The Fed cuts interest rates by 25 basis points amidst global political turbidity

Macroeconomic perspectives:

 

As uncertainties on the economic horizon amplify amidst the China trade war and other global political turbidity the Fed is taking preventive action to keep the economy healthy.

 

The Fed in the past saw itself as a firefighter, but today it is more like a gardener that is expected to nurture an economy and keep it growing…It’s an ounce of Prevention is worth a pound of cure kind of movesaid Dec Mullarkey, head of investment strategy at SLC Management, which manages $159 billion in assets.

 

Consumer spending data shows strength, with sustained job growth and income gains. Inflation has been less than the Fed’s 2% target which also signaled a cut could be a good move.

 

According to Ken Matheny, at Macroeconomic Advisers,” the way things look now, the Fed could very well reverse course next year and push interest rates back up a notch.”

 

The Fed’s change in strategy in opposition to that of previous years could just be a blip in the general trend of raising rates over the past few years that may pick back up soon.

 

Implications for Real Estate investing:

 

Long term mortgage rates have already reacted to this rate cut and are unlikely to decline further without substantial evidence of further cuts.

 

“From the perspective of real estate, if the Fed’s policy move has its intended consequence of boosting inflation and maintaining the expansion of the economy, we should actually expect to see mortgage rates increase,” Ruben Gonzalez, the chief economist at Keller Williams,

 

Lawrence Yun, the chief economist at the National Association of Realtors stated, “These low interest rates will partly help with housing affordability over the short-term… Both rents and home prices have been consistently outpacing income growth. The only way to mitigate housing-cost challenges as a long-term solution is to bring more supply of both multifamily and single-family homes to the market.”

 

This increased supply especially in coastal regions of California is unlikely to happen given the lack of new development of multifamily and single-family units. This means that the sooner home ownership is established in these markets the better given the established trend of lack of affordability for first time homeowners. With the short-term increase in affordability seen as a result of this Fed rate cut, for some it may be the needed break for entry to the market.

 

“If you are financing and you have a 26 percent debt to income ratio post-closing, a building that requires 25 percent as a maximum is still out of reach despite the bank’s willingness to write the loan…A rate drop can mean the difference between board rejection and board approval.” said Gill Chowdhury, a real estate broker at New York City’s Warburg Realty.

 

-Written by Derek Branch

Analyst | Buckingham Investments

Helping people learn plan and invest in real estate

 

 

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