The most potent force in the economy is human psychology. The markets are driven by fear more than anything else, either the fear of missing out on a booming market or losing money in a turbulent economy.
2022 is transitioning into the latter category. The Covid Virus and the dramatic measures the government and Federal Reserve took over the past two years turned the economy from a lockdown recession to a raging economy with significant inflation.
As a result of the inflation, the Federal Reserve has indicated it will begin to raise interest rates to reduce inflation to more normal levels. So far, the stock market has not reacted well, recognizing that higher interest rates will slow the economy.
How high will interest rates go, and how much will this affect the real estate and stock markets? But, of course, the other risk is a recession, seldom has the Fed been able to navigate a soft economic landing.
What this means for real estate-
The economic philosophy of most economists and governments has changed over the past 30 years from a balanced budget policy to MMT or Modern Monetary Theory. In a nutshell, the US economy is more reliant on the Federal Reserve to manage the debt and growth of the economy than on the free market. Today the US is in more debt than it has ever been in, and so far, this has not been a problem as the cost of the debt is low due to low-interest rates. But, what if interest rates rise substantially?
I believe the Federal Reserve cannot let interest rates rise very much as the increased cost of the debt could be devastating to the economy. This is good news for real estate but not so much for stocks.
Look for mortgage rates to stay in the same range and perhaps even go lower later in the year as short-term interest rate increases continue to hurt the stock market and slow the economy.
Interest rate Update- The 30 year fixed rate for mortgages has risen from approximately 2.75% to 3.75% in the past 30 days. Expect mortgage rates to stay in the range of 3.25 - 4.0% for the foreseeable future.
This year, wild Cards to the economy are another Covid variant and Russian military developments.
Dow Chart for the past 30 days-
