Interest rates...what now?

PacNumber's picture
Rank: Neanderthal | 2,462

The Fed is hellbent on continuing to raise rates. Stock market isn't digging it at all. Growth is questionable for 2019 despite a solid 2018. The 10yr is off 50bps in what, 30 days when it appeared that it would easily stay above 3. Looks like long term rates will hover in and around 5% for the foreseeable future. I for sure thought 6% money was going to exist next year.

I got in the business in 95'. We never seem to raise rates to their previous high's but always cut them below their previous low. This has been the trend for almost 30 years.

BTW, I just talked to a resi broker here in San Diego. He says he's busy doing BPO's and listing short sales. Yeah, that happened fricken fast!!! 6mo ago who thought short sales would be a new trend in SoCal for sale housing.

I'm so confused at the moment.

Comments (6)

Dec 20, 2018

I don't really have a comment, but as always @PacNumber , thanks for content.

    • 1
Dec 20, 2018

In the last downturn San Diego was one of the first markets to get hit. The it spread up through Orange County and Los Angeles County (and others across the nation). Not exactly sure why this is, but it is an observation. Not a good sign.

Good info though.

"The three most harmful addictions are heroin, carbohydrates, and a monthly salary." - Nassim Taleb

Dec 21, 2018

I have to imagine it has something to do with affordability. San Diego is one of the (if not the) least affordable markets in the country when looking at income to housing cost ratio (housing costs obviously not as high as NYC or Bay Area but incomes are a fraction). Buyers are often maxing out what they can afford from a monthly payment perspective, so when interest rates rise, the buyer pool is going to dry up quickly at the pricing levels we are at (or were at over the summer). Not as many buyers in ARM products this time around so I don't foresee a foreclosure crisis unless there is some major blip on the income side of the equation, but demand is definitely going to be hit early.

All that being said, going to back to OP - mortgage rates are obviously sliding over the past month or so, so that should slow the tide for a bit. But if we believe the economy is strong, and this concern over the fed is short-lived, I wouldn't be surprised to see housing take a hit as the rest of the economy hums along.

    • 2
Dec 21, 2018

Yeah, wages here suck. My salaried friends do pretty well but most of them are grinders.

From 92 - 99 real estate was rough yet the economy was doing just fine. Even MF sucked in the 90's.

Most Helpful
Dec 21, 2018

Some stream of consciousness thoughts:

I feel like the stock market action has been a logical correction. For a year, stocks have continued to rise while the Fed has been unwinding the balance sheet and simultaneously raising rates. A dip makes sense to me, but I'm no HF guy.

I'm not savvy enough to understand how this rate thing will play out. I've heard whispers of a handful of big CMBS bond issuances coming to market in early 2019, and it's assumed that those will drive rates up a bit. Beyond that, it just feels weird out there, like it can go in either direction within the next two years.

For example, class B and C apartments in the suburban northeast are still trading at huge numbers. Realistic IRRs are the same as class A- product. Transaction volume does seem to be slowing significantly in some sub-markets, yet others continue onward and upward (feedback from brokers within the past month). There's so much money in the market and I don't see an imminent end to that without some major event scaring everyone.

Over the past 2 months, land prices have risen by ~30% in a couple of NYC opportunity zones. This could prove to be a giant shitshow in the making. New construction $100MM to $1bn deals are getting done at 12 IRRs (10 year holds) on aggressively trended growth assumptions, and assuming reversion cap rates 50-100bps below today's market. Those are gross deal-level IRRs, pre-tax. Yes the tax benefits are substantial, but there will be challenging times along the way and no one is underwriting those.

With interest rates all over the place, you'd expect some caution, but the buyers who are closing don't care. I don't know how to make money as a principal anymore. Get me out of this timeline.

    • 4
Dec 21, 2018
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