Fed To Begin Quantitative Tightening, Here Is Why And What To Expect

Each week the Incline Village real estate market gives us something to ponder. There were 8 new listings, 13 price reductions, 8 places going into escrow and 3 properties closing escrow in the past 7 days. We continue to see sales activity in all price ranges.

The increase in prices during the past few years means we have had to redefine the price range for each property category. A low-end house now qualifies as anything under $1.2 million whereas in the previous decade it was anything under $600,000. Moderate priced houses now range up to $3 million. The high-end goes from $3 million-$6 million with the super high-end above that level.

It’s apparent that Federal Reserve chairman Jerome Powell can still move markets with his words. The speech he gave last Friday in Jackson Hole Wyoming reinforced the notion that fighting inflation is the most important goal of the Fed. Considering that poor decision-making by the Fed is the primary cause for the inflation we are now experiencing it will be interesting to see if they are successful.

The Fed kept interest rates way too low for far too long. It was also a huge mistake for the Fed to be purchasing mortgage-backed securities when the real estate market was strong. Backstopping stock and bond markets during the pandemic was an egregious error. It is the responsibility of the Fed to provide liquidity not solvency. Unfortunately, when you combine reckless Fed policy with irresponsible fiscal policy by the Congress it’s a recipe for high inflation.

It’s going to be a painful process to fight inflation. In September the Fed will begin quantitative tightening. There will also likely be another interest rate increase somewhere between 50 and 100 basis points next month. Energy prices for oil and natural gas won’t be coming down anytime soon. With the winter heating season not far away, there is no reason to believe that energy prices will be retreating significantly.

Mortgage interest rates for a 30-year fixed-rate mortgage are once again approaching 6 percent. The 2 year treasury bond interest rate is now inverted with the 5 year, 10 year and 30 year bonds. Banks are still paying extraordinarily low interest rates for savings accounts and certificates of deposit. Finding safe investments that provide a good yield after taking inflation into account is extremely difficult.

Over the long-term, holding real estate especially quality properties that generate a lot of cash flow will turn out to be a good investment. But it’s going to be a rough ride the next couple of years for many investment categories. Fasten your seatbelt and hold on tight...