Pet Friendly Properties

The Federal Reserve came out swinging with closed fists this past month to beat down inflationary pressures. Federal Reserve Chairman Ben Bernanke began the charge by telling an audience at an International Monetary Conference that the Fed needs to be more vigilant about controlling inflation. Throughout the ensuing days, several other members of the Federal Open Market Committee (the committee that decides interest-rate policy) echoed the Chairman’s sentiments in other public settings. The good news is that it appears a Bernanke-led Fed will be more open with the public about its intent to conduct monetary policy. The bad news is that the Fed may be gambling with a wobbly consumer.

The Difficult & Delicate Balance
Chairman Bernanke’s remarks made it clear that the Fed’s priority will be containing inflationary pressures over slowing economic growth. The Chairman said that the pace of core prices (the consumer price index excluding food and energy) was at the upper range that the Fed views as consistent with price stability and that this was an unwelcome development. He then said the U.S. economy is showing signs of slowing. More specifically, he remarked: “The anticipated moderation of economic growth seems now to be underway.” Pushing all that “Fed Speak” aside, the Fed basically announced to the world that it will continue to exert upward pressure on interest rates to contain what it perceives to be high inflationary pressures.

From a real estate market perspective, these revelations are disquieting. At present, over half of the nation’s housing markets are experiencing a meaningful cooling of home sales activity. Home sales for the entire state of Florida are down about 25 percent year to date (as of April), and California is posting similar dire numbers. There is no doubt that a transition is taking place in the real estate sector and with fingers (and toes) crossed we hope it will be an orderly transition from boom to soft landing.


If rates continue to increase, higher monthly mortgage payments from the re-pricing of variable rate mortgages could result in higher delinquency and foreclosure rates. That could aggravate already sluggish local housing markets.If rates continue to increase, higher monthly mortgage payments from the re-pricing of variable rate mortgages could result in higher delinquency and foreclosure rates. That could aggravate already sluggish local housing markets.


Different Strokes for Different Folks
In the wake of the real estate boom, there are a number of large metropolitan areas whose housing markets are now fragile and vulnerable to higher interest rates. To the point, these markets have an inordinately high market share of speculative investors and variable-rate mortgage loans. Over 70 percent of all mortgages originated in California during the past two years were variable rate loans. And most of those loans were interest-only loans. It is easy to explain why: affordability. A median income household living in San Francisco had to stretch its credit with an interest-only mortgage to afford a home in a metro area where the median price was over $740,000. And California is not alone. Metros such as Miami, West Palm Beach, Orlando and Washington, DC also have a high composition of variable rate mortgage loans. The bottom line? If rates continue to increase, the higher monthly mortgage payments from the re-pricing of variable rate mortgages could result in higher delinquency and foreclosure rates, which could aggravate already sluggish local housing markets.

That could impact consumer spending. A cooling housing sector combined with a prolonged period of high oil prices and rising interest rates are already taking their toll on consumers. How many times can consumers get a blow to the head until they finally fall to the mat? The Fed has increased the federal funds rate 16 consecutive times, oil prices are hovering at an unprecedented $70 per barrel and the diminishing wealth effect in homeownership has taken away the ability of property owners to tap their equity to spend on goods and services. Consumer spending has already shown signs of measurable deceleration, with spending growth projected to fall between 2.7 and 3 percent for the remainder of this year, compared to a 5.1 percent burst in the first quarter.

The Risks of a Weakened Consumer
I am the first to say—take some medicine now so that the patient will be healthier in the longer-run. I have supported the Fed the previous 16 times it has raised interest rates. But my support will dissipate if the Fed chooses to hike rates a seventeenth time at the end of this month. At present, the risks of a weakened consumer are greater than the risks of inflationary pressures. Wage inflation, as measured by average hourly earnings has been relatively tame. Core inflation has been hovering around 2 percent. Some Fed Governors believe 2 percent is too high; I disagree, particularly when the trade-off is a debilitated consumer.

My vote (and I know I have no vote): postpone a rate hike at the Fed’s June FOMC meeting. This is not the time to gamble on a weakening economy. I urge the Fed to digest more information about some of our nation’s fragile housing markets and as well as gather more evidence about inflationary pressures and the long-term negative effects of a prolonged period of high oil prices on consumer spending. It is better to wait a bit longer and make a more informed decision at a later time, than to rush to judgment.



Learn more about NAR Chief Economist David Lereah

Pulled from Realtor.org