Wednesday, Federal Reserve Chairman Powell announced the outcome of two days of meetings of the Federal Reserve. The Fed is a board of the heads of each of the regional Federal reserve banks and their board of Governors. The focus is often on the Chair of the Federal Reserve. But the board is really made up of a committee who vote on the policy.
Interest-rate projections released Wednesday showed eight of 17 officials—the reserve bank presidents and board governors who participate in the Fed meetings—expect they will cut the benchmark rate by year’s end from its current level in a range between 2.25% and 2.5%. Seven of those officials see lowering the rate by a half percentage point by the close of 2019, and one expects just a quarter-percentage-point reduction. Eight officials projected the Fed would hold rates steady, and one projected a rate increase.
The Fed this week announced that they were holding interest rates steady at this meeting, but signalled strongly that we can expect a rate cut at the July meeting, about 6 weeks from now. The guidance is for a half point reduction between now and the end of the year, based on economic indicators. The fed is seeing a slowdown in economic activity, party due to global economic slowdown, and some linked to the current trade discussions between the US and China.
The central bank’s rate-setting committee on Wednesday dropped language from its policy statement describing its stance as “patient”—which implied rates were on hold. Instead, it said uncertainties about the economic outlook have increased, a phrase it has used during past periods of rate cuts.
“The committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion,” the statement said. That’s code for they plan to reduce rates on signs of economic weakness.
So this is a strange situation where no change in interest rates is actually news worthy. In response to the announcement, the stock market seems to have responded positively. But the real news is that low interest rates mean that the government’s out of control spending is going to continue to enjoy low interest rates making their over-spending less unaffordable. I’m deliberately using a double negative here because the spending isn’t affordable at all, it’s less unaffordable with lower interest rates.
For us as real estate investors, short term loans are typically linked to short term rates like LIBOR, and permanent financing is typically linked to the yield on the 10 year treasury. That’s why Wednesday’s news is actually news for real estate investors. Yields on the 10 year treasury fell to the lowest level since November 2016. The rate now stands at 1.98%. That means that the rate for most HUD and agency loans will be solidly below 4% for the first time in a couple of years. Now is the time to position your portfolios to take advantage of the lower interest rates. If you start the process in June, by the time you exit the underwriting process in July, you will likely see an even lower rate locking into your permanent financing.
These financings take considerable time. The lender has to underwrite the deal, the market conditions, and the borrower. The commercial appraisal won’t be ordered immediately. That’s typically one of the last steps in the underwriting process and typically takes several weeks to complete.
So if you want to take advantage of lower interest rates that are here now, and in our near future, now is the time to start the process to rate lock for the long term.
