What is the TED Spread? Why It Matters to Real Estate Investors?

[Nicholas Varner]

The TED Spread measures credit risk to the general economy. TED is an acronym that stands for T-Bills and Euro-Dollar. The TED Spread is calculated by a simple formula:

TED Spread = 3-month Libor Rate - 3-month T-Bill Interest Rate.

Some very basic principles are as follows:

• 3-month LIBOR rate measures the rate at which banks will lend each other money. This week it's .62%, but a year ago it was .26%
• 3-month T-Bill Interest Rate currently sits at .26%, but last year was at .03%. This really measures how much confidence investors have in the economy as a whole as T-Bills are backed by U.S. Treasury.
• TED Spreads in a healthy market are going to be 30-50 basis points. In the 2008, they went up past 400 basis points.

Here is a chart that describes the last 10 years of TED Spreads courtesy of the St. Louis Federal Reserve.

Much like the VIX, it measures short term temperament in the market and shows the credit risk premium for inter-bank lending by describing the willingness of lenders to deploy credit to other banks. The higher it goes, the less that banks are going to feel comfortable lending to one another. We've gone through several years where both variables (T-Bills and LIBOR) have been artificially driven lower by never before seen Quantitative Easing and bank-friendly Federal Reserve policy.

So why does any of this matter to the market or to Real Estate Investors?

As a variable, the TED Spread has a correlation to Home Price Appreciation. When Home Price Appreciation goes down, TED Spreads go up. Historically, TED Spreads lag by two quarters HPA. With high TED Spreads, rent prices will drop as well home prices. TED spreads are not the "be all, end all" in Real Estate investing, however, it's another variable that we as investors would do well to monitor in the background for any unforeseen movements.