Fed pause means advisors may need to get real with house-hunting clients

Brad Case, chief economist, Middleburg Communities

Potential homebuyers may be looking at a 30-year fixed mortgage above 7 percent long past the spring buying season.

The Federal Reserve is in no rush to cut interest rates, despite the stock market’s great expectations. That means financial advisors better hurry up and tell their house-hunting clients that the wait for their dream homes may be a lot longer than they thought.

Federal Reserve Chair Jerome Powell told 60 Minutes Sunday that Americans will likely be waiting well past March for a reduction in interest rates while his team looks for more economic data to confirm that inflation is indeed sinking to the Fed’s 2 percent target.

As a result, potential homebuyers may be looking at a 30-year fixed mortgage that’s above 7 percent long past the spring buying season. That’s a major bummer for a substantial number of Americans, as homeownership is the largest source of wealth among families, and it certainly helps to start building that wealth with a reasonable mortgage rate. The median value of a primary residence is worth nearly 10 times the median value of financial assets held by families, according to the National Association of Realtors.

Brad Case, chief economist for multifamily housing developer Middleburg Communities, foresees a difficult year for the owner-occupied market as a result of this continued elevation in rates, as well as a lack of supply that’s holding home prices aloft. For rental housing, however, he sees numerous investment opportunities given the continued strong demand.

“I want to know whether people have the confidence to move out of their parents’ house, move out of their fraternity brother’s house and get their own place. And the economy is continuing to be very strong,” Case said. “I look at the labor market, income growth and consumption growth. But it’s really about having jobs.”

Since 2004, Middleburg Communities has acquired or built over 22,000 apartments and executed more than $3 billion in transactions. primarily in the southeastern U.S. Prior to Middleburg Communities, Case worked as an economist with Fannie Mae, Nareit, and the Federal Reserve Board.

He warns that development companies that were counting on lower rates this spring and summer might be imperiled, and said advisors should steer clear of potentially troubled investments.

“We’re actually the ones providing the funding for the people whose development projects got halted when interest rates went high,” Case said of his company.

He added that the current rate environment, coupled with the lack of supply of new homes, is hastening the so-called “build-to-rent” trend.

“If people want to rent a house but they also want four walls, it used to be that you can only do that by renting a house owned by the guy two blocks away,” said Case. “Now, build-to-rent is professionally managed communities where they do the rent, do the repair and maintenance. There’s a community pool. There are all the other amenities that you used to get only in a multifamily community. That’s what we’re developing around the Southeast.”

Finally, when asked whether the problems plaguing commercial real estate will rub off on residential housing and its developers, Case said the overlap is limited.

“Most of the office real estate market is just sunk for the long term,” he said. “That affects banks, which affects the financing for what we do. But really, that’s the only way it affects us.”