Continuing our coverage on the Fed’s announcement of a 25-basis point rate hike at the end of their two-day July meeting, more commentary has come through focusing specifically on the real estate market, including sales, defaults, and home prices.
Commentary Marty Green [1], Principal, Polunsky Beitel Green [2]
- “Inflation continues to moderate and, for now, the economy appears to be poised for a very difficult-to-achieve soft landing. This gives the Fed more runway to continue its inflation fight. However, this soft landing can become very bumpy if the Fed doesn’t recognize that the time is rapidly approaching for it to patiently let the cumulative effect of its decisions work through the economy.”
- “The housing sector is again showing signs of slowing, with inventory once again a critical issue. The higher mortgage rates triggered by the Fed’s policy have caused more sellers to sit on the sidelines given the large differential between the rate they enjoy on their current home compared to the possible interest rate on any home they may purchase today. This means buyers have fewer choices and may sit on the sidelines as well. If the Fed isn’t careful, this critical industry may once again slow to crawl in the fall and winter.”
Commentary Justin Barry [3], Partner, Morris, Manning & Martin [4]
- “With each round of rate hikes, the Fed puts increasing pressure on multifamily properties with floating-rate loans or maturing fixed-rate loans. Many owners are attempting to pass along the increased financial burdens to tenants by increasing rental rates, provided that demand in a particular submarket supports higher rental rates. So, while the Fed is attempting to stave off inflation by raising interest rates, it could actually have the opposite effect on rents.”
- “The other byproduct of increased rates is a rising number of defaults of financial covenants in multifamily loans – in particular, failure to meet certain debt service coverage ratios or debt yield requirements. For the most part, we have seen forbearance from lenders in exercising remedies for these types of defaults; but the million-dollar question remains: how long will lenders ride along before calling these loans?”
On the Federal Reserve side of things, a common topic has been that since rate hikes began last year is the threat of a recession, which has consistently been predicted to occur in at least two quarters into the future, but has yet to seriously materialize.
In a press conference, Fed Chairman Jerome Powell backed off on using the word “recession” and returned to using the term “soft-landing.”
“It has been my view consistently, that we do have a shot, and my base case is that we will be able to achieve inflation moving back down to our target without the kind of really significant downturn that results in high levels of job losses that we've seen in some past instances, many past instances of tightening that look like ours. That's been my view, that's still my view. And I think you know, that's sort of consistent with what I see today,” Powell said.
“So, but it's a long way from assured and you know, we have a lot left to go to see that happen. So, the staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession,” Powell continued. “I just want to note that it's, that our staff produces its own forecast which is independent of the forecast that we as FOMC participants produce, having an independent staff forecast as well as the individual participant forecast is really a strength of our process. There's just a lot of, I think, constructive diversity of opinion that helps us make, help informs our deliberations, helps us make I hope better decisions.”
Even though a recession does not appear to be likely, Powell is avoiding the term “optimism” for the time being.
“I wouldn't use the term optimism about [inflation lowering and keeping a strong labor market] yet. I would say though that there's a pathway and yes, that's a good way to think about it,” Powell said. “We've seen so far the beginnings of disinflation without any real costs in the labor market. And that's a really good thing. I would just also say the historical records suggest that there's very likely to be some softening in labor market conditions and consistent with having a soft landing, you would have some softening in the labor market conditions, and that's still likely as we, as we go forward with this process.”
“But it's a good thing to date that we haven't really seen that. We've seen softening through other, not through unemployment, not through higher unemployment, we've seen softening through you know, job openings coming down part of the way back to more normal levels.”