The big and bummer news this week:
Interest rates remain at a 23-year-high, and they’re likely to stay that way for longer than anticipated.
The Federal Reserve met earlier this week and, unlike some earlier expectations, decided to hold rates steady. While the Fed typically meets every 6.5 weeks (8 times a year), they’re expected to maintain this stance for several upcoming meetings.
This shift comes as a surprise. Back in January, analysts and investors predicted a decrease in rates by now. Discussions even centered on whether the drop would happen in Q2 vs. Q3.
Nobody is talking about that anymore.
Inflation hasn’t cooled as much as hoped. As of March, the consumer price index stood at 3.5 percent, well above the Fed’s target 2 percent. (April’s CPI data will become available on May 15).
The Fed released a statement on Wednesday citing “a lack of further progress toward the Committee’s two percent inflation objective” in their decision to hold rates steady.
Until inflation drops, interest rates are likely to stay high.
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High interest rates are keeping both homeowners and renters in a bind.
Homeowners Handcuffs vs. Tenant Trifecta
The rapid rise in interest rates is creating a logjam in the housing market.
The national average 30-year fixed rate on a mortgage is 7.75 percent, according to USA Today.
Around 70 percent of homeowners have mortgage interest rates that are more than 3 percentage points below the current rate.
This creates a golden handcuffs scenario — a “lock-in effect” due to the financial penalty that comes from selling.
While this might sound like a ‘champagne problem’ — a problem of abundance — the reality is that many homeowners are reluctant to change jobs, relocate for work or family, or make other moves that would be beneficial to their lives.
The result? A 57 percent plunge in existing home sales last year, according to a report from the Federal Housing Finance Agency.
This drop in supply is one reason why nationwide home prices rose 5 percent last year.
Rising home prices makes life tougher for renters, who feel increasingly shut out of the housing market.
Any renter who aspires to own a home faces a tough trifecta: high interest rates, high home prices, and low inventory.
It’s the opposite side of the coin. Both renters and homeowners face a problem that stems from the same source: a constrained housing market.
There’s not enough supply.
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What can you do?
If you’re a renter who aspires to own:
Househack. Buy a duplex, triplex, or 4-plex, which will offset some of the high housing costs you face.
If you live in an area that lacks multiunits, buy a single-family home and retrofit a portion of it into an autonomous dwelling. Convert the basement or garage into a separate unit. Build an accessory dwelling unit (ADU), which in some regions is called a casita, in-law suite or granny flat.
This holds a dual benefit: you contribute to the solution (creating more supply), while also collecting income to offset your housing costs.
This email won’t cover everything, but a few days ago, I did a YouTube livestream in which I answered a question from a VIP List subscriber who wants to househack. This person calculated that their out-of-pocket housing costs would come to $300 per month. They asked for feedback. Here’s what I said. [Starts at 8 min, 15 seconds]
If you’re a homeowner feeling trapped:
Feeling trapped in your home but the desire to move is strong? Let’s break it down.
First, how urgent is the move? Is it a non-negotiable career or family situation? (These are big reasons to move). Or is it more about wanting a bigger space? (This can potentially wait.)
If moving is crucial, consider becoming an accidental landlord. Here’s the idea:
- Hold your current home and rent it out.
- Find a rental place in your new city as you save for a downpayment on your next home. (Bonus: reduced transaction costs; higher likelihood of buying after rates decline, which eliminates the cost and hassle of a refi).
Don’t sweat squeezing every last dollar out of your accidental rental. This isn’t a dedicated investment property; avoid the “comparison trap” if you chat with experienced rental investors.
Focus on finding a good tenant who takes care of the place. The rental income should primarily help cover your costs, not maximize your profits.
The profit-maximizing properties are bought with that intention. This is a holding, not an acquisition.
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Jobs boom, stocks soar … yet inflation stays high, money is expensive to borrow, and both homeowners and renters feel stuck.
Confused by mixed economic signals? Listen as I break it down in this First Friday podcast episode.
Enjoy!
— Paula
