While there was a recent thread about buying in a rising interest rate environment, I'd like to have a thoughtful discussion about where you're predicting interest rates to be in 1-2 years and how that will impact the market, if at all.
To preface the discussion: I first entered real estate shortly after the GFC and I suspect many of you did as well. Recently, I've had this nagging feeling that the market I've operated in over the past decade isn't "normal" and I should research the past 100 years (thanks, Ray Dalio). Sure, the pundits have been saying "historically low interest rates" for years, but I've just plowed forward as usual, accepting today's reality for what it is: reality.
Eventually the feeling arose that maybe I've been lulled into a "new normal" perception of the market since it's the only thing I've ever known. And what does "historically low interest rates" even mean from a contextual perspective?
Well, from 1995 to 2000, the Federal Funds Rate averaged somewhere between 5.4 - 5.5 %. During that same period, the Freddie Mac 30-year Fixed-Rate Mortgage Index averaged around 7.62% (ballparking). However, in 2001, things got wacky. Due to a recession and 9/11, the Fed Funds rate dropped to 1.75% in 2001 and 1.25% in 2002. Yet the Freddie Mac index averaged 6.97 and 6.54, respectively. Freddie Mac rates trended downwards for the next couple of years then stabilized in the high 5's to low-to-mid 6's before the GFC hit.
So, as you can see, even after a recession in 2001, rates never went as low as they are today. In fact, I had to go back to September 1, 1961 to find a Fed Funds rate under 2.00. We were sitting at 1.70 as of 5/1/2018, according to the St. Louis Federal Reserve.
As someone that's become active on the construction side of things, I've recently received written notifications from regional suppliers that there will be a substantial increase in the prices of goods across the board (think 5-10% minimum for almost everything involved in a stick-frame build). The notices didn't stop there as they stated we could expect another bump in November if things keep trending as they are now. There were a number of reasons for the increase but a unique one was the lack of labor to load the trucks and ship the materials.
Very low unemployment (3.8% and probably high 6's "real") combined with the aforementioned inflation makes my spidey-senses feel like things are going to be a lot different towards the end of 2019. I'm definitely not making the case for another GFC, but I am making the case that we need to be thoughtful about what the market could look like at that time.
Now to real assets: I recently bid on a value-add apartment deal in the sub $10MM range. I used completely reasonable assumptions that would normally have put me in contention 6-12 months ago. However, I'm 500k - $1MM off and there are tours for days on end... What's going on? Heck, I'm even using optimistic broker assumptions of where rents can go to in 2-3 years.
What are your thoughts on where this all leads to and what are your respective strategies for dealing with the uncertainty going forward? As a newly minted entrepreneur I'd like to be able to make things work, but every day things get weirder and weirder--and profit margins get smaller and smaller--as excessive liquid capital chases anything and everything. Yet, on the flip side, there's been at best equilibrium construction in most markets so oversupply isn't a big issue (assume case-by-base basis).
Within this context, I can't help but wonder where things are heading, what unique options are still available to the thoughtful investor, and what valuations could look like in 2-5 years.