When President Trump announced he would break with precedent and nominate Federal Reserve Governor Jerome “Jay” Powell to replace current Federal Reserve chair Janet Yellen in early 2018, he was keeping a much-publicized campaign promise to “fire” Yellen. During the presidential campaign, Trump repeatedly criticized the Federal Reserve for keeping interest rates artificially low and create a national economy and housing market dangerously dependent on government interference.

Under Yellen

Whether you agree with the president’s assessment of the situation or not, the changing of the guard from Yellen to Powell certainly could shake up the real estate market. Under Yellen, theFederal Reserve raised short-term interest rates four times. It took small steps toward unwinding massive economic stimulus. To which many have said rendered the U.S. economy far too dependent on the ongoing goodwill of the federal government and heavy taxation. When interest rates remain low, as they have under Yellen, mortgage interest rates and, by extension, homeowners’ monthly mortgage payments, remain relatively low. When interest rates rise, mortgages with variable rates may rise in monthly costs. It can also become more difficult for homebuyers to qualify for mortgages since monthly payments will comprise a larger portion of their monthly income. Particularly given that wage growth has been stagnant in 2017, this could mean that more households rent instead of buy in 2018. Or that current homeowners find themselves forced to sell if their mortgage payments rise and become too expensive.

High Hopes for Powell

Many economists hope Powell will continue Yellen’s policy of gradual increases to interest rates. Something that appears likely since his practices have largely been “middle-of-the-road” throughout his career. “That gradual movement [of interest rates] is very helpful to home buyers who are making a very large purchase. And moves in the interest rates can affect the math on what they can afford to buy,” Danielle Hale, chief economist at Realtor.com, observed to MarketWatch.

However, since the Fed’s mandate is primarily to control inflation and the labor market, if Powell or the administration believes a faster series of interest rate hikes is necessary, the housing market could shift dramatically and much more quickly than most housing analysts would like. If housing becomes suddenly and dramatically less affordable, for example, the market for rental properties could skyrocket nearly overnight. Some analysts also believe Powell might affect housing affordability by selling off the Federal Reserve’s portfolio of mortgage-backed securities. A move in this direction could cause mortgage interest rates to increase even if theFederal Reserve does not raise short-term rates. “If the Federal Reserve decides to start clearing out some of these [securities], and they really stop any expansion in acquiring [them], that will likely push rates up,” observed Ralph McLaughlin, Trulia’s chief economist.

REIs Take Note

In this case, real estate investors will simply need to adjust their strategies to accommodate a housing market that may have fewer buyers and more renters. REIs may need to adjust the methods they use to acquire properties as well. In the short term, it seems unlikely much will happen on this front before the end of 2017 since Powell will not assume his new position until around February 1, 2018. In the interim, preparing for changes and monitoring any announcements from the Federal Reserve about last-minute actions from Yellen will keep investors informed and ready to react when Federal Reserve leadership changes.

  • Carole VanSickle Ellis

    Carole VanSickle Ellis serves as the news editor and COO of Self-Directed Investor (SDI) Society, a membership organization dedicated to the needs of self-directed investors interested in alternative investment vehicles, including real estate. Learn more at SelfDirected.org or reach Carole directly by emailing Carole@selfdirected.org.

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