Did you catch the nuance in the headline? Most people don’t.
Take a second and read it again. It doesn’t seem like much of a fair exchange now, does it?! I believe this is the predicament that the Federal Reserve is currently in and the impact that it will have on the average U.S. citizen. Unfortunately, I think we are heading into a lose-lose situation.
Last week we saw the Fed raise rates for the first time since 2019. If you don’t know by now, this will have an immediate impact on interest rates tied to “The Prime Rate,” – which is 3% higher than the Federal Funds Rate. This will affect home equity lines of credit, credit cards, car loans, and other similar debts.
The Fed Funds Rate is used to control the money supply, thereby influencing inflation. Raising the rate makes it more expensive to borrow, which lowers the supply of available money, thereby increasing the short-term interest rates and helping keep inflation in check.
Conversely, lowering the rate has the opposite effect. It brings short-term interest rates down and spurs low rates for borrowing. That is what the Fed was forced to do at the start of the Covid pandemic to avoid a market crash. More money has been printed in the past two years than ever before. We are now faced with the aftermath of their actions.
For the average homeowner, what does this mean? A majority of homeowners now have a mortgage rate that is lower than the current prevailing market rate. Their low rate is guaranteed, at historical levels, which is a great thing, but are they now stuck? I have daily consultations with individuals who need access to funds, but they don’t want to “give up” their low rate. Many are turning to home equity lines of credit, which I carefully consult them about, but often it’s not enough to achieve their objectives.
What about the prospects of selling their home? As is known, home prices are at historical highs. Most of the wealth of the average homeowner is tied up in the equity of their home. Sellers can make a lot of money by selling their homes now, but then what? Many can’t even look at new listings because although they are strong and experienced buyers, their real estate agent tells them that an offer “contingent on the sale of their home” is laughable and unsatisfactory in this market.
That said, I have some excellent strategies for people in this situation, including a great analysis to see if their financial situation is worsening or improving by selling and buying in today’s market. What if they don’t take action to sell today? Does that mean the market will crash, and they will have missed the boat?
For the average homebuyer, what does this mean? If they don’t buy today and home prices and mortgage rates continue to increase, they lose. If they do buy today and the market crashes, or we enter a recession, what impact does it have on them? Can they be assured that home prices will continue to rise as forecasted by most analysts? At what level do higher mortgage rates push down home values?
After months of claiming that inflation is “transitory,” the Federal Reserve is finally pledged to fight inflation aggressively. They claim they will be considering all options as they look to tame inflation. Unfortunately, what is happening abroad in China, Russia and Ukraine will continue to have a massive impact on inflation in the U.S. The Fed will have its backs against the wall, pushing us into a substantial recession. The decisions you make today will significantly impact your financial well-being for the next 3-7 years. Don’t gamble and expect The Fed to fix the problem.
Shout out and happy birthday to Beth Appelbaum, Rivky Basch, Nathan Cohen, Ari Erdfarb, Miriam Fein, Jeff Kimmel, Aaron Klein, Amanda Hoffman, Robin Mendelson, Rebecca Racer, Karla Steinberg, Steven Vegh, Tolsie Vegh and Jewish Link co-publisher Mendy Schwartz.
Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected].
