The Double-Edged Sword of Stalled Interest Rate Hikes
Written by Albert J. Haddad
How the Fed’s decision is impacting the market for the good and the bad.
Recently I’ve been getting a lot of questions on the current the lack of movement in interest rates. People are wondering how this will affect them and consumers and whether it is best to be a buyer or seller with the interest rates at their current spot and not seemingly in a position to change in the near future.
Here’s how I approach these questions: the capping of interest rates at a lower number is actually a double-edge sword for consumers and investors.
Interest rates effect everything—they are a major contributor to the confluence of commerce. To truly gauge the health of the economy, you must begin with the interest rates and where the Fed is capping them.
Positive Impacts—
- Provides an opportunity for liquidity to come back into the market.
- Creates a sense of confidence in the consumer who is able to grab a foothold in the market.
- Providing an opportunity to perhaps go out and borrow at favorable rates.
However, the standstill the Fed is using for interest rates also creates a negative impact on investors—specifically those looking to buy investment grade real estate.
Negative Impacts—
- With a lower cap rate, the higher the valuation of the property and the more you will pay for it.
- If the cap rate rises, the lower the valuation becomes.
- Sellers are directly affected, because money has become very cheap. This perhaps is a result of the Fed not being conscientious of what is occurring globally. By wanting to maintain financial domestic tranquility, they make the economy a paper palace that could fall with a stiff breeze.
The question we should be asking is this: what does that mean for me as a consumer, and is the market a healthy market? With this double-edge sword, the Fed probably has made the right decision to halt the hike of rates to allow things to even out.
This will allow for more opportunities for investments and investment sales, though it can create a type of “buyer beware” situation. By halting the rising interest rate hikes, the Fed is positioning itself for the market to stabilize to a point where they can begin to look at raising rates again and hopefully with a managed cadence so that people do not take hits like they did toward the end of 2018.
If you have questions about the freeze on interest rates and how they may affect you, please call the Alpha-Rex team to discuss and answer questions on any property or portfolio needs you have.
