Our newsletter is written and designed to cut through the headlines. The news speculates as to what may happen, we give you our insights on how it will affect you and your investment properties.
The Federal Reserve (“The FED”) via their annual monetary policy speech in Jackson Hole, WY announced the high probability of upcoming rate decreases. They admitted that their interest rate policies were in restrictive territory indicating that high interest rates are hurting the economy. The number of jobs created in the economy is actually way less than what was originally reported, meaning the employment market is not doing well and is likely contracting, not expanding. Generally, when the data indicates a bad or slowing economy, interest rates usually come down.
Refresher
The FED’s Funds Rate impacts short-term loans such as HELOCs, Construction lines, Business lines, credit cards, and auto loans.
*FED Funds = short-term, not mortgage rates.
Treasury Bond Yields directly impact mortgage rates not the FED’s Fund Rate. When Treasury Bond Yields go down, mortgage rates go down. When Treasury Bond Yields are high, mortgage rates are high.
Bond yields are high because they have to attract investors with a higher return because investors are currently making more money in the Stock Market.
Bond yields go down when investors buy bonds because it offers them conservative returns when there is fear that the economy is in decline.
The Problem & Conundrum
Recent data came out that the suppliers’ price index is showing signs of inflation which results into higher prices that get passed down to the consumer.
Consumer prices are still high, yet the economy is showing signs of weakness in the form of less job creation.
*Lowering interest rates could cause even higher inflation via consumer spending with lower borrowing costs.
How does the FED stimulate the economy without causing severe inflation?
The answer: Moderately.
How does this affect you?
The projected FED rate cut is already being calculated into current interest rates. The mortgage rates quoted now already reflect the next interest rate cut.
Mortgage rates did not decrease because of The FEDs projected rate cut, they decreased because of the bad job growth news.
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Lines of Credit & Personal Debt: if you have any balances on these, you’ll notice your payments start to decrease although very little.
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Refinancing: Have a loan coming due but don’t need to sell? Refinancing will be a solid option.
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Consumers will have more disposable income with lower interest payments, either the savings rate or spending will grow.
Sellers
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If you’re an owner that needs to sell due to lack of liquidity, health issues, or property problems, there will be a larger buyer pool for your property with lower borrowing costs.
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Pricing for your building will not increase, it will just make it sellable if priced to market.
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2021-2023 prices are not returning with slightly lower interest rates. Current commercial rates are 6-6.5%, Buyer’s generally seek to purchase at 150 BPS over interest rates. *Market cap rates on an income approach are between 7-8% (Dependent on area and many other factors).
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If there’s no need to sell, right now is not the time to list your property for an above market rate price hoping for a 1031 buyer. 1031 exchanges are at a low level anyway.
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Seller-Financing is only viable if it offers better terms than what you can get with a bank. 50% or greater as a required down payment does nothing, regardless of how low the interest rate is.
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If your property is an outlier or in a rural area, prepare to hold the property for many years unless you sell it at a high cap rate with low-downpayment seller-financing.
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*Refinancing? If yes, I recommend obtaining shorter-term debt with flexible or no pre-payments so you can refinance or sell when rates get to an attractive level.
Buyers
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This is the dip, buy before pricing stabilizes and potentially goes up in coming years.
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Prices are not coming down to 1920s or Great Financial Crisis (2008-2012) levels. If you’re getting a screaming deal with this type of pricing, proceed with extreme caution.
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Set your buying criteria and focus on that to unlock more opportunities. Contact brokers, lenders, and owners in your desired geographic markets.
Conclusion
The prospect of lower interest rates has excited sellers, buyers, brokers, and lenders. The FED is only expected to lower interest rates 2x for the remainder of the year and for 50 BPS total.
In other words, not much.
If bad economic news persists, this will correlate to lower mortgage interest rates. But it also means that the economy is not doing well.
Keep in mind, if the FED reduces their rate and the data comes with higher inflation, this will result in higher mortgage rates. A lower FED’s fund rate will not directly result in lower mortgage rates.
If you’re an owner needing to sell or refinance, these next six months will be your window to do so.
If you’re a buyer looking for a good cap rate deal with a motivated seller, this is your window to buy.
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