As far as real estate investors are concerned, there’s more bad news than good from the latest Federal Reserve meeting.
The bad news is that interest rates will remain the same. The good news is that inflation is down (from 3.4% last month to 3.3% in May). Now, it’s surely a matter of time—possibly in July or September—until the Fed follows in the footsteps of the Bank of Canada and the European Central Bank and begins to cut rates.
As most homebuyers and investors are only too aware, the Fed has opted to hold the federal funds rate steady for almost a year in response to elevated inflation and better-than-expected economic performance. By keeping rates as they are, the Fed is attempting to pull off a delicate balancing act and nail a soft landing by lowering inflation just enough to avoid a recession and then lowering rates to stimulate the economy. Should the Fed cut rates too quickly, they fear they will spark inflation again.
The fact that inflation remains more than a percentage point higher than the Fed’s target of 2% has many investors wondering if the Fed’s stance will result in any rate cuts this year. In its recent announcement, the Fed stated there will now be one rate cut. A drop of 25 basis points for mortgage holders is marginal and won’t move the needle much on most people’s loans. However, it could be the start of something significant next year and into 2026.
The First Rate Cut Could Come in September
“This [the lower inflation number] was a very encouraging number,” Laurence Meyer, a former Fed governor who runs an economic advisory firm, told the Wall Street Journal. “I’d need to see more before cutting, but I think September is in play” for the first rate cut.
In a Q&A after his remarks on June 12, Jerome Powell, Chairman of the Fed, said:
“The best thing we can do for the housing market is to bring inflation down so we can bring rates down. There is still a fundamental housing shortage. We’ve made pretty good progress on inflation. We’ll need to see more good data. We want to remain confident that inflation is moving back down to 2%.”
With mortgage interest rates hovering around 7%, many would-be homebuyers will still be forced to circle the runway for a while longer. Meanwhile, investors desperate to refinance to lower rates are hanging on by their fingernails, while others whose loans have already reset higher have been forced into foreclosure, with more to come.
“Rates are just shy of 7%, and we expect them to modestly decline over the remainder of 2024,” Sam Khater, Freddie Mac’s chief economist, told the New York Times. “If a potential buyer is looking to buy a home this year, waiting for lower rates may result in small savings, but shopping around for the best rate remains tremendously beneficial.”
The Job Numbers Role
Last week’s employment report for May also played a role in the Fed’s decision to keep rates as they are. However, deciphering what that role has been is debatable because the numbers sent mixed signals.
Job growth exceeded expectations, bolstering the Fed’s argument to leave rates untouched. However, the unemployment rate also rose to 4%, which, though historically low, would support the argument for a rate cut. Amid the crosswinds, the Fed felt doing nothing alarming for the time being was the safest bet. If employment rates tick up next month and new job creation decreases, the argument for a rate cut will only grow stronger.
The Risks of Prolonged High Rates to Banks
When rates are high, people don’t borrow, save, or make deposits, and mortgages go into foreclosure. The Fed’s “higher for longer” stance is as painful for banks as it is to their customers.
Once customers start to withdraw cash from savings and checking accounts to cover living expenses or because they’re fearful their bank could be in trouble, the banks really could be hurting, as we’ve seen from recent events surrounding Signature Bank and Silicon Valley Bank. For investors, it means that cash for loans will not be so readily available, and lending criteria might increase.
In a Q&A after his remarks, Powell stated that he felt the banking sector had stabilized after the scare last year. However, keeping rates high will only add further stress to lenders and borrowers, which has to be a consideration.
What Real Estate Investors Can Do Now to Prepare for a Potential Rate Cut
One fundamental thing investors should be doing in preparation to borrow again is ensuring their credit scores are as high as possible and that their debt-to-income ratios are favorable to lenders.
In addition, investors who currently own multiple properties should take inventory of those that are performing and those that aren’t, the available equity on each, and the current interest rates, and decide which properties they could sell and 1031 exchange and which they should keep. It might also be worth getting an appraisal to present potential buyers to expedite the sales process.
Investors with good credit and equity should also consider getting HELOCs and business lines of credit to prepare to buy and start doing renovations. However, selling now could be a prescient move for investors who are at the end of their tether and cannot hold on anymore. Rate cuts are on the horizon, and buyers may be more inclined to buy ahead of a potential stampede when rates fall next year.
Final Thoughts
The Fed announcement did little to alleviate the worries of people carrying high debts. It’s all much of the same. Home sellers are likely to stay put with their pre-2021 low interest rates, and borrowers whose rates have adjusted and praying for a few rays of hope are still despairing. The high rates will keep inventory tight in key markets, and house prices elevated because of it.
“The urgency to pay down high-cost credit card or other debt is not diminished,” Greg McBride, chief financial analyst at Bankrate, told the New York Times. “Interest rates took the elevator going up, but they’re going to take the stairs coming down.”
Unfortunately, that means the waiting game continues.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
