Storm clouds on the horizon

There's been a lot of news headlines the past week and a half culminating with the Federal Reserve hiking interest rates by three-quarters of a percent on Wednesday. Moves of this size are not common. This announcement was the biggest rate hike in 28 years. The Federal Reserve made a hawkish call because the US inflation rate reached 8.6% in May, its highest level since December 1981, a 40-year high.

I submitted an article to the Laconia Sun some time ago titled "Is Our Current Inflation Transitory." The Central Bank back then kept reassuring us that it is. We can see now they were behind the curve, and we can expect to see an aggressive Federal Reserve over the next couple of months. Let's take a look at some of the things happening all around us so we can see the broader picture of what the future outcome might be:

• On Tuesday, the 10-year yield jumped to 3.48%, representing an 11-year high.

• On June 15th, the average rate on a 30-year fixed-rate mortgage increased to 6.10%, according to bankrate.com, compared to 3.29% in early January. As an example, a mortgage of $100,000 would result in a monthly payment of $606 for principal and interest. In total interest, you'd pay $118,158 over the 30-year life of the loan.

• The motivation for all of this is that prices are going up, and the Fed is trying to fight that with higher interest rates to reduce demand. Markets expect the Central Bank to continue jacking up rates through at least the end of the year as it tries to pull inflation down nearer its 2% target.

• The big question looming is, will the Fed trip the economy into a recession if they become too aggressive in raising the rate? Only time will tell.

• Inflation has been difficult to swallow. In May, overall inflation rose 8.6%, the highest since 1981 (gasoline increased 48.7%, airline fares 37.8%, gas services 30.2%, Electricity 12%, and food 10.17%.) A dozen eggs went up 32% over the last year. Fuel oil is up 106%.

• However, if we think inflation is through the roof today, compare it to 1974 at 12% and 14.5% in 1980. I remember those two periods painfully. Radical changes were made to our everyday lives. When President Carter appointed Paul Volcker as the Fed chair, we saw huge increases in interest rates to stop inflation. In 1981 interest rates were 18-19%, and they were variable rates. You could not get a fixed-rate mortgage.

• So today 30, year fixed-rate mortgages are over 6%. How do today's rates compare to other 10-year periods of time:

o The 1970s — 8.86% average.

o The 1980s — 12.70% average.

o The 1990s — 8.12% average.

o The 2000s — 6.29% average.

o The 2010s — 4.09% average.

o The 2020s — 2.81% average.

• What do you derive from the above? We must be prepared for higher rates. The helium injected into the economy over the past 13 years, with record-low rates and huge stimulus is over, and we will feel pains; it's part of the process, and the Federal Reserve faces a tenuous balancing act.

• Home sales have been dropping for several straight months nationally, and the fall is expected to worsen.

• Total mortgage application volumes nationally was 52.7% lower last week than the same week one year ago, according to the Mortgage Bankers seasonally adjusted index, and sharply rising interest rates are decimating refinance volume.

• Homebuilder sentiment has dropped to the lowest level in two years nationally as the housing demand has slowed.

• The S&P, Dow, and NASDAQ stock exchanges hit record highs in 2021, and look where they are now. The NASDAQ is down 32% from its all-time high. The S&P is now in an official bear market, and we saw what happened to the Dow in the last week, an 880-point loss last Friday followed by more 800-point drops and tumbling below 30,000 to the lowest levels in more than a year.

• The crazy speculation in the cryptocurrency market that hit record highs the last year hit a huge speedbump this week. Over the weekend and into Monday, more than $200 billion has been wiped off the cryptocurrency market. Bitcoin came close to falling below $20,0000 as investors continued to flee cryptocurrencies. Bitcoin has lost more than 52% of its value this year and has lost 70% of its value since hitting its all-time high of roughly $69,000 in November. The pain is widespread. Coinbase lost 13% on just Monday, lost 80% this year, and is cutting 18% of its employees. Binance temporarily paused Bitcoin withdrawals "due to a stuck transaction causing a backlog." Celsius paused all account withdrawals and transfers, citing "extreme market conditions." Micro Strategy lost 26%. So the crypto market took a huge capitulation this week as investors dumped crypto amid a broader sell-off in risk assets.

• Real estate firms Compass and Redfin announced layoffs this week as the housing market slows. Compass announced a 10% cut to its workforce, and Redfin announced an 8% cut.

In summary, it's jolting to see how quickly markets can change. There are a lot of moving parts that can collide and cause major friction. There clearly is a shift to a pessimistic or concerned outlook. The markets are not confident that the Federal Reserve can handle all of the inflationary pressures without causing a recession… only time will tell.

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This article was written by Frank Roche. Frank is president of Roche Realty Group with offices in Meredith and Laconia, NH, and can be reached at 603-279-7046. Please feel free to visit www.rocherealty.com to learn more about the Lakes Region and its real estate market.