{"id":160552,"date":"2023-10-11T19:44:00","date_gmt":"2023-10-12T01:44:00","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=160552"},"modified":"2024-02-28T10:56:51","modified_gmt":"2024-02-28T17:56:51","slug":"speaker-mccarthy-ousting-is-a-big-deal-for-investors","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/speaker-mccarthy-ousting-is-a-big-deal-for-investors","title":{"rendered":"Former Speaker McCarthy Getting Ousted is a Big Deal For Investors\u2014Here&#8217;s Why"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC9124089903\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">If you\u2019ve paid any attention to the news, it can seem like the world is turning upside down. The war in Ukraine still rages, Israel is now in a full-fledged conflict with Hamas, which is&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.nytimes.com\/2023\/10\/11\/us\/politics\/iran-israel-gaza-hamas-us-intelligence.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">purportedly backed by Iran<\/span><\/a><span data-preserver-spaces=\"true\">, and there\u2019s tremendous economic uncertainty still putting investors on edge.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">While some of these events can feel like they are a world away, one in particular will be felt right here at home and may directly impact your real estate portfolio. And that event is the recent removal of Kevin McCarthy as Speaker of the House.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I\u2019m not going to comment on matters of politics. We\u2019re all entitled to our opinions and beliefs on the way things ought to be, and it\u2019s not for me to project what I feel is right or wrong here.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">However, I feel obligated to discuss the current situation since the actions of Congress and the current state of the world have a real impact on your bottom lines. The disarray in Congress and the now added uncertainty due to the Israeli conflict is a recipe for some serious issues that will affect real estate investors.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Looming Government Shutdown<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Former House Speaker Kevin McCarthy was ousted in a 216-210 vote on the House floor. McCarthy\u2019s ousting was a product of his spending compromise with the Democrats to avert a government shutdown that would have started Oct. 1. I won\u2019t get into the details of the spending package, but the point is that McCarthy was able to get a 45-day extension of government funding to push the spending issue down the road.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">However, Rep. Matt Gaetz of Florida found this to be unacceptable. He concluded that McCarthy had failed in his role as Speaker by giving concessions and immediately called for a vote of confidence that wound up sending McCarthy packing.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Here\u2019s why this matters to investors: No matter how you feel about government spending, a shutdown is never an ideal scenario. It\u2019s especially problematic for bond yields and, in turn, mortgage rates.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In fact, on the day of the Speaker\u2019s ousting, the yield on the 10-year Treasury note spiked from 4.5% to nearly 4.9%.<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1318\" height=\"450\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/10\/fredgraph-62.jpg\" alt=\"Market Yield on 10-Year U.S. Treasury Bond (July 2023 - October 2023) - St. Louis Federal Reserve\" class=\"wp-image-160563\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/10\/fredgraph-62.jpg 1318w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/10\/fredgraph-62-300x102.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/10\/fredgraph-62-1024x350.jpg 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/10\/fredgraph-62-768x262.jpg 768w\" sizes=\"auto, (max-width: 1318px) 100vw, 1318px\" \/><figcaption class=\"wp-element-caption\"><em>Market Yield on 10-Year U.S. Treasury Bond (July 2023 &#8211; October 2023) &#8211; <a href=\"https:\/\/fred.stlouisfed.org\/\" target=\"_blank\" data-type=\"link\" data-id=\"https:\/\/fred.stlouisfed.org\/\" rel=\"noreferrer noopener\">St. Louis Federal Reserve<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<p><span data-preserver-spaces=\"true\">It subsided to 4.7% in the days following, then jumped back up to 4.8% as the attacks on Israel began, and then fell back to 4.65%. The yield now sits 1% higher than it did during this time last year and is the highest it\u2019s been since 2007.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The impact of a shutdown on bond yields is largely a measure of confidence in the U.S. government.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.investopedia.com\/how-a-government-shutdown-would-hurt-the-economy-7973671\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Economists suspect<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;that a shutdown might trigger a credit downgrade, which could create a massive sell-off of bonds as investors flee for other assets\u2014pushing the yields even higher.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Bond Yields and Mortgage Rates<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Mortgage rates are likely to increase if U.S. Treasury rates rise, and investors concerned about this are wise to pay particular attention to the 10-year Treasury rate. As the 10-year rises, typically, so too do mortgage rates. The 10-year rate has been marching upward all year in response to the Federal Reserve raising their benchmark rate and a slow \u201cuninversion\u201d (is that a word?) of the yield curve. Investors who call for a \u201csoft landing\u201d expect the yield curve to continue &#8220;uninverting.&#8221;&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Bonds, specifically U.S. bonds, are issued by the Treasury to service U.S. debts. A 10-year, $10,000 bond purchased at a 5% yield will provide the investor with annual payments of $500 until the date of maturity, which will come 10 years later. At that point, the investor will get their full $10,000 back.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">U.S. Treasuries have historically been viewed as incredibly safe investments\u2014literally referred to in many investment circles as the \u201crisk-free\u201d rate of return.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">However, bonds that are purchased can be resold to other investors, which is where things can get sticky. From 2010-2022, 10-year T-bills consistently yielded anywhere from 2% to 4%. These are not the most attractive rates to investors, especially when stocks during this time were in full bull mode. But many investors, including high-net-worth individuals, banks, and large corporations, purchase Treasuries, attracted by the low risk of default and high liquidity they provide. However, when interest rates rise, the value of a bond bought prior to the rate hike is worth less, hurting those who have held long-duration U.S. Treasuries over the past year.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In this situation, investors looking to sell their bonds before maturity find that the bonds are not attractive to potential buyers and will have to settle for a lower payout unless they hold them to maturity. This is exactly what happened to Silicon Valley Bank earlier this year\u2014it saw a liquidity crunch due in part to the fact that it held many longer-term U.S. Treasuries, which lost a significant portion of its equity value as rates rose\u2014leading to its collapse.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">At the same time, 30-year mortgage rates for buyers with great credit tend to be ~175 bps higher than 10-year Treasuries. As 10-year Treasury rates go up, so too do mortgage rates. As long as the current bond yield remains elevated, mortgage rates will follow suit, as lenders will be forced to peg their rates higher than the yield of a bond.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Why? Well, would you rather lend $300,000 to a consumer earning $100,000 a year in the tech industry at a 5% interest rate or lend the same amount to the U.S. government at a 5% interest rate? The risk profile is much more favorable in the latter, so naturally, a lender would raise their interest rate on the consumer to make up for the added risk.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Of course, higher mortgage rates equal a decline in housing market activity. Prices are already sky-high, having reached another record in August. Reduced inventory brought forth by the \u201clock-out effect\u201d and waning demand will only continue to push the market to an absolute halt.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Sure, your properties might be worth more now, but good luck finding buyers as rates continue to climb.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">But Wait\u2014There\u2019s Another Problem<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">As if the current situation couldn\u2019t get any worse, Israel was attacked this past weekend. Anytime there\u2019s a war or conflict featuring a major power, there is a real threat to the stability of financial markets.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For instance, the initial economic shock from the attack was felt in the oil markets. The price of Brent crude oil jumped from $84\/barrel to $89\/barrel almost immediately.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Those numbers aren\u2019t horrible, but the risk of a larger conflict puts a lot of uncertainty in the air as the risk of system shocks increases.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Furthermore, Iran\u2019s involvement, if it\u2019s true, would create an even larger question about whether Israel retaliates by striking Iran, and if so, are we in for a massive war in the Middle East? Iran, which has been slowly increasing its oil exports, would likely get shunned by the global community, reducing its exports and thus reducing the overall oil supply.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">That\u2019s bad news for the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/what-the-consumer-is-telling-us-about-the-economy\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">U.S. consumer<\/span><\/a><span data-preserver-spaces=\"true\">, who has already been paying higher gas prices than we\u2019ve seen over the last several years. Add in higher energy costs, and we\u2019re looking at another contributing factor to the overall inflation rate potentially increasing again. I\u2019ll also note that energy costs are not a factor in core inflation but still contribute to the overall inflation rate.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Now, I\u2019m not saying that energy prices will force the Fed\u2019s hand toward increasing interest rates again just because there\u2019s an uptick in inflation. In fact, it\u2019s possible that the conflict in the Middle East might bring international investors to the U.S. bond market to protect their money, which could actually bring yields down, therefore taking pressure off mortgage rates.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Regardless, the Fed is in a peculiar position, and they\u2019ve already signaled that there might be another rate hike in the near future, although some investors are beginning to think that&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.nytimes.com\/2023\/10\/11\/business\/wall-street-interest-rates-federal-reserve.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">those days are over<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Potential Path Out of This<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">If the House can\u2019t rally behind a Speaker in time, then Congress is essentially a lame duck. There\u2019s no key representative to discuss appropriations on the Republican aisle, and a fractured caucus is likely to yield a Speaker who has to promise that they won\u2019t back down on a spending bill, hurtling us towards another last-minute countdown to a government shutdown.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">All of that will only further decrease investor confidence in the government, invite a potential credit downgrade if the government does shut down, and force mortgage rates and bond yields up.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">However, there is a way all of this can be avoided. The war in Israel is not a small skirmish. The U.S. has already deployed an aircraft carrier strike group to the Eastern Mediterranean to support Israel, which means, like it or not, we\u2019re involved in this. This could force the House to act swiftly on electing a new Speaker as soon as possible to negotiate an Israeli aid package. In fact, as of Wednesday, the Republicans nominated Steve Scalise of Louisiana in a closed-room vote, but no official Speaker vote has come to the House floor yet.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">With that said, having a Speaker in place as early as possible gives the best possible chance of negotiating an appropriation bill that will keep the government open once the deadline arrives. Will that lower bond yields? Who knows? Will mortgage rates keep rising? Maybe. But is it better than shutting down the government? I would say yes.<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_63ff91bc0967cc8031ec93dbbc309873\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_db55ac6e31ea8d5128c166b5a95a4955\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-theme-gold-light-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-gold-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Get the Best Loan Today<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">Find trusted, <em><strong>investor-friendly<\/strong><\/em> lenders who specialize in your strategy. <\/p>\n\n\n\n<p><\/p>\n\n\n\n<div id=button-custom-event-block_6cb749b120475d4716f2bd53c5cbc8ec class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/business\/finder\/lenders\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Lender Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/speaker-mccarthy-ousting-is-a-big-deal-for-investors&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Find a Lender<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\" first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Marketplace-Blog-Blocks-Lender-v3.png\" alt=\"investor friendly lender, investor friendly real estate loans\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/speaker-mccarthy-ousting-is-a-big-deal-for-investors&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>There&#8217;s turmoil in government, and that&#8217;s plunging investor confidence. Here&#8217;s what you need to know.<\/p>\n","protected":false},"author":612375,"featured_media":160565,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7384,7119],"tags":[],"class_list":["post-160552","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-politics-policy","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/160552","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/612375"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=160552"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/160552\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/160565"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=160552"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=160552"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=160552"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}