Do you remember the opening scenes from the classic movie Mary Poppins?
The camera focuses on a weather vane changing direction as observers comment …
“Looks like the winds are changing over 17 Cherry Tree Lane” … home to one George W. Banks.
But today it’s the Fed’s Janet Yellen – not Mary Poppins – bringing winds of change.
And it’s not over Cherry Tree Lane, but 1600 Pennsylvania Avenue … home to one Donald J. Trump.
According to CNBC, “It’s (almost) official: The Fed is raising rates next week.”
“If there were any doubts about whether the Federal Reserve would be hiking interest rates this month, Wednesday’s blockbuster jobs report almost completely removed them … pushed market-implied probability of a Fed move to 92 percent …”
Of course, interest rates are the price of money … or rather, currency … in an economy.
And because the U.S. dollar is the reserve currency of the world, Fed policy affects the entire world … including lowly real estate investors, our tenants, and their employers.
So will the Fed raise rates? And if they do, what does it mean to investors … real estate and otherwise?
Let’s just do a short re-wind …
Right after the election last November, we said, “… the odds [of an interest rate increase] are probably higher now because we’re guessing the Fed isn’t a fan of Donald Trump.
Of all the aspects of a Trump administration, the one we find MOST fascinating is the dance between President Trump and the Federal Reserve.”
Of course, now we know the Fed actually did raise rates … albeit only a token amount … in December.
Then President Trump gave his first big speech to Congress. And as we observed shortly thereafter, the stock markets LOVED it.
Now the markets think the Fed will raise again in March, so the stock market’s pulling back.
Dizzy yet?
Not if you’re a real estate investor. You’re just watching all the gyrations, and collecting your rent checks each month. Market fluctuations are bo-ring … in a GREAT way!
We like to point this out when talking to whip-sawed stock investors about the calming benefits of investing in real estate. Sometimes a little boring is fun.
However, with the probability of a Fed hike looming, here are some things for real estate investors to think about …
Mainstream financial pundits ASSUME a Fed rate hike is automatically bad for real estate.
The theory is higher interest rates make homes less affordable. You hear this ALL the time.
And when newbie real estate investors hear this, they get nervous about investing. But there’s so much more to the story …
First … if fewer people can afford to buy homes, then more people need to rent! Duh. And who’s that good for? Landlords.
Next, higher Fed rates are usually introduced as a tool to slow inflation as measured by the CPI or Consumer Price Index.
Well, a higher CPI is usually the by-product of higher wages … which is usually the by-product of a tight labor market.
Go back and read the CNBC excerpt. The Fed is expected to raise rates because of the “blockbuster” jobs report. In other words, a tightening labor market.
Now we’re not saying the U.S. economy employment situation is great and wages are rising. But perhaps the Fed is trying to get ahead of the curve.
Then again, this Bloomberg article suggests wage growth might NOT accompany this jobs “boom.” So maybe the Fed agrees and won’t raise rates. Or maybe they will anyway.
The point is NO ONE KNOWS … and it doesn’t REALLY matter.
If rates don’t rise, the stock market will roar a while longer. Great! More time for stock investors to take profits, and move some paper wealth into nice, boring real estate.
If rates do rise, there will be fewer qualified home-buyers, which leads to more people needing to rent some nice, boring real estate. Great!
If job growth stagnates and wages fall, there will be fewer homebuyers, less new build inventory expanding competitive supply, and more renters seeking out AFFORDABLE markets and property types.
And as long as you’re okay investing in nice, boring, affordable markets and properties, you’ll be there to meet the demand. Great!
Of course, if job growth continues and wages rise, so will rents and mortgage rates. A rising economy lifts all assets.
And for real estate investors who’ve locked in nice, boring, long-term fixed financing on their nice, boring properties … you’ll have lower fixed costs against those rising rents.
This means better cash flow and equity growth. Great!
The point is that if real estate investors focus on affordable markets and properties, and structure deals with sustainable financing and cash flows …. it doesn’t matter much which way the wind blows or how hard.
Until next time …. good investing!
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