The New York times did a piece on the latest job reports. It’s a few weeks old now but you can find it HERE. I love when they use this format – I think it shows how many different opinions there are on this stuff.
Anyone who says they can predict what is going to happen is either Marty McFly or they shouldn’t be trusted. There are WAY too many variables at play to feel confident about predicting the future, even for people who make it their life’s work.
With that heavy disclaimer, if you asked me to guess I’d say it will go one of two ways:
OUTCOME #1:
- The fed continues to lower rates but the labor market softens too much and we end up in a recession with high unemployment which means property values likely decrease and rental inflation begins deflating or at the very least inflating at a slower rate. For whatever it’s worth, Goldman Sach’s recently lowered it’s prediction of a recession from 25% to 20% (SOURCE) and that was before rate cuts.
OUTCOME #2 (A and B):
- The Fed achieves a soft landing, the labor market holds steady, interest rates continue to come down which drives property values up. In this scenario, rent is a tough variable to predict:
- On one hand you can argue that more renters will be able to afford to buy with lower mortgage rates which is probably true nationally but not as easy to believe in a supply constrained market like New England.
- On the other hand, the single-family market has been stuck for years. Homeowners haven’t wanted to sell with high rates because they feel it’s compressing property values down, and people haven’t been able to afford to buy. Lower interest rates could cause all of those people who have been waiting on the sidelines to jump back in and create a hot real estate market for single family homes which would drive prices up and may keep many renters on the sideline a little while longer until the market cools off.
I think we’re all rooting for outcome 2. Although lowering the rate by .5% instead of .25% is a good start, it’s tough to see the fed being faster to lower rates than they were to raise them. It took them 18 months to raise to their current rate.
Source : Board of Governors of the Federal Reserve System (US)
In 2000-2001 it took them 12 months to reduce rates, in 2007-2009 it took 17 months.
Source : Board of Governors of the Federal Reserve System (US)
All of this is to say, it’s difficult to predict the economy or multifamily markets which is really all we need to know. With an unclear future, most investors will continue to invest but there will be two options:
1) Buy now and be prepared to hold for a long time. Expect property values to rise over a long period of time. Be prepared to ride it out through a recession but hope you don’t have to.
2) Build spreads into calculations between previous cap rates and yield on cost. Once confidence begins to rise that we’re heading to a strong economy, those spreads will reduce. That could be months maybe years from now.
SO WHICH ONE IS WHITE BARN?
It’s a cheap answer but really we’re a bit of both. Our strategy is buy and hold long term and we feel good that over a long period of time New England real estate will appreciate, it’s hard not to. With that being said, we work hard not to buy properties that we can add value to.
If you or someone you know has a property between 5-50 units in Southern New Hampshire or Massachusetts that you’re considering selling, or if you want to tell me your completely different take on the market – I’d love to hear from you!
Thanks for reading,
Steve Parry