Traditionally, bad news in Washington DC (i.e. a government shutdown) or volatility on Wall Street (i.e. erratic stock market movements) are bad for the real estate market.
Conventional wisdom says bad economic news translates into negative consumer sentiment, anxiety over job security and general pessimism over future economic forecasts.
However, there are two silver linings resulting from the recent bout of bad news out of DC and Wall Street:
Falling Mortgage Rates
The Federal Open Market Committee (FOMC) raised its target interest rate by 25 basis points at the end of December, to 2.25%-2.50%, a move that was widely expected by most market participants. Generally, the Fed raises interest rates to help cool a heating economy and avoid runaway inflation. However, the prolonged government shutdown, which is affecting about 800,000 employees, is already threatening to slowdown the economy by around half of a percentage point this year. As unfortunate as the government shutdown is to federal employees and government services, gridlock is taking some steam out of the economy and removing a the key reason for the Federal Reserve to further raise interest rates.
As a result, mortgage rates have already responded to the negative news by dropping half a percentage point (0.5 point) to 4.45 percent, according Freddie Mac’s latest Primary Mortgage Market Survey. Sam Khater, Freddie Mac’s chief economist, said “Mortgage rates fell to the lowest level in nine months, and in response, mortgage applications jumped more than 20 percent. Lower mortgage rates combined with continued income growth and lower energy prices are all positive indicators for consumers that should lead to a firming of home sales.”
Stabilizing Home Prices
The past few years have been a sellers market. Prices have been steadily going up, far outpacing the general rise in wages. However, recent data suggests prices are increasing at a slower pace than the past few years. Additionally, more and more listings are starting to reduce their asking price. The seemingly endless rise in home prices was affecting inventory as homeowners sat on a fortune that seemingly kept going up. Now, a growing number of homeowners are starting to consider capitalizing on recent price gains and put their homes on the market. Basically, many homeowners are adjusting their expectations and are coming back to earth with their asking prices. This is obviously good news for buyers and brokers.
Conclusion
The economic forecast is uncertain. Opinions are split as to whether the economy will continue to grow and whether real estate prices will continue to rise over the next couple of years. Some observers believe the current growth cycle will continue into 2020, while others see a slowing global economy and even a recession on the horizon.
For the time being, however, the bad economic news may have helped put the breaks on a runaway housing market, thereby positioning the real estate market for a “soft landing” instead of a sudden crash like the one we had in 2008.