by Austin Gilleland –
In response to the COVID-19 pandemic, the U.S. Federal Reserve (the “Fed”) slashed interest rates to stimulate a stifled economy. The near-zero interest rates have contributed to a booming housing market that will be a chief concern for the Fed through 2022 as it fights to curb inflation.
Impending Rate Hikes
In December of 2021, Consumer inflation in the United States reached its highest since the 1980s. To combat the overheated economy, the Fed now plans to cool the economy by steadying inflation. With inflation at roughly 7%, the value of the dollar continues to fall. The brunt of the diminished dollar is felt by consumers engaging in every type of transaction from buying bread at the grocery store to purchasing a home.
On January 26, 2022, the chair of the Fed, Jerome Powell, announced that the Fed will raise interest rates in March and will implement additional rate increases throughout the year. The announcement followed a two-day meeting during which the Fed assessed staggering inflation and near-zero interest rates. The increased inflation and low interest rates were policies implemented by the Fed to counter the economic downturn caused by the COVID-19 pandemic. However, because interest rates were zero for so long, there is now a surplus of cash in circulation in the economy. With cash readily available, the value of the dollar drops, and prices rise.
Although the Fed announced its plan to raise rates, it has not indicated how high it will drive the rates. Powell has hinted at a “wait and see” approach after each rate hike to determine the additional increase that may be necessary. Still, Powell has made it clear that numerous rate hikes are coming in 2022. Economists believe that the Fed’s toughest battle will be fighting inflation in the housing market, where prices are expected to rise through 2022.
Between a Rock and a Hard Place
The steep price increases in the US housing market are due to a few key factors. First, as discussed above, consumer inflation is at a 40-year high. Simply put, a dollar today is not worth as much as it was in recent years so sellers are demanding higher prices. Secondly, the COVID-19 pandemic has strangled supply chains, driving the cost of materials up. Finally, wages rose significantly in 2021 thereby increasing the purchasing power of the average American. Due to these factors, home prices grew at nearly 17% percent in 2021, compared to a 25-year historic average of 3.9%.
As a result of the rising prices, homeownership in the United States is at a 50-year low. Accordingly, the rental sector is particularly strong. Just like the market for homes, rental prices are soaring. In 2021, the national median rent was up by over 11%. Comparatively, in 2017, 2018, and 2019, rent prices increased roughly 3% annually. Part of this surge is because landlords were able to increase rental prices after the COVID-19 rent restrictions were lifted. Still, inflation, increased wages, and intense demand all contribute to the high rental prices just as those factors affect home prices.
With prices climbing in both the home buying and rental sectors, many Americans are stuck between a rock and a hard place. The rental market is growing at a far higher rate than the home buying market. Rental market share is the highest it has been in nearly 60 years. But less than half of Americans rent because they prefer it to homeownership. Instead, most Americans say that they rent due to financial circumstances.
Will 2022 be a Year of Rebalancing?
The Fed is set to raise interest rates in March of 2022 as the first step in monetary tightening. Interest rates are integral to the housing market because they determine how much a home buyer must pay in interest each month of a mortgage. Traditionally, when rates are higher, demand for homes falls because buyers do not want to pay higher interest on their mortgage.
Whether the interest rate hikes through 2022 will have this effect on the housing market has yet to be seen. Likely, consumers will still find themselves in a tug-of-war between buying a home or renting. Further, supply chains still face uncertainty from the COVID-19 pandemic resulting in a shortage of new home construction. What is more unclear is how high the Fed is willing to push interest rates to curb the soaring prices in the housing market.
Many economists predict that housing and rental prices will rebalance in 2022—thereby continuing to rise but at a lower rate. While there is still high demand for homes, this demand will likely decrease due to higher interest rates. Further, as supply chains clear, developers will be able to build more homes and apartment units. Despite these factors, it appears 2022 will be a seller’s market and rental prices will continue to rise, but not at the astronomical rates seen in 2021.
About the author: Austin Gilleland is a candidate for his Doctorate of Jurisprudence degree from SMU Dedman School of Law, May 2022.
We offer the foregoing to you not as legal advice (please consult with your own attorney regarding your specific facts) but as an overview. If you desire to know more about how issues like this can affect your business, please contact Ron Holmes at 469.916.7700 ext. 105 or via email.