It has been a difficult couple of years for the global economy, due to supply shortages, pandemic-related closures, and any number of other factors. Here in the US, we have seen the unemployment numbers remain relatively healthy and the stock market stay strong, despite all of the challenges that have faced the economy. In many ways, the government stimulus provided to citizens throughout the COVID-19 crisis have helped to keep many people afloat. Unfortunately, the infusion of trillions of dollars into the economy ultimately has an effect on the market, and when combined with supply shortages, shipping delays, and an increasingly limited housing market, inflationary pressure has recently become a concern. This past week, numbers of November released indicating a 6.8 percent increase in average consumer prices from this time last year, marking the largest inflation increase in 40 years.
In response to this acute inflationary pressure, the Fed will likely be taking steps over the next few months to try to rein in inflation and stabilize the US economy. One of the most effective tools they have for doing this is raising interest rates, which tends to slow the growth of the economy. When interest rates are low, people are more likely to take out loans, invest in the stock market, and engage in other behavior that takes advantage of these low rates. When rates are high, by contrast, loans are more expensive, investors tend to gravitate to bonds (which are more stable than stocks and provide value through the payment of interest rather than dividends), and prices tend to stabilize rather than increase, since consumers are buying less of most non-essentials.
Because home sales are often directly dependent on the ability to access loans in the form of mortgages, the housing industry is acutely affected by interest rates. When rates are extremely low, as they have been for the past 5 to 10 years, people are more likely to take large mortgages to purchase houses, creating a sellers’ market, since there are so many prospective homebuyers. This effect is partially responsible for the huge increase we’ve seen in home prices over the past few years. By contrast, when interest rates go up, people are less likely to take out large mortgages to buy homes, which decreases the size of the pool of prospective home buyers.
When there are less buyers competing for homes, it becomes more difficult to sell them, particularly at the relatively high prices that the real estate industry has enjoyed over the past decade. Looking forward, it is pretty clear that the Fed will begin to raise interest rates in the next few months and into 2022, which means that home sellers are nearing the end of the current bonanza. This is why we suggest that homeowners who are planning to sell sometime in the near future consider doing so sooner rather than later. In order to take advantage of the current hot real estate market, it is a good idea to put your house on the market while interest rates are still low. Once they raise, it will be much more difficult to sell your house, which means you are less likely to be able to fetch premium prices for your homes.
People with houses for sale in western and northern Washington would do well to explore the possibility of getting their properties on the market as soon as possible. To learn more about the Puget Sound real estate market and your options as a home seller, feel free to reach out to our team here at Serving the Sound, your Washington real estate professionals.