Moody’s Chief Economist: Fed Interest Rate Cut to Boost Real Estate (with Caveat)
The Federal Open Market Committee (FOMC) decided to lower the fed funds interest rate, decreasing by 25 basis points to 2.00%. The committee voted 8-2 in favor of the cut.
Main Takeaways from the Fed Interest Rate Cut:
This is the first FOMC reduction since the depths of the Great Recession in October 2008. This also marks the end of a nearly four-year cycle of periodic rate increases dating back to December 2015.
A rate cut during an economic expansion is a little unusual. The US currently enjoys the longest expansion in its history at 121 consecutive months, though growth has often been sluggish.
FED FEARS TRADE WAR, GLOBAL TROUBLE
The official rationale from Fed Reserve Chair Jerome Powell is that the rate cut should stifle recessionary pressures. The Fed fears rising trade tensions with China and general economic uncertainty abroad. Still, Powell described the state of the economy as “moderate” and the job market as “strong.”
Investors normally greet interest rate reductions with optimism. The expansionary monetary policy normally means long-term investments will pick up steam and businesses should have more incentive to grow. Instead, major stock market indices were bearish following the cut, perhaps out of fear that the rate adjustment could be a one-off.
Borrowers are the most obvious and direct winners. Lower borrowing costs will make new debt more attractive and allow existing debtors to refinance at lower rates. (This is particularly good news for the U.S. government, by far the largest debtor in the world.)
Savers lose out, for the same reasons. Indeed, many banks already cut yields on savings accounts and CDs this year in anticipation of likely Fed rate cuts.
REAL ESTATE SHOULD GAIN, BUT…
Expect gains in multifamily and other property types, says Victor Calanog, Chief Economist at Moody’s Analytics REIS, as investors chase yields. He warns, however, that cap rates remain low and there are “less discounts to be had, and more thought required to find the right balance of risk and return.”
Quick Thoughts on the Fed Interest Rate Cut
Real estate investors should expect cheaper loans and, to the extent that cheap debt increases the demand for real estate, higher property valuations. In the near future, this could create opportunities for investors to capture capital gains.
Keep in mind that mortgage rates do not always correlate with the fed funds rate. Last year, for example, mortgage rates slid late in the year despite four consecutive rate hikes by the FOMC. In fact, most 30-year loan rates are tied to the 10-year Treasury yield, which is primarily influenced by investor sentiment about the future.