The newest trend in the rental markets show higher income earners putting off home ownership until housing prices and interest rates come back to earth. In 2021, 44M Americans were renters with a median family income of $71K.
The number of households earning more than $150K that are still renters increased 87% between 2016 and 2021 to over 3M. Austin, Texas saw an increase in this rental category of over 154% during that five year period.
Other areas from Nashville to Atlanta had large increases during and after the pandemic in higher income renters. This phenomenon was due primarily to people moving from more expensive urban areas to work remotely.
The moves to slow down inflation by the Fed raising interest rates has had a profound impact on the real estate markets. Historically these markets are always the first to respond.
Low interest rates and easy access to money drove the real estate markets for many years. The Fed’s actions in increasing rates and trying to tighten monetary policy will most certainly bring down housing prices.
Before the pandemic began, we were all expecting another real estate recession. The Amazon Effect, which I will define, was the main culprit at that time.
The Amazon Effect
If you own retail space in a commercial property, you can certainly find tenants. The problem is that you have difficulties finding tenants who will actually be able to pay you.
If you can’t get rents, then you can’t pay your mortgage. If you can’t pay your mortgage, then the bank will foreclose. Once the banks take the building back, they sell them, normally at substantial discounts. .
If the banks end up with too many bad loans on their books, they become insolvent and the FDIC comes in and takes over the bank. All of these factors alone would have brought down prices and driven the real estate markets into a recession.
But the pandemic hit and the government pushed out trillions of dollars in relief. This put a momentary end to the real estate pricing adjustments.
fast forward, and now we also have rampant inflation and the Fed raising interest rates. These factors in combination with the Amazon Effect seem to have created the Perfect Storm.
Real Estate prices will have to adjust. This would be the only way that buyers could get mortgages in the first place.
If you’re still renting, be patient. Your time will come.
Look on the bright side. When something breaks, the only thing you need to do is make a call.
Let me leave you with this.
The February Jobs report where employers added 311K jobs did little to calm the markets. This meant that since December, the Jobs number has averaged about 350K.
The most recent bank failures didn’t help much either. These factors are leading many investors to think that the Fed may go back to a 50 basis point increase. Whether they do the larger or the smaller increase may be irrelevant in the longer term.
The question now becomes how much is enough? There’s one historical fact that all should understand.
In the past several inflationary periods we’ve weathered, inflation didn’t respond properly until the Fed Funds rate was higher than the Inflation Rate. January’s rate of inflation was 6.4% while the Effective Fed Funds rate is currently only 4.57%.
It’s obvious that we still have quite a way to go.
Plan your work and work your plans. We aren’t done with this mess by a long shot.
One last thing. We’ve extended all of the returns that are due this coming Wednesday. If you would like to make a deposit with the extension to stop any potential penalties, please contact us today.
We’re all going to get through this. Let’s get through it together.
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