On Wednesday, the Federal Reserve approved a 0.75 interest rate increase, the largest increase since 1994. Not only that, but the Fed also indicated that it would continue to raise rates this year at the most rapid rates in decades in an effort to slow the economy and combat inflation, which is running at a 40-year high.
The 0.75 percentage-point rate increase will increase the Fed’s benchmark federal funds rate to a range between 1.5% and 1.75%, according to the Wall Street Journal (WSJ). The Fed approval interest rate increase will affect credit card debt, as well as the housing market and auto loans.
The News-Press interviewed local experts on the impact this will have on Santa Barbara’s economy.
“The recent Fed interest rate hikes are having a mixed effect on the Santa Barbara real estate market. On one hand, buyers are getting priced out of the market as even small interest rate increases make large increases in monthly mortgage payments. On the other hand, it is spurring demand as buyers are anxious to purchase a home before there are further increases which are expected,” Bob Curtis, a real estate agent with Village Properties, told the News-Press.
“Inflation has skyrocketed, as we all know. There is no CPI for Santa Barbara but the acceleration in prices is widespread. Prices are rising much faster than wages, meaning people are getting a real wage cut, that is, every dollar buys less than it did a year ago. Along with rising rates the fed sets, mortgage rates have also climbed to their highest level since 2008, now at 5.8% for a 30 year fixed. This will slow down the housing sector some, but many recent purchases have been all cash,” said Peter Rupert of the Department of Economics at UCSB.
“Our market remains tight in terms of inventory, which is keeping prices steady and, in some cases, still rising. The inventory is slightly up recently because some sellers are concerned that prices are going to drop and are putting their houses on the market. Despite this, inventory remains at record or new record lows. For example, currently there are only 3 condominiums available for under $1 million and there are only 12 single family homes under $1.5 million. This is from Carpinteria to Goleta,” said Mr. Curtis.
The News-Press asked Mr. Rupert if we are in danger of going into a recession: “We are certainly in the middle of a correction, but these are different times given we are coming out of the pandemic that upset so many different facets of business and life. So it is hard to use history to judge whether this slowdown leads to an overall recession. Having said that, the slowdown is real and whether we end up in a recession is hard to predict, although many business economists say it is getting more likely,” he said.
“Our market is ‘normalizing,’ we are still seeing almost 70% of the homes that come on the market receive multiple offers. The difference is that instead of receiving 8-10 offers we are now seeing 2-3. When properties receive multiple offers, they generally sell for above the list price. For example, this year houses in the San Roque area sold, on average, for 19% above the list price,” said Mr. Curtis.
“I think the Fed was off on this one. For many months they thought it was transitory given the supply chain issues, etc. Given that it has been much higher than they anticipated and lasted longer, they had to respond very aggressively, hence the 75 basis point increase and more to come. The increase they implemented helped to alleviate some of the stress out there and the market gained a little yesterday but fell again today. The Fed is now walking a tightrope … raise enough to keep inflation in check but trying to prevent a recession. They can do the former if they are dedicated to it, but have little to say about the latter,” said Mr. Rupert.
Officials approved the interest rate increase during a two-day policy meeting which concluded on Wednesday, new projections showed that all 18 officials who participated in the meeting expect the Fed to raise the rates to at least 3% this year. In fact, the Feds-fund rate might rise to at least 3.375% this year, according to at least half of the officials, according to Wall Street Journal.
Fed Chairman Jerome Powell said that the central bank wasn’t trying to reduce a recession. “The events of the last few months have raised the degree of difficulty” of achieving a soft landing. “There’s a much bigger chance now that it’ll depend on factors that we don’t control. Fluctuations and spikes in commodity prices could wind up taking that option out of our hands,” said Chairman Powell, reported the Wall Street Journal.