Fed Rate Increases and Our Industry

[Doug Smith]

This is more of a rant and personal opinion to hear what others in the know think. Yes, I get inflation has been out of control, but what is the real cause of our current inflationary trend. The Federal Reserve has destroyed demand and made it very, very difficult for investors to cash flow a rental without putting down a ton more cash by raising the Fed Funds rate 11 out of the last 12 times. It's also squashing supply by making it difficult for homeowners (including me personally) to upgrade due to the cost of taxes and interest for a larger mortgage. Private sector payroll growth has plummeted in the past year. While some on the Fed Board are starting to back off of their desire to raise interest rates, there are still other Board members that seem to want to keep raising rates. I think everyone expects them to not raise rates later this month again, but many of the Board members seem to be very open to raising them again later this year. I agree inflation is an issue, but raising rates is treating the wrong issue. In my humble opinion, out-of-control government spending and the printing of currency is the real culprit here. I've attached a chart that our very own Fed puts out showing how much currency is in circulation. When you have that much cash in circulation chasing fewer resources, you get inflation. That's Econ 101. Lowering rates quickly would have a negative impact as well, but the Fed needs to stop it already and let the market catch up a bit. Banks "stress test" since Dodd Frank was enacted in 2010. Raising rates this quickly (550 basis points) when most banks are built to withstand 400 basis points or so is forcing banks to struggle. Just watch when banks start to crumble and politicians point fingers at bad lending practices from banks as the cause when it's really the Fed and government spending that's the culprit. That's my rant, but I thought having a discussion with some of you about the state of our industry would be more enlightening than reading another post about how great some guru's course is. What say you all?

[Henry Clark]

Don’t answer.  “Who did you vote for?”.  You deserve what you get.  Doesn’t matter party.  We deserve what we get.. I’m talking for the last 40 years.

The US is built to swing to far each way.   And will never correct to the middle except during times of war or depression.     

No point in ranting.   Just the way it is.

Back to today. 
1.  Federal debt is around $33 trillion.   Actually closer to $150 trillion when you include social security, Medicare and Medicaid.

2.  Baby boomers are retiring.  Triggers 1 above.  

3.  Baby boomers retiring creates a huge vacuum in the workforce.  There are far more baby boomers than the current work force in their 20 to 30’s.  This will and is creating labor rate inflation.  Feds can’t stop.

4.  Housing shortage.  Feds can’t stop that.  Will cause inflation.

5.  Illegal immigration surge.  Forget good or bad.  This is putting pressure on housing and rental costs.  Feds can’t stop that.

5.  Carbon fuel.  Oil or coal.  Push to reduce.  Whether you agree or disagree there is no transition plan.  Fuel cost are up and will go up.   Feds can’t stop that.  Goes into all products.

6.  China.  The consumer dollar has chased low labor costs around the world.  Japan after world war 2.  Korea after the Korean War.  China after both Japan and Korea moved to higher end manufacturing as their labor costs got too high.  Chinas labor cost is now three times higher than 20 years ago.  It is to expensive now.  India and Malaysia are the next cheap labor destinations but they are not Western centric.  There will be a transition period to a lower labor cost country.  During that time costs will go up.   The Fed can’t control that.

7. College debt.  Is bigger than the last housing crisis.  Just listening to a radio show. 70% of adults where family earns less than $100,000 per year are living pay check to pay check.  Student payments are starting back after Covid relief.  They can’t make those payments.  Feds can’t control or bail out, to big.  

The above dominoes have to fall.  Whether one of them or all of them, doesn’t matter.  The Feds can’t stop inflation.  If they back off 1% point inflation will come roaring back.  Take me.  I held off building more due to costs.  If interest rates go 1% point down, we have 3 projects waiting.  

Doom and Gloom.  Everyone has an opinion.  They only count if they put their money where their mouth is.

We have held off investing.

We sold one of our newest golden goose projects   It had both our largest debt and largest cash gain if sold.

Paid down on a lot of our debt.  Bought investment land for cash. When economy turns around we are positioned to develop.  No carrying costs.

We refinanced 2 years ago.  We were 2 years away from our 5 year balloon dates.  Refinanced 1% point higher.  Our banker who we have a great relationship with gave us a 7 year ballon term versus another 5.  Within 6 months rates went above the 1% hike we took.

My advice is to review your investments and trim low performers.  Don’t pay off debt, keep a cash position.  Put it into 5% yields.

Lower your risk reward ratio so the world can do what it wants and you don’t have to worry so much.

OP looks like you’re an established person.  Sale your house tax free.  Primary 2 out of 5 years up to $500,000 gain for married.  Go buy a house twice the size with no debt in a different area.  

Depending on your financial position.  Inflation for us is great.  Our assets will go up.   Our debt will get devalued.  

Feds.  Keep raising interest rates.

Start small and Make Your Big Mistakes Early.    

It’s your money.   You’re always right, even if you’re wrong.   

9/11 tomorrow.

Both my Cousin and Brother were stationed at Bagram airbase at the same time.

Would like to thank my Cousin Doug who couldn’t be there when his daughter was on the US soccer development team and her boyfriend was messing with her.  Next time call me and I will take care of the boyfriend.

Would like to thank my brother Harvey for putting the weight of the world on his shoulders and carrying us.   While getting blown off his feet and having to deal with 500 pissed of Afghanis.  Having to go into a minefield and retrieve an overturned jet fuel truck with 20,000 gallons of fuel on the airbase.  

PTSD.   Let me know how I can help.  Both of you keep smiling. 

[Jay Hinrichs]

Its a real issue. And really hammers the middle class..

Last fall when things really slowed in my market I was working on all sorts of back up plans

50% through my 75 million dollar new build project.. Then January hit and for whatever reason

in our market the public went to back to buying and we have had a great year. Although I will give

my wife the credit were the other builders were stripping all the nice stuff out of the houses

so they could lower prices she insisted we go HIGH end which we did and now in our little 25k

Population city in suburbs of Portland there are 23 new builds pending from 550k to 1mil and we

have as of today 13 of them are our homes. And mostly all cash buyers or close to it.

Now on the investment property side I am still seeing sales in the markets I fund in back in the mid

west selling of course not like it was 2 years ago but we are still moving all our deals. The major

Difference has been my clients are starting to keep probably 20 to 50% of the properties they

are refinancing and holding where as in the past all inventory was sold Turn key you know they like

big checks and it takes a boat load of rental doors to live on.

As for the fed it affected me big time I had a nice 5 to 7 year run of borrowing construction loans

@ 1/2 to 1 and 5% my banks had a floor of 5% for construction loans. My loans were tied to prime

And we know what happened there.. So this past summer I refinanced and got fixed rate financing

at about 7 to 7.5% which for the next 18 months for me to finish up I think is a better bet than

tying my loans to prime. I had 3 banks competing for my business so I got them to do it with ZERO

points and THEY paid all my closing costs title insurance etc and they paid for the 5k Mai appraisal

as well. WE did had to move 7 figure cash deposits to them though. 

[Jay Hinrichs]

On a Personal investment that I want to make into some sort of commercial or MF property.

Not much or anything makes sense on the west coast.. the best I can get is 6.5 to 6.7 fixed

with no points for fees.. and even at that when cap rates are 4 to 5.5 downpayments are sky high

as my banks have gone from 1.20 DSCR to 1.30 DSCR. I will find something but its tough

From what I see deals are still happening but its the all cash buyers and 1031 taking these down or

Syndications.

[Henry Clark]

Don’t answer.  “Who did you vote for?”.  You deserve what you get.  Doesn’t matter party.  We deserve what we get.. I’m talking for the last 40 years.

The US is built to swing to far each way.   And will never correct to the middle except during times of war or depression.     

No point in ranting.   Just the way it is.

Back to today. 
1.  Federal debt is around $33 trillion.   Actually closer to $150 trillion when you include social security, Medicare and Medicaid.

2.  Baby boomers are retiring.  Triggers 1 above.  

3.  Baby boomers retiring creates a huge vacuum in the workforce.  There are far more baby boomers than the current work force in their 20 to 30’s.  This will and is creating labor rate inflation.  Feds can’t stop.

4.  Housing shortage.  Feds can’t stop that.  Will cause inflation.

5.  Illegal immigration surge.  Forget good or bad.  This is putting pressure on housing and rental costs.  Feds can’t stop that.

5.  Carbon fuel.  Oil or coal.  Push to reduce.  Whether you agree or disagree there is no transition plan.  Fuel cost are up and will go up.   Feds can’t stop that.  Goes into all products.

6.  China.  The consumer dollar has chased low labor costs around the world.  Japan after world war 2.  Korea after the Korean War.  China after both Japan and Korea moved to higher end manufacturing as their labor costs got too high.  Chinas labor cost is now three times higher than 20 years ago.  It is to expensive now.  India and Malaysia are the next cheap labor destinations but they are not Western centric.  There will be a transition period to a lower labor cost country.  During that time costs will go up.   The Fed can’t control that.

7. College debt.  Is bigger than the last housing crisis.  Just listening to a radio show. 70% of adults where family earns less than $100,000 per year are living pay check to pay check.  Student payments are starting back after Covid relief.  They can’t make those payments.  Feds can’t control or bail out, to big.  

The above dominoes have to fall.  Whether one of them or all of them, doesn’t matter.  The Feds can’t stop inflation.  If they back off 1% point inflation will come roaring back.  Take me.  I held off building more due to costs.  If interest rates go 1% point down, we have 3 projects waiting.  

Doom and Gloom.  Everyone has an opinion.  They only count if they put their money where their mouth is.

We have held off investing.

We sold one of our newest golden goose projects   It had both our largest debt and largest cash gain if sold.

Paid down on a lot of our debt.  Bought investment land for cash. When economy turns around we are positioned to develop.  No carrying costs.

We refinanced 2 years ago.  We were 2 years away from our 5 year balloon dates.  Refinanced 1% point higher.  Our banker who we have a great relationship with gave us a 7 year ballon term versus another 5.  Within 6 months rates went above the 1% hike we took.

My advice is to review your investments and trim low performers.  Don’t pay off debt, keep a cash position.  Put it into 5% yields.

Lower your risk reward ratio so the world can do what it wants and you don’t have to worry so much.

OP looks like you’re an established person.  Sale your house tax free.  Primary 2 out of 5 years up to $500,000 gain for married.  Go buy a house twice the size with no debt in a different area.  

Depending on your financial position.  Inflation for us is great.  Our assets will go up.   Our debt will get devalued.  

Feds.  Keep raising interest rates.

Start small and Make Your Big Mistakes Early.    

It’s your money.   You’re always right, even if you’re wrong.   

9/11 tomorrow.

Both my Cousin and Brother were stationed at Bagram airbase at the same time.

Would like to thank my Cousin Doug who couldn’t be there when his daughter was on the US soccer development team and her boyfriend was messing with her.  Next time call me and I will take care of the boyfriend.

Would like to thank my brother Harvey for putting the weight of the world on his shoulders and carrying us.   While getting blown off his feet and having to deal with 500 pissed of Afghanis.  Having to go into a minefield and retrieve an overturned jet fuel truck with 20,000 gallons of fuel on the airbase.  

PTSD.   Let me know how I can help.  Both of you keep smiling. 

[Robin Simon]

Agree with a lot of this - one of the most frustrating things is the mainstream "wisdom" and messaging that inflation can be caused by monetary policy and the Fed only and that somehow fiscal policy and other political decisions have no effect, when I think the opposite is mostly true.

Worried inflation is back on the upswing primarily due to energy costs which were suppressed this last 12 months or so from SPR draining.

The upside(maybe?) for the industry is the math with the government debt load and interest rates essentially ensures that by far the most likely outcome is that rates have to come back to zero and the debt is monetized/inflated away.  So the value of real estate (nominal) will only skyrocket in the coming years.  Financed real estate as the value goes way up in $ terms and the debt is inflated down will be one of the only quality investments

[Carlos Ptriawan]

all the banks including Bank of America,Wells Fargo is already in default technically today due to their carry of "unrealized" HTM losses. But as long as those bond is not gettng sold into the market (like SVB), they are just okay.

Eventually what happened with Fed action is very bad impacting anyone in Lending sector and commercial RE.