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Where Do We Go from Here?

Lately, it seems that no matter who I’m speaking with, rising costs of everything seems to come up. Inflation, or the general cost of goods and services rising, feels painful for all. Of course, it affects some more than others. While we all feel it at the gas pump and the grocery store, credit is a different playing field. The main way the federal reserve tries to reel in inflation, is through raising interest rates. This is where the divide starts to happen. If you can pay for a holiday gifts, a car, a home in cash, this doesn’t affect you in nearly the direct and painful way that it affects those who need to borrow to pay for these items. And, unfortunately, that’s the plan. Not necessarily the disparity, but the idea that it becomes harder or more painful to borrow money is the plan. This is because the way the US economy combats inflation is to “strongly encourage” Americans to spend less. The price of consumer goods, in its simplest form, is determined by supply and demand. If Americans purchase less goods and services the prices of those goods and services should go down. Reducing inflation.

What’s that have to do with interest rates? Well, good, bad, or ugly, much of the U.S. consumer economy is run on credit. So, if it’s more expensive to get credit (a higher interest rate on your credit card, personal loan, car loan, etc.) we (consumers) are going to buy less things. So, if you’re feeling like all your money is going to necessities like heat, groceries and gas and you are going to cut way back on holiday gifts. That is exactly the intent.

I can get behind the idea of not needing extra stuff for Christmas, but what’s that mean for the housing market? Because mortgage interest rates are also rising, it means buyers who need a mortgage, no longer have the buying power they had 18, 12 or even 6 months ago. They will get less house for the same payment. The interesting part here is that the demand for housing isn’t going down. And it’s not forecasted too. We still have a huge housing shortage and renting is just as expensive (more when you consider you aren’t gaining ownership of anything). Unlike just buying less holiday gifts, these shoppers (today’s real estate buyers) aren’t in a position where they can easily choose to wait or not buy at all. What history has showed us is that like the consumer buying less gifts during a time of high inflation, these buyers will also be forced to scale back. The home they buy will not be the 2,000 sq ft. 3bd, 2ba. house they pictured in 2019. It may be a 1300 sq ft 3 bd, 1ba for the same payment. Interestingly, when I speak to people over 50, they are way less shaken by this. I think the reason is experience. They’ve seen mortgage rates hit over 18% and I’m sure that felt scary. But they’ve also seen interest rates in 6-8% range that felt stable and normal. Our interest rates have been abnormally low for so long that people who became adults in the last 5-10 years haven’t seen anything else. I don’t have happy news for you, but what I can offer is perspective. Perspective is important. It always makes me feel better to look at historic charts of the S&P 500 and mortgage interest rates.

While I can’t predict the future, I can 100% assure you it will constantly be changing. There is a reason that the last few years have been flooded with homeowners refinancing their mortgages. They bought a house when mortgage rates (while normal at the time) were higher and took advantage of the historically low rates in the last few years.

Focus on the parts you can change and make peace that you’ll do your best with the parts you have no control over. And as always, surround yourself with knowledgeable advisors to guide you along the way.

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