Headlines rarely tell the full story. The Federal reserve made a U-turn and markets roared then tanked. Why? Is this really good news? What does this mean for rates? How will this impact real estate? “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy, that is, neither speeding up nor slowing down growth,” Powell told the Economic Club of New York. The markets jumped 2.5% after the announcement and subsequently have fallen 6%. Why is this new language so important? What does this mean for rates? How will this impact real estate? Is this change in tone really good news
Why is this language change so important?
This recent statement is a drastic change from October where Powell stated that rates were a far way from neutral signifying more rate hikes. Prior to Powell’s statement the market was forecasting 4 or 5 more rate increases. One in December and then 3 or 4 next year. This new statement reduces the probability of 4 or 5 increases to around 3: one in December and then two next year. As a result of the “dovish” comments the markets soared.
Why the change in tone?
Powell said his Fed colleagues and many other economists “are forecasting continued solid growth, low unemployment and inflation near 2 percent …. If you look down the road, you see challenges ahead, and they’re challenges that are typical in a cycle,” said Powell speaking earlier this month at the Federal Reserve Bank of Dallas. “We have to be thinking about how much further to raise rates and the pace at which we will raise rates.”
I would interpret this to mean that the market is not “digesting” the prior rates as the federal reserve had originally anticipated and therefore the federal reserve is going to slow the “pace” of rate increases.
What does this mean for rates?
The federal reserve has drastically slowed the pace of increases which will flow through to rates rising at a slower pace. Mortgage rates should also rise at a slower pace than originally anticipated. This should keep long term mortgage rates below 6%
What is the real story?
The market is not nearly as “solid” as the federal reserve continues to state. Inflation continues to remain about flat, housing has sales have declined, and the market has entered a “correction phase”. Regardless of what the federal reserve is stating on the economy. The federal reserve, with their change in tone, is finally recognizing that the economy is facing substantial headwinds heading into 2019.
The change in the federal reserve’s stance on interest rates is not actually good news. It reinforces what the market has been feeling that the economy has numerous “downside” risks at this stage in the economic cycle. We are already seeing consumer’s pull back on longer term purchases like housing where new home sales fell almost 9% in October and home sales tumbled to a 4 year low. We will see this “downside” risk flowing through to more areas of the economy in the next several quarters.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).