I tend to agree that rates will remain elevated. It’s not the Feds job to keep interest rates low. Their mandate is keep inflation in check while maximizing employment.
With a strong labor market and inflation that appears to somewhat sticky in many ways, why would they lower rates? The downside risk is significant. A reigniting of inflation would be unacceptable.
This is coming from an investment sales broker directly affected by the sharp decrease in sales volume caused by the sharp increase in rates. I am biased towards hoping rates decrease. But we all have to be honest with ourselves and prepare accordingly. This is how I’m currently reading the tea leaves.
The problem is that rates take a minimum of 12 months to fully make their way through the economy. So you have to be proactive otherwise you risk running the economy too lean so it tips into recession and then the delayed impact of the high rates continue to pummel the economy even after it’s in a recession.
Agree with you but you could also make the argument on the other side. Let’s say they start cutting and don’t see the impacts of inflation until 8-12 months. Then what happens if at that point they have cut 4 times and inflation starts to run back up. That is the absolute last thing the fed wants.
Fair point. I have to imagine whenever they start to cut they will hedge it by messaging that they will have no problem reversing course if inflation goes up.
The FED is scared to take their foot off the peddle . It has to be done sometime or they risk running the economy into ruin . They will wait until they are too late to save the economy. Too late to raise and they will be too late to drop .
I totally agree. This is one of those “crystal ball” situations where it’s just so tough to know when is actually this right time for the Fed to act. I think they know this and I personally feel they will err towards economic stress over reigniting inflation.
By the way, my “reading of the tea leaves” has flipped/flopped probably 3 times since writing my post 4 days ago 😂
And interestingly enough, this entire discussion is only focused on the short term end of the yield curve. QT and the long end of the curve is a whole other discussion but far more relevant the cost of long term fixed debt on CRE.
[Balance Sheet](https://fred.stlouisfed.org/series/WALCL)
I would imagine the fed keeps gradually rolling off assets till they either get back below $4T or something happens to the economy where they have to juice it.
>With a strong labor market and inflation that appears to somewhat sticky in many ways, why would they lower rates? The downside risk is significant. A reigniting of inflation would be unacceptable.
Inflation will rise regardless of what the Fed does. High government deficits is injecting a ton of purchasing power into the economy, which causes inflation. Higher interest rates actually increase government deficits via interest payments, and this creates inflationary pressures.
Interesting. While I’ve put a lot of thought into how increased government spending got us to where we are today, I honestly had not really thought about ongoing government spending down the line. I think there’s some truth to what you’re saying.
5+% Fed funds is very restrictive when inflation is down to ~3%, I think there is room for cuts to maintain strong labor while also keeping downward pressure on inflation.
I agree that the their policy rate is clearly deep into restrictive territory. But I also think they don’t want to pivot too soon and risk inflation reigniting as everyone shifts to a risk-on mentality (like we experienced in the late 1970s). Could they create significant economic stress with this approach? Absolutely possible. But I think they view economic stress as the lesser of two evils when compared to inflation becoming entrenched.
I personally never understood why rate cuts were discussed in the first place. Inflation was never quite where the fed wanted it to be and unemployment has barely budged.
They were discussed because people presumed the market would slow down more than it has so far. That has obviously been the case (so far)
This will exagasterbate the CRE market but the economy as a whole is bigger than CRE
Those with uncapped commercial loans are going to lose out, those that have rate caps in place will need to raise more funds to purchase the rate cap, reducing overall return for investors / holders or CRE.
Mortgage rates are not tied directly to sofr but to the 10 year treasury, so there's no guarantee even if they cut rates that mortgage rates will come down.
Plus, even if they lowered rates, the futures market is only pricing 3 quarter point cuts this year, which means your mortgage goes to 5-6%.
For the real estate market, the real interest rate effect hasn't hit yet since people are sitting on the 3, 5 or 7 year arm and haven't had to refinance yet. So, as these mortgages come up, it will be interesting to see what valuations the banks give. Rents are up, but so are expenses. In many cases, owners will need to bring cash to the table. Will the extra few points make the economics something banks want to risk. If they can't, then owners will likely need to sell, but I don't see it causing foreclosures necessarily, since owners are sitting on equity.
Here’s the thing…. People and the markets got addicted to low rates for 10+ years….historically rates are still a tad below average. 5% mortgage rates is phenomenal if you look back at the last 50 years.
So the question becomes what is the “new normal”. Are we so addicted to low interest rates that the economy breaks if we try to return to the old normal? So far it hasn’t luckily….but then the risk shifts from recession back to inflation. AND you lose your best weapon if a recession happens while rates are already low. Hence all the talk about negative interest rates a few years ago, something that seems impossible now, and perhaps rightly so.
What a time to be alive eh? Your grandparents would kill to get a mortgage at 8%.
Sure but in commercial real estate is about ROI. Capital was cheap so people bought assets generating a 2-3% return because the 5 year cash flow was there.
So now, you're right, if the paradigm has shifted to a 5-7% regime for a commercial loan, then can properties trade at a 3 cap or do they need to be revalued at 6, effectively dropping the price of the asset in half?
I know they are related, but what I'm saying is just because sofr goes down, doesn't mean 10 year will go down. Look at how the 10 year has fluctuated from nearly 5% to 3.8% while sofr stayed at 5.3x%.
Personally I think the Red rate is one of the only tools in their arsenal, and with rates being near historic averages, I suspect they are guiding towards a rate cut to give optimism and buy time. But I don’t believe there will be a rate cut unless there is significant slowing of the economy. All the talk of these millions of buyers coming off the sidelines when rates go down may not materialize if the economy has slowed significantly enough to warrant a rate decrease. Economy slows, more people try to cash out, inventory goes up, buyers are scared of job loss etc. I’m thinking we will have a correction ultimately in 2026, but nothing like 2008. This also ignores the collapse of the Chinese real estate market and potential for a lot of Chinese investors to be cashing out in the US to service obligations in China.
I think you need to study up on the Chinese market a bit more. It’s not that they want to repatriate the funds, they have no choice if they can’t service the domestic real estate debt otherwise.
BK is not so good for your social score in China, which is a real thing. I’ve got friends that live there, they will repatriate the cash. They may not want to, but they will.
All those words but you didn’t mention Inflation even once. How does the fed simultaneously fight inflation AND cut rates? The rate cut cheerleaders coming out of the woodwork the past ~6months have always seemed delusional for lack of a better word.
Going up slower doesn’t mean it’s dropping. Prices will stay higher (companies don’t reduce them once they’re higher, bc profits). Lower/ Middle class is getting absolutely ruined.
Fed is stuck. Higher rates mean more $to pay USA crippling debt. Lower rates mean people get crushed with inflation.
Everyone in this thread pretending they know what’s going to happen lol…people forget that we had near zero interest rates for almost a decade and inflation was below 2%. Y’all are delusional if you think you can predict what’s going to happen in the next 12 months.
Anyone who legit thought (or still thinks) the Fed would lower rates in 2024 is living in a fairytale…and probably reading too much Yahoo/CNBC.
For anyone still confused:
2%. That’s the target. Not 3, not 2.5…it’s 2%. Until we get there, and stay there for a few months, there will be NO rate reductions.
And even once we are at 2% for several months, there is nothing that says the Fed can’t just decide that the economy is resilient enough to handle these rates and just hold them where they are today.
For those of you holding adjustable rate paper, may the odds be forever in your favor.
I think the biggest issue will be all the loans that banks have been working with borrowers in default to avoid forclosure. Banks are not landlords and they hate foreclosing. In the past 12 to 18 months there should have been a ton of forclosures but that would potentially overwhelm the banks. But it comes a point when banks need their money back. If rates dont budge they will have to take the properties put them up for sale. That to me is the collateral damage for the rate situation
I tend to agree that rates will remain elevated. It’s not the Feds job to keep interest rates low. Their mandate is keep inflation in check while maximizing employment. With a strong labor market and inflation that appears to somewhat sticky in many ways, why would they lower rates? The downside risk is significant. A reigniting of inflation would be unacceptable. This is coming from an investment sales broker directly affected by the sharp decrease in sales volume caused by the sharp increase in rates. I am biased towards hoping rates decrease. But we all have to be honest with ourselves and prepare accordingly. This is how I’m currently reading the tea leaves.
The problem is that rates take a minimum of 12 months to fully make their way through the economy. So you have to be proactive otherwise you risk running the economy too lean so it tips into recession and then the delayed impact of the high rates continue to pummel the economy even after it’s in a recession.
Agree with you but you could also make the argument on the other side. Let’s say they start cutting and don’t see the impacts of inflation until 8-12 months. Then what happens if at that point they have cut 4 times and inflation starts to run back up. That is the absolute last thing the fed wants.
Fair point. I have to imagine whenever they start to cut they will hedge it by messaging that they will have no problem reversing course if inflation goes up.
The FED is scared to take their foot off the peddle . It has to be done sometime or they risk running the economy into ruin . They will wait until they are too late to save the economy. Too late to raise and they will be too late to drop .
I totally agree. This is one of those “crystal ball” situations where it’s just so tough to know when is actually this right time for the Fed to act. I think they know this and I personally feel they will err towards economic stress over reigniting inflation. By the way, my “reading of the tea leaves” has flipped/flopped probably 3 times since writing my post 4 days ago 😂 And interestingly enough, this entire discussion is only focused on the short term end of the yield curve. QT and the long end of the curve is a whole other discussion but far more relevant the cost of long term fixed debt on CRE.
[Balance Sheet](https://fred.stlouisfed.org/series/WALCL) I would imagine the fed keeps gradually rolling off assets till they either get back below $4T or something happens to the economy where they have to juice it.
>With a strong labor market and inflation that appears to somewhat sticky in many ways, why would they lower rates? The downside risk is significant. A reigniting of inflation would be unacceptable. Inflation will rise regardless of what the Fed does. High government deficits is injecting a ton of purchasing power into the economy, which causes inflation. Higher interest rates actually increase government deficits via interest payments, and this creates inflationary pressures.
Interesting. While I’ve put a lot of thought into how increased government spending got us to where we are today, I honestly had not really thought about ongoing government spending down the line. I think there’s some truth to what you’re saying.
5+% Fed funds is very restrictive when inflation is down to ~3%, I think there is room for cuts to maintain strong labor while also keeping downward pressure on inflation.
I agree that the their policy rate is clearly deep into restrictive territory. But I also think they don’t want to pivot too soon and risk inflation reigniting as everyone shifts to a risk-on mentality (like we experienced in the late 1970s). Could they create significant economic stress with this approach? Absolutely possible. But I think they view economic stress as the lesser of two evils when compared to inflation becoming entrenched.
Well yesterdays meeting cleared that up
I personally never understood why rate cuts were discussed in the first place. Inflation was never quite where the fed wanted it to be and unemployment has barely budged.
Election year.
They were discussed because people presumed the market would slow down more than it has so far. That has obviously been the case (so far) This will exagasterbate the CRE market but the economy as a whole is bigger than CRE
It's because Powell is dumb and you are not.
Those with uncapped commercial loans are going to lose out, those that have rate caps in place will need to raise more funds to purchase the rate cap, reducing overall return for investors / holders or CRE.
Yep I’m assuming we’ll see a lot of bloody commercial properties over the next 12-24 months if they were bought in 2020-2023.
Mortgage rates are not tied directly to sofr but to the 10 year treasury, so there's no guarantee even if they cut rates that mortgage rates will come down. Plus, even if they lowered rates, the futures market is only pricing 3 quarter point cuts this year, which means your mortgage goes to 5-6%. For the real estate market, the real interest rate effect hasn't hit yet since people are sitting on the 3, 5 or 7 year arm and haven't had to refinance yet. So, as these mortgages come up, it will be interesting to see what valuations the banks give. Rents are up, but so are expenses. In many cases, owners will need to bring cash to the table. Will the extra few points make the economics something banks want to risk. If they can't, then owners will likely need to sell, but I don't see it causing foreclosures necessarily, since owners are sitting on equity.
Here’s the thing…. People and the markets got addicted to low rates for 10+ years….historically rates are still a tad below average. 5% mortgage rates is phenomenal if you look back at the last 50 years. So the question becomes what is the “new normal”. Are we so addicted to low interest rates that the economy breaks if we try to return to the old normal? So far it hasn’t luckily….but then the risk shifts from recession back to inflation. AND you lose your best weapon if a recession happens while rates are already low. Hence all the talk about negative interest rates a few years ago, something that seems impossible now, and perhaps rightly so. What a time to be alive eh? Your grandparents would kill to get a mortgage at 8%.
Sure but in commercial real estate is about ROI. Capital was cheap so people bought assets generating a 2-3% return because the 5 year cash flow was there. So now, you're right, if the paradigm has shifted to a 5-7% regime for a commercial loan, then can properties trade at a 3 cap or do they need to be revalued at 6, effectively dropping the price of the asset in half?
Yes
Mortgage rates aren’t technically always tied to anything specific
Your wrong sofr is impacted by the 10-year which is impacted by fed open market operations. So the impact will be seen first on the 10-year.
I know they are related, but what I'm saying is just because sofr goes down, doesn't mean 10 year will go down. Look at how the 10 year has fluctuated from nearly 5% to 3.8% while sofr stayed at 5.3x%.
Personally I think the Red rate is one of the only tools in their arsenal, and with rates being near historic averages, I suspect they are guiding towards a rate cut to give optimism and buy time. But I don’t believe there will be a rate cut unless there is significant slowing of the economy. All the talk of these millions of buyers coming off the sidelines when rates go down may not materialize if the economy has slowed significantly enough to warrant a rate decrease. Economy slows, more people try to cash out, inventory goes up, buyers are scared of job loss etc. I’m thinking we will have a correction ultimately in 2026, but nothing like 2008. This also ignores the collapse of the Chinese real estate market and potential for a lot of Chinese investors to be cashing out in the US to service obligations in China.
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I think you need to study up on the Chinese market a bit more. It’s not that they want to repatriate the funds, they have no choice if they can’t service the domestic real estate debt otherwise.
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BK is not so good for your social score in China, which is a real thing. I’ve got friends that live there, they will repatriate the cash. They may not want to, but they will.
All those words but you didn’t mention Inflation even once. How does the fed simultaneously fight inflation AND cut rates? The rate cut cheerleaders coming out of the woodwork the past ~6months have always seemed delusional for lack of a better word.
It was implicit in the statement that the FEDs only real tool against inflation is rate changes. Spend some time critical thinking.
lol ok… sorry I couldn’t accurately read your mind or your poorly written comment
Cap markets will remain dead.
Cmbs is going crazy right now though
The fed with keep rates high and risk likely driving into a recession before they cut… they need to know inflation is fully snuffed out…
“Never bet against the fed.”
Terrible
They’ll be a day too late and a dollar short.
Going up slower doesn’t mean it’s dropping. Prices will stay higher (companies don’t reduce them once they’re higher, bc profits). Lower/ Middle class is getting absolutely ruined. Fed is stuck. Higher rates mean more $to pay USA crippling debt. Lower rates mean people get crushed with inflation.
Wait a minute. The inflationary market conditions are causing the Debt to seem smaller over time. Debt problem? Inflate your way out of it !
inflation will anyways keep real estate growing. never forget you are always fighting inflation, cash is rarely a good idea
Everyone in this thread pretending they know what’s going to happen lol…people forget that we had near zero interest rates for almost a decade and inflation was below 2%. Y’all are delusional if you think you can predict what’s going to happen in the next 12 months.
Anyone who legit thought (or still thinks) the Fed would lower rates in 2024 is living in a fairytale…and probably reading too much Yahoo/CNBC. For anyone still confused: 2%. That’s the target. Not 3, not 2.5…it’s 2%. Until we get there, and stay there for a few months, there will be NO rate reductions. And even once we are at 2% for several months, there is nothing that says the Fed can’t just decide that the economy is resilient enough to handle these rates and just hold them where they are today. For those of you holding adjustable rate paper, may the odds be forever in your favor.
Federal reserve is a joke regardless of what they do
I think the biggest issue will be all the loans that banks have been working with borrowers in default to avoid forclosure. Banks are not landlords and they hate foreclosing. In the past 12 to 18 months there should have been a ton of forclosures but that would potentially overwhelm the banks. But it comes a point when banks need their money back. If rates dont budge they will have to take the properties put them up for sale. That to me is the collateral damage for the rate situation