Written by: Harrison LaHaie
What’s in the News
The Federal Reserve hiked the Fed Funds rate another 75 bps in response to continually elevated levels of inflation, falling in line with recent rhetoric espoused by Fed Chairman Jerome Powell. Thirty-year fixed rate mortgages hit 6.7% this week, the highest since July of 2007. Stock market indexes have re-entered bear market territory. Housing starts surprised on the upside with a 12.2% increase, led primarily by multi-unit developments, showing developers’ hesitation about the single-family market moving forward. However, building permits declined by 10%, signaling a downward trend to be coming down the pipeline. The Federal Reserve’s quantitative tightening policy and the shrinking of its balance sheet has begun to show up as the total assets held by the Fed have decreased by roughly $150 billion.
Economic Outlook for CRE
The tightening financial conditions due to the Federal Reserve’s recent policy will likely bring more challenges to the CRE world. The costs of financing are set to continually increase, which will contribute to a potential gap between buyer and seller expectations. With buyers forced to change their underwriting, sellers will have to understand how prices may have to accommodate the new interest rates (i.e., the dramatic rise of the 10-year over the last month). This does not mean a total halt of activity like in the Great Financial Crisis as some sectors still have the opportunity for success. Multifamily, for example, is well positioned as single-family homes have become increasingly unaffordable due to climbing mortgage rates and incredible price growth, putting more people in apartments. Fundamentals still matter, and regions with solid fundamentals will have success despite macroeconomic conditions.
At this point, the number of possible outcomes of this recent economic cycle are decreasing by the day. With the Fed, according to their guidance, posturing for rate hikes all the way to over 4-5% next year, the likelihood of a soft-landing decreases. Jerome Powell has limited tools to stop inflations, and they all involve economic pain. As a backward-looking institution, the Fed is likely aware that premature loosening of monetary policy allowed inflation to make a comeback several times in the early 80s. Powell and the rest of the committee likely want to avoid this if possible. Right now, the Fed is looking at positive real interest rates through the next year, as they have the long-term neutral rate at about 2.5%. That means tight monetary/financial conditions for an extended period.
Sources: Globe St, WSJ, First Trust, Federal Reserve.