Where are we in today’s market ?
The news today is filled with a lot of financial doom and gloom, with the stock market leading the charge – it being as volatile as it has been all year. It seems like no matter where you turn, the news has something or someone commenting on the state of the interest rates (or the FED raising the rates), the economy, the state of the overall market, and the state of the real estate market. After a while it all becomes overwhelming.
The FED has raised the interest rate several times now in very aggressive increments in order to try to stem inflation, without a whole lot of success. Even though the last three increases in the last three months have been as follows, they’ve not been successful:
- June 16, 2022, +75, 1.5% to 1.75%
- July 27, 2022, +75, 2.25% to 2.5%
- Sept 21, 2022, +75, 3.00% to 3.25%
Inflation remains at over 8% and with no abatement in sight because the US is not producing enough oil to feed itself and the foreign oil producers are cutting back on production. This will further increase inflation in the gas prices, which are already very high. Unfortunately, oil spreads like tentacles into almost all sectors of the economy because so many items are derived from oil and oil byproducts. So let’s look at each item alone for a minute.
Interest Rates
Interest rates, how are they affecting the market? For the most part, commercial property rates are hanging in the 6% to 7.5% range these days. Given that just one year ago, the interest rates were more in the 3% to 4% range, similar to residential mortgages, there is a price to be paid with the higher rate. Let’s look at an example:
- $800,000 commercial mortgage
- 20 year term
- 7% interest rate
- This would be a $75,000+/- annual payment
- VERSUS
- 4% interest rate
- 20 year term
- 7% interest rate
- This would be a $58,800+/- annual payment
The difference in just the interest rate is creating a change of $16,200. The question becomes, how many people will be taken out of the ability to afford that same mortgage? As this interest rate factor begins to narrow the pool of potential buyers, the availability of good properties to purchase may begin to open up for the serious investor.
Inflation
The economy and inflation go hand in hand, so what is the bottom line effect on the average person? What is the bottom line effect on the economy? There was a report recently that suggested that the average person would spend somewhere around $6,000-$8,000 more this year for the same things they purchased last year. That money coming out of the household budget has to come from somewhere, and with the cost of essentials consistently higher, consumer spending will dry up and the economy will start to slow, which is what is needed to slow inflation. The downside, however, is a recession due to lack of sales, then creating the need for manufacturing to reduce their workforce, which increases unemployment and further decreases consumer demand, causing a deeper recession.
Effects on Real Estate
How does all of this relate to the real estate market? The interest rates have the obvious effect of usually slowing down the market. However, given the lack of supply and the still strong demand in many areas for both residential and commercial real estate, it does not yet appear to have had that effect. There are other factors affecting the market also. Likely the most important factor is the large amount of liquidity still in the money supply. The other appears to be a movement of money away from stocks and bonds (volatility) to a more secure income producing asset, such as real estate, thereby potentially keeping demand at a higher level.
The bottom line answer to the question is, there are too many mixed signals from all of what is going on in the market to be able to determine what the near and the long term future holds. There is a lot of uncertainty. Volatility in markets drives investors to stable assets that they can touch and feel, which means commercial real estate is likely one of the better bets for short and long term stability.
-Dave Garvey