We have all read the changes in bond prices following the selloff of government bonds around the globe since the election. The Trump administration has made it crystal clear they are not in favor of ultra-low interest rates. The Trump administration is looking to kick start the economy from its low growth era. As this aircraft carrier turns it is going to create a substantial wake and increased cost of capital is going to be one of them. Rates will most likely rise more rapidly than we have seen in the last decade or more. Everyone is looking into their crystal ball for the answer. My ball is blank and does not have the answer.
What I can provide is information provided by the Atlanta Fed in a presentation a year ago. Growth over 2% will be meet with increased rates. As in past years the 3rd quarter growth in 2016 was above 2% after a very slow start to the year. We all expect a December increase in rates. The question is what about 2017 and 2018.
If it was me I would be looking at planning on increases.
Commercial real estate:
Commercial real estate has been a hot spot for some time with values driven outside of fundamentals. Values in some markets exceed 2008 levels which will create challenges for properties that cannot increase rents to offset interest costs.
A friend who is a successful small developer has sent eight of his properties to his mortgage broker for new pricing with an eye toward fixed pricing. He is hoping inflation will drive rents.
It is my guess that some in this sector will catch the wake broadside creating turbulence and opportunity for others.
Residential Real estate:
Today’s WSJ (11/30) had a piece on residential real estate values. The good news was that the national average returned to the low point in 2011 / 2012. The bad news it was driven by California which looked like a hockey stick. Personal experience is that they have a ways to go in Massachusetts outside of 95 / 128 and Florida. Much of the country that elected the Trump administration remains in the abyss.
Will increased rates end the housing party? Maybe yes maybe no. The WSJ quotes a study by John Burns Real Estate Consulting that looked at 10 instances over the last four decades of increased interest rate and the impact on the market. Surprise strong job and wage growth along with a confident consumer did not result in an issue.
My guess is it will depend on your market and the surrounding industries. While unemployment data remains positive it does not count the millions out of work who voted for the Trump administration. The economy has acted differently than most economists predicted per a high level Boston Fed officer. It is just different, so we shall see what happens to housing if 30 year mortgage rates get to 6%.
Rates have already moved from 3.6% to almost 4% since August of this year. An increase from 4 to 6 percent will change a mortgage payment by 25%. This is $610 a month on a $500,000 mortgage. It will take substantial wage growth to support this type of increase.