Two friends were in a bar and decided to make a bet. One guy told the other, I bet I can get more money from the bartender than you with one try. He quickly glances at the menu and orders the most expensive drink. The bartender says, “That will be $27.” The man quickly replies, “I already paid you; you must’ve forgotten.” The bartender says, “You’re right; it’s tough to keep track sometimes.” His friend, who has thus far been watching silently, says, “I know what you mean. You never gave me my change of $100 for the same drink.”
Last week I won an easy bet. I bet someone that the Federal Reserve would only raise interest rates by 25 basis points. He thought there would be no rate hike. Unfortunately, it’s not the way the Federal Reserve works. The Fed only knows how to swing the pendulum to the extreme. When they lower rates, they keep it there too long; when they raise rates, they do it too much for too long. Each time they break something in the process, which only then causes them to reverse direction.
Is it any surprise that this week Fitch downgraded the United States debt from a rating of “AAA” to “AA+”?! Fitch cited too much debt, deteriorating economic outlook and “erosion of governance” – i.e., handling of the debt ceiling fiasco, amongst other disasters. The Fed is constantly looking through a rear-view mirror rather than looking in front of them and seeing what current market conditions reveal. They are making big bets, and significant decisions, on inflation reports that are all outdated and inaccurate.
As a result of their aggressive rate hikes, and by their own admission, “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.” Yet, they still don’t think they have done enough. However, they fail to blatantly see that the banking sector is in a big credit crunch that is not only ongoing but appears to be accelerating. All types of loans, including business, home, HELOCs, and car loans, were declining, and further bank tightening is expected.
Speaking of wagering – most of the prominent real estate analysts are now betting that the housing market will end up might higher than initially forecasted earlier this year. Corelogic expects a 10% increase in home pricing. Zillow has now revised its prediction to 10% as well. The FHFA has also drastically increased its forecast to 7%, while Black Knight and Case-Shiller, the group’s most conservative, predict a 5% increase.
As those who read this column regularly know, I have consistently predicted that home prices would remain strong this year, despite the higher rates and dim forecasts. In fact, a few weeks ago, I was interviewed by a reporter from Realtor.com, and she told me that I was the only person she interviewed that was right about the fact that despite higher rates, home prices will still climb higher. I should have bet her other sources.
With no Federal Reserve meetings scheduled for August, the next major “bet” will be to see what happens at the September 20 meeting. Many anticipate that The Fed will raise rates again. Let’s see what else breaks before then.
Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected].
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