Macroeconomists are having a heyday. It’s been years, decades since students and the public were so interested in inflation!
However, many of their models and tools may be ill-equipped to deal with the current situation, and home prices might be collateral damage of the blunt policy tools available to the Federal Reserve.
The Federal Reserve has a dual mandate to achieve “stable prices” and “maximum employment.”
One could argue that we’re closing in on maximum employment with the unemployment rate below 4% again (we’re likely still in a bit of an aberration with the labor force still more than a half-million people below pre-pandemic levels), while it’s more difficult to argue prices are stable with consumer inflation in the 7% range and oil and gas prices on the rise.
But what’s driving the inflation, what’s the policy response and what does it mean for us in SENC?
Traditional theories of monetary policy suggest that increasing the money supply causes inflation, yet the Fed more than quadrupled the monetary base coming out of the financial crisis and inflation never materialized.
In fact, inflation was so low that policymakers were puzzled by their inability to increase prices by their 2% objective.
This disconnect between the recent experiences and traditional models suggests the current inflation may, at least in part, be driven by supply chain disruptions and surges in demand from federal stimulus programs.
The Fed is in a position where it is forced to act, and its main tool today is influence over interest rates. Unfortunately, interest rates don’t fix supply chains in the near term, but they are likely to have an effect on real estate markets.
At the onset of the pandemic, the Fed pushed rates about as low as they could go, and people responded by refinancing and buying homes.
The Fed’s policy coincided with two other events though, a massive run-up in the stock market and the (temporary?) decoupling of work location from employment location; both events contributed to high levels of geographic mobility and put even more pressure on local real estate prices with median home prices in the three-county area now more than $100k higher than pre-pandemic, a nearly 40% increase.
However, it’s the general rise in prices that has the Fed’s attention, not the rise in home prices in our region.
To the extent that one is sympathetic to the supply chain disruption argument for inflation, interest rates appear a rather blunt instrument to slow inflation.
The trick for the Fed will be raising rates at an appropriate pace to manage inflation expectations without crashing the housing and investment markets. Get ready for the “soft-landing” terminology to reappear. While the Fed must do something, at least they seem to be moving in a measured way.
So, what should we expect for home prices in our region in the face of rising interest rates?
Economic theory would suggest that as interest rates rise, home prices should come down, other things equal; it is those “other things” that are likely to drive home prices in the Wilmington area.
Are people able to continue working remotely, or are they called back to the office, in which case they might not want the home here anymore?
Do rising rates put a damper on the stock market and slow the movement of retirees to the region?
Does a stock market adjustment shrink the purchasing power of homebuyers?
Is there really a re-evaluation of work and priorities such that millennials and Gen Xers will prioritize quality of place over career aspirations?
Yes, interest rates are going to rise and put downward pressure on real estate prices but “all real estate is local,” and many other factors are likely to be part of the story here in Southeastern North Carolina.
Adam Jones is a regional economist with UNCW’s Swain Center and an associate professor of economics at UNCW’s Cameron School of Business.
