Fed Cuts Rates by a Half-point and What That Means for Real Estate Investors
Published September 18, 2024Share this article
What You Need to Know
Today's widely anticipated rate cut came as the Federal Reserve’s response to ongoing economic conditions, aiming to stimulate growth, especially with the gradual cooling in the labor market, and provide relief to consumers and businesses alike. Until the last couple of days, during which rate traders priced in a greater than 50% chance of a 50 bps rate cut, analysts and economists had largely expected a more modest cut of 25 bps. This move by the Fed aims to keep inflation on a path down towards their 2% annual long-term target while tempering the effects of the 2022-2023 rate hike cycle, which drove borrowing costs to two-decade highs and unemployment up to 4.2% in August 2024 (from 3.5% in mid-2023)*.What That Means
Despite the scale of the move, this decision may not significantly alter financing terms for many prospective borrowers. Debt instruments are priced based on the underlying structure, risk profile, and term of a loan, with products ranging from floating rate lines of credit to 30-year, traditional fixed-rate mortgages. Floating rate instruments, such as Prime Rate-based borrowing, will see a near-term benefit from the Fed’s move to reduce the Fed Funds rate. However, fixed-rate, long-term instruments price instead based on the market’s expectation of long-term rates, which have been steadily declining since mid-2024 (5-Year Treasury Rate is down to ~3.5% from ~4.7% in mid-April)**.As an owner and operator of single-family rental property across the country, Flock sees this cut as having a limited impact on our investment thesis and home price dynamics broadly. While the cut may spur an uptick in refinancing applications and encourage some would-be buyers to step in in the near term, affordability is still a challenge with limited inventory and rising insurance and property tax expenses nationwide. We remain bullish on home price appreciation and rental cash flow over the long-term, especially when owned at scale and managed professionally to drive revenue management and cost efficiencies.*Bureau of Labor Statistics, US Department of Labor: News Release (September 6, 2024). **FRED Economic Data, St. Louis Fed: Market Yield on U.S. Treasury Securities at 5-Year Constant Maturity, Quoted on an Investment Basis (September 17, 2024).Landlords, retire and minimize taxes.
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