due to the 4X cost of purchasing a larger home between increased home values and higher interest rates. While it is hard to predict the future, historically prices tend to continue upwards, so now is still the time to buy as refinancing at a lower rate in the future can drop a monthly payment significantly.
The second disruption is typically seen in the stock market. During the pandemic when interest rates dropped the stock market took off significantly. So as interest rates increase, stock values should decrease, right? Well, not exactly. Since the 60’s the stock market has trended upwards throughout past rate increases & decreases. As long as the Federal Reserve effectively communicates their intentions to the market an increase in rates should not cause panic resulting in a crash. In fact, stock values rose during the last rate hike and stocks have been recovering over the past 60 days. A recession is defined as two consecutive quarters of Gross Domestic Product (GDP), but most experts agree that there is less than a 50% chance of that happening over the next 12 months. Once inflation rates begin to drop, the Fed will begin lowering interest rates, stimulating the economy in the process.
There are some winners in a downturn of the market such as low risk savers, or people that like CDs, money market accounts and bonds. Over the past couple of years most high risk savings accounts have yielded little interest, but with the Fed raising rates savings accounts are now paying a healthy amount. In the past, in years when the stock market was stagnant, these accounts could actually outperform on return.
There are 5 top recommended banks with a higher return on interest. Each of these are FDIC Insured and will probably increase their return as future rate hikes take place. Number one is Ally Bank, which currently offers 1.25% interest on free savings accounts, however their checking account requires a $250 minimum per check. Next up in Marcus by Goldman Sachs offering 1.20% interest on free savings accounts. Third, SoFi offers 1.50% interest on their savings account along with a $300 bonus for signing up for direct deposit. Fourth, CitiBank offers 1.65% interest on their savings accounts and topping the list is Citizens Bank with 1.75% interest.
People with fixed rate mortgages, or people with adjustable rate mortgages that are at least 3-5 years out are also winning during the downmarket. If you have an ARM that is one year out, your payment is likely going to increase substantially and soon. If you have an ARM that is 3 to 5 years out, you may want to consider looking into a locked rate loan to protect yourself for the future. You can always refinance if needed. For those with fixed rate mortgages, your monthly payment will remain unchanged regardless of rate changes.
Inflation rates are still high, but beginning to get back on track, dropping from 9.1% to 8.5% in June to July of 2022. We did see a 60 cents per gallon price drop at the gas pump over the last 30 days, which will hopefully continue. Jerome Powell indicated that inflation is beginning to soften, but we will have to wait and see what the future holds.
My closing advice to use money wisely and protect yourself & your family are: 1. Save 15% of your gross income. 2. Save 25% if you can 3. Over time stocks and real estate values increase 100% of the time.
For any and all real estate help, give myself and my team a call at 248-221-2777