Bold Prediction: The Fed WILL Do a 25+ BPS Cut... But RE Borrowing Rates Will Rise

[Scott Trench]

Ready for some nerdery? 

I believe that the Federal Reserve is going to cut rates by 25-50 bps at it's September meeting (no emergency cut), but that 30-year fixed rate mortgage rates will rise to upper 6s low 7s around the same time, and Commercial borrowing rates, including for multifamily, will increase as well. 

Here's the bet: 

- "Unemployment" is not about to shoot up. This is important, because the only way the Fed gets aggressive about rate cuts is in the face of skyrocketing unemployment. Immediately after the weak jobs report, we saw unemployment applications come in way below projections.

The economic pain people and businesses are facing in 2024 is real. But, unemployment, as measured by the US Census is unlikely to explode. Why? Two Reasons: First, because 50M people in this country either work gig jobs or are illegal immigrants, when they lose their jobs or have their hours scaled back, it doesn't show up on official unemployment stats. Second, when Boomers lose their jobs, they often simply retire, and they are an enormous generation. 

 - Core Inflationary pressures remain high. A rate cut in September is more symbolic and a signal to markets that the Fed is cautiously optimistic that they've tamed inflation than actual dovish Fed Policy. We have 10,000 boomers leaving the workforce each day, and this will continue for years. There are not enough Gen Z-ers to replace them, and that puts pressure on (legal citizens) wages, partially offset by immigration. Oil prices remain a huge X factor, and housing prices (at least with respect to rents) are being held back by the most supply EVER being built and coming online here in 2024. Supply won't abate until at least middle of 2025, but when it does, inflationary pressure on rents will be very high indeed, especially if I'm right and rates stay high.

- The Yield Curve will begin to normalize (uninverting): Even as the Federal Funds Rate begins to drop, the yield curve will finally begin it's march towards normalization. Even if the Fed lowers rates by a full 100 bps over the next 12 months, to 4.25%, the 10-year, in a normalized environment, should be at 5.5% (+125bps over the FFR). While it won't get all the way to 5.5%, it will creep towards 5%, and occasionally tick past it, with high volatility. Yield curve has been inverted for nearly 2 years now. It won't stay that way forever, so enjoy it while it lasts...  

- US Treasuries, with each passing year, are "less safe", putting upward pressure on yields: Regardless of the election outcome, neither party is about to solve the budget deficit. US Treasuries will not see their credit rating improve, and will, within the next 12-24 months get another (small) downgrade, inching up treasury yields. We aren't in "US is going to default and is an inherent credit risk" at 6X national debt to tax revenue ratio, but we are getting close to "let's be wary" territory for creditors. Imagine a $185K income earner ($100K after tax) having a $600K mortgage. Not crazy, but if that mortgage becomes $650K, $700K, $800K, you begin to feel a little apprehensive and need more interest in return for incrementally higher risk. 

So, even as the Fed lowers the Federal Funds rate, and as we see the spread between the 10-year treasury yield and the 30 year mortgage rate shrink, upward pressure on the 10-year from longer-term foundational pressures will see mortgage rates tick up or or at least hold steady.

While this is neutral/slightly negative news for home buyers, it is very bad news indeed for our friends in the commercial real estate world, who are really seeing the best case scenario for the 10-year right now. I think this is your moment, friends in the multifamily space, and that if you let it pass, you might not get better terms.

It can, and, I believe, will, get WAY worse for borrowers in the multifamily and CRE spaces.

[Dustin Tucker]

I'm going to go out on a limb, and say the dumb money keeps buying treasuries like they are going out of style, which continues to push the rate lower.  The fed's cut will be too late and they will be playing catch up, as defaults and Job Layoffs continue to mount.  Additionally, we will see the unemployment rate tick up another .5%, to 4.9+ maybe even over 5%.  

[Chris Seveney]

Quote from @Dustin Tucker:

I'm going to go out on a limb, and say the dumb money keeps buying treasuries like they are going out of style, which continues to push the rate lower.  The fed's cut will be too late and they will be playing catch up, as defaults and Job Layoffs continue to mount.  Additionally, we will see the unemployment rate tick up another .5%, to 4.9+ maybe even over 5%.  

 I do not disagree. I think one thing people need to understand is in the US the ten-year treasury is competing against the mortgage-backed securities and while the ten-year is impacted by interest rates, its not the only factor and amount of spending we do also impacts it.

they auctioned off 30-year today and it went really bad as no one wants our long-term debt and it sold for 4.3%

10-year notes recently traded for 3.96% but again very weak demand - which I believe means yield prices may continue to move up, which means interest rates are not going down dramatically anytime soon - so that fed 25 or 50bps drop is not going to have your mortgage lender dropping rates suddenly the next day...

Now the spread between the 10 yr and 30yr mortgages historically is closer to 1.75 but recently has been between 2-3% due to yield curve. So that is one area where there could be some movement, but again, if people are thinking they are going to see a 4 in the interest rates anytime soon, I do not see it. I do not think we will even see a 5 within the next 12 months and if we do, then that is because of some pretty harsh economic data and that $500k home is now back to $400k.**

**I am not a financial advisor or guru, I was just a dumb civil engineer who learned that you cannot push on a rope and dirt and water  = mud.

[Scott Trench]

@Chris Seveney - Where do you get your data on US treasury demand - per your "very weak demand" comment? 

[Jack Seiden]

Quote from @Scott Trench:

Ready for some nerdery? 

I believe that the Federal Reserve is going to cut rates by 25-50 bps at it's September meeting (no emergency cut), but that 30-year fixed rate mortgage rates will rise to upper 6s low 7s around the same time, and Commercial borrowing rates, including for multifamily, will increase as well. 

Here's the bet: 

- "Unemployment" is not about to shoot up. This is important, because the only way the Fed gets aggressive about rate cuts is in the face of skyrocketing unemployment. Immediately after the weak jobs report, we saw unemployment applications come in way below projections.

The economic pain people and businesses are facing in 2024 is real. But, unemployment, as measured by the US Census is unlikely to explode. Why? Two Reasons: First, because 50M people in this country either work gig jobs or are illegal immigrants, when they lose their jobs or have their hours scaled back, it doesn't show up on official unemployment stats. Second, when Boomers lose their jobs, they often simply retire, and they are an enormous generation. 

 - Core Inflationary pressures remain high. A rate cut in September is more symbolic and a signal to markets that the Fed is cautiously optimistic that they've tamed inflation than actual dovish Fed Policy. We have 10,000 boomers leaving the workforce each day, and this will continue for years. There are not enough Gen Z-ers to replace them, and that puts pressure on (legal citizens) wages, partially offset by immigration. Oil prices remain a huge X factor, and housing prices (at least with respect to rents) are being held back by the most supply EVER being built and coming online here in 2024. Supply won't abate until at least middle of 2025, but when it does, inflationary pressure on rents will be very high indeed, especially if I'm right and rates stay high.

- The Yield Curve will begin to normalize (uninverting): Even as the Federal Funds Rate begins to drop, the yield curve will finally begin it's march towards normalization. Even if the Fed lowers rates by a full 100 bps over the next 12 months, to 4.25%, the 10-year, in a normalized environment, should be at 5.5% (+125bps over the FFR). While it won't get all the way to 5.5%, it will creep towards 5%, and occasionally tick past it, with high volatility. Yield curve has been inverted for nearly 2 years now. It won't stay that way forever, so enjoy it while it lasts...  

- US Treasuries, with each passing year, are "less safe", putting upward pressure on yields: Regardless of the election outcome, neither party is about to solve the budget deficit. US Treasuries will not see their credit rating improve, and will, within the next 12-24 months get another (small) downgrade, inching up treasury yields. We aren't in "US is going to default and is an inherent credit risk" at 6X national debt to tax revenue ratio, but we are getting close to "let's be wary" territory for creditors. Imagine a $185K income earner ($100K after tax) having a $600K mortgage. Not crazy, but if that mortgage becomes $650K, $700K, $800K, you begin to feel a little apprehensive and need more interest in return for incrementally higher risk. 

So, even as the Fed lowers the Federal Funds rate, and as we see the spread between the 10-year treasury yield and the 30 year mortgage rate shrink, upward pressure on the 10-year from longer-term foundational pressures will see mortgage rates tick up or or at least hold steady.

While this is neutral/slightly negative news for home buyers, it is very bad news indeed for our friends in the commercial real estate world, who are really seeing the best case scenario for the 10-year right now. I think this is your moment, friends in the multifamily space, and that if you let it pass, you might not get better terms.

It can, and, I believe, will, get WAY worse for borrowers in the multifamily and CRE spaces.

I can’t say I disagree with the analysis, just think (I’m sure this will sound incredibly stupid in the future) ultimately bonds and mortgages are likely to trade in a very narrow band the next few months, without a really nasty recession I find it hard to see them getting much below the 3.75% they hit Monday, I also think the Fed wants to keep the number below 4.25% because while I don’t think the economy is in a recession or anything it’s clear to me and I think the Fed as well l, that the economy probably can’t handle another year of rates above that, they will lower rates & possibly even taper qt to achieve that outcome. For the 1st time really since 2022 when I look towards next year, my biggest question is what housing demand will look like within that band of rates more so than what rates actually are. 

[Chris Seveney]

Quote from @Scott Trench:

@Chris Seveney - Where do you get your data on US treasury demand - per your "very weak demand" comment? 

 Treasury's $25 billion auction of 30-year bond met with weak demand - MarketWatch

Yields rise after weak 10-year auction, heavy corporate supply | Reuters

[V.G Jason]

Quote from @Dustin Tucker:

I'm going to go out on a limb, and say the dumb money keeps buying treasuries like they are going out of style, which continues to push the rate lower.  The fed's cut will be too late and they will be playing catch up, as defaults and Job Layoffs continue to mount.  Additionally, we will see the unemployment rate tick up another .5%, to 4.9+ maybe even over 5%.  

 I'm more in line with this.

I do think we see closer to 5ish mortgage rates though within 12 months, probably 6-9 months but because of those same underlying reasons mentioned above. Harsher outputs forcing stronger inputs and cuts in Q1/Q2.I could see a total of .5bps hit by EOY 2024, then a flush of a bad Q4 data/earnings come out and Jan we're forced to move .5-.75bps getting us to sub 4 and another cutin March forcing us under 3.5/3.75 and mortgage rates hovering 1.5-1.75 over. Let's see though, I think the bad data may take longer to unravel or if it doesn't maybe Fed gets proactive in Dec24 or Nov24. 

[Henry Clark]

So whatever your projections are, what are your actions?

1.  Still leaving money in the stock market.  Next week talking with financial advisor to move from a broad approach to more food or consumer perishable goods, medical portfolio.  Our stock position is from a Longterm 15 years or more needs standpoint.  Can ride volatility.  

2.  Cash-  set aside a large cash equivalent position.  This is bad from an inflation standpoint. But good from a sleep standpoint.  And potential downmarket investment standpoint. 

3. REI investments- we are retired thus not in a growth mode. Sold 4 of our 8 Selfstorage locations to take profits off the table and pay some debt down. Paying debt down is a bad move if you plan on inflation which we do. Plus you should hold assets going into inflation. Thus we broke two rules. Part of the funds we are taking from a "C" market and will invest in an "A" market thus increasing both our development and monthly cashflow returns.

4. REI debt- we moved to about a 45 to 50% LTV position. Thus if asset valuation goes down we have plenty of equity to cover. This is bad from Aggressive position since we are not leveraging as much as we could. But being retired we sleep better. Our debt is around 5 and 7% rates. With SBA loan in a 20 year amort and balloon. Our commercial is in a 7 year balloon and a 25 year amort. Thus not worried about balloons needing refinanced anytime soon.

5. REI- country subdivision just lots. Have a 75 acre piece which will be 18 lots of 2 to 6 acres. Working thru permitting. This will be about 120% return over 5 years. Mainly cash position versus debt. Thus interest is not eating us up. Only opportunity cost may have a downside. But this diversifies from just Self Storage. We are in Iowa. Still a housing and rental shortage. People still wanting to move out of the city. Will see how sales go starting this fall.

6. REI- Selfstorage. Still have the itch to develop. Running numbers. Bankers on board. Looking at 7% interest rate. 20 year amort with 5 year balloon on hard assets. This will be cargo containers. They will do 7 year amort versus normal 5 year. The containers by themselves have a 3 year payoff. There is never a sure thing, but this is the best market analysis we have ever down.
7.  REI-  house is paid off.   This could be our cheapest interest rate.  But again we are retired.  Makes us sleep better.

8. REI- teak plantation in Belize. Have a mixture of 14 year old trees and 4 year old trees. Market agents 20 to 25. Primary markets are India, China and Europe. This diversifies our economies versus straight U.S. Also diversifies our investment harvest timeline.
9.  OTHER investments and resources covered also.

10.  The only one we don’t have covered is Health.

The above are our actions and positions.  Doesn’t really matter what happens.    

What are my projections?

1.  US dollar will stay the dominant currency.  All prior currency changes were led by a gold standard.  Can’t remember the exact figures but the U.S. and its close allies have 10x the amount of gold than all of the BRICS countries combined.  There is not enough annual production for BRICS to buy their way into a dominant position.

2.  US is going bankrupt.  Either by defaulting or printing money.  Even with that said. We will still be the primary consumer market in the world.  Whether the dollar inflates or deflates it will all still be worth relatively the same.  BRICS still can’t take over as a currency since each of those countries have underlying flaws.  

Roller coaster ride.   But we will come out the same on the other side.  

[Henry Clark]

Just sitting down for lunch at Jalisco’s in Mabank Texas.  

Made me remember. Every day I buy a large Diet Coke at McDonald's $1.07 forever. Then about 2 years ago $1.49. $1.07 sausage biscuit now $1.99. My point is forget the metrics. This won't work Longterm for the lower middle and lower income folks. Our economic or social model will have to change. Now have to see how that impacts the REI models.

[Nicholas L.]

@Henry Clark

can you elaborate on your "US going bankrupt" comment?  interested in your opinion / additional thoughts.

it seems to me that we can probably kick the can down the road to the late 2030s or so... and at that point, two interesting things probably happen: 1. US population growth slows and fewer new households form, which is probably not great for RE investors; and 2. the Social Security trust fund runs out.  

i think those two things make can kicking a lot harder...

[Nicholas L.]

@Scott Trench

thanks for the post.  i bet i know the answer but are you changing your own personal strategy based on any of this?

[Scott Trench]

Nope - My strategy assumes that rates rise long-term, and calls for spending less than I make. I'm just gradually deleveraging, this next time by likely buying all in cash, and continuing to not lever my properties until cap rates are lower than interest rates... unless I can get cheap and low leverage debt through assumption.

[Jack Seiden]

Quote from @Scott Trench:

Nope - My strategy assumes that rates rise long-term, and calls for spending less than I make. I'm just gradually deleveraging, this next time by likely buying all in cash, and continuing to not lever my properties until cap rates are lower than interest rates... unless I can get cheap and low leverage debt through assumption.

 Does buying all cash not make your return lower than just sticking it in a S&P index fund?  

[Henry Clark]

Quote from @Nicholas L.:

@Henry Clark

can you elaborate on your "US going bankrupt" comment?  interested in your opinion / additional thoughts.

it seems to me that we can probably kick the can down the road to the late 2030s or so... and at that point, two interesting things probably happen: 1. US population growth slows and fewer new households form, which is probably not great for RE investors; and 2. the Social Security trust fund runs out.  

i think those two things make can kicking a lot harder...

 Bankrupt to me is either us defaulting in interest payments or debt securities.  Doesn’t have to be much to start a downward spiral.  Then our rating gets lowered and when we sell new debt it is more expensive.  

Or we print xxxxx dollars to cover our interest and debt payments.  Same result as above.

A third alternative is forced inflation.  That way the government pays with cheaper dollars. 

Problem with the above and kicking the can down to the late 2030s is we are in a timetable.  The average U.S. government debt has a 7 year period.  Then it gets refinanced to higher interest rates.  We are about 2 of the 7 years into refinancing in the new interest rate levels.  

Not that worried about the population going down.  Although I don’t like illegal immigration, I like immigration. The U.S. is still the place to go.  Most US citizens haven’t been overseas. Tons of people would die to have our U.S. blue passports.  

Not worried about Social security running out.  I’m 63 and at the tail end of the Baby boomers.  There will be a massive wealth transfer from the baby boomers to retirement care or to a younger and smaller generation.  Over the next 20 years starting now.  Or taken from them to cover taxes.  Or to help cover the $110 trillion unfunded debt.

Keep in mind the U.S. has had 90% income tax rates before.  Anything is possible. 
. 

[Scott Trench]

@Jack Seiden

Great question: 

I am 60/40 stocks and real estate right now, excluding my primary (my investment in BiggerPockets as a private business). I'd feel more comfortable with 50/50, so the next big chunk goes to RE. 

A paid off property at 5-6 cap rate should also appreciate at about 3.4% per year on average, so my real estate return at 8.4%-9.4% is reasonably close to what I'd expect in the stock market, and the income is tax advantaged. A cash purchase, added to my portfolio, reduces my levergage ratio on my real estate portfolio, but does not bring it to zero of course as I am not paying off existing low rate mortgages on rentals. 

The alternative I had pursued the last two years was hard money lending. Even at a blended 13% rate, the after tax yield on these higher risk notes was closer to 7.5%, as I work full time and earn good W2 and other investment income. The paid off property is an attractive and way lower risk / less work investment from my seat. Further, a paid off purchase does not preclude me from refinancing in the future. And, there is every possibility that I am able to assume quality debt if I am a low-leverage purchaser. I'd be very open to that.

A High Yield Savings Account at 4.5% yields a close to 2.5% after-tax amount. I am not so scared of the market that I think I can't beat that with real estate OR stocks. I am not a bull on crypto. 

Thus, putting the money into something is the name of the game, when my Hard Money Note matures. Right now, I am curious about, but not anything close to sophisticated on, office, especially in the suburbs of Denver where I live. I think that urban office still has a lot more pain to go through, but I wonder if many people will want to get out of the house to work in the next few years, but not have to commute through to downtown. I know I like going into the office, but not every day. 

It's hard for me to imagine suburban office / retail getting hit harder than it already has, and a small building for small companies in the services field feels interesting to me - right now that's a "Feel" and I have to wrap my head around whether data supports this hunch or not, but I do at the very least like the fact that office has been hit so hard, and seems to have no net new supply coming online. 

I believe that when my last Hard Money Note matures (November) I will be able to find good value close to where I live in office space, and if I can't or am wrong with this hunch, can always do another small multiunit in Denver, which has been my bread and butter. 

[Jack Seiden]

Quote from @Scott Trench:

@Jack Seiden

Great question: 

I am 60/40 stocks and real estate right now, excluding my primary (my investment in BiggerPockets as a private business). I'd feel more comfortable with 50/50, so the next big chunk goes to RE. 

A paid off property at 5-6 cap rate should also appreciate at about 3.4% per year on average, so my real estate return at 8.4%-9.4% is reasonably close to what I'd expect in the stock market, and the income is tax advantaged. A cash purchase, added to my portfolio, reduces my levergage ratio on my real estate portfolio, but does not bring it to zero of course as I am not paying off existing low rate mortgages on rentals. 

The alternative I had pursued the last two years was hard money lending. Even at a blended 13% rate, the after tax yield on these higher risk notes was closer to 7.5%, as I work full time and earn good W2 and other investment income. The paid off property is an attractive and way lower risk / less work investment from my seat. Further, a paid off purchase does not preclude me from refinancing in the future. And, there is every possibility that I am able to assume quality debt if I am a low-leverage purchaser. I'd be very open to that.

A High Yield Savings Account at 4.5% yields a close to 2.5% after-tax amount. I am not so scared of the market that I think I can't beat that with real estate OR stocks. I am not a bull on crypto. 

Thus, putting the money into something is the name of the game, when my Hard Money Note matures. Right now, I am curious about, but not anything close to sophisticated on, office, especially in the suburbs of Denver where I live. I think that urban office still has a lot more pain to go through, but I wonder if many people will want to get out of the house to work in the next few years, but not have to commute through to downtown. I know I like going into the office, but not every day. 

It's hard for me to imagine suburban office / retail getting hit harder than it already has, and a small building for small companies in the services field feels interesting to me - right now that's a "Feel" and I have to wrap my head around whether data supports this hunch or not, but I do at the very least like the fact that office has been hit so hard, and seems to have no net new supply coming online. 

I believe that when my last Hard Money Note matures (November) I will be able to find good value close to where I live in office space, and if I can't or am wrong with this hunch, can always do another small multiunit in Denver, which has been my bread and butter. 

So I’m pretty close to you, once I pull some cash I have sitting in a flip that will probably turn into a brrr I’ll be about 70/30 stocks, I really don’t mind buying property provided I think for some subjective reason that area is undervalued/will outperform the market, but to me the stock market has a few advantages, 1. it is much easier obviously/more liquid. 2. I have this theory that basically the stock market can grow faster than the fundamentals more so than housing, reason being when people put money into their 401k or whatever they are just throwing money in, not looking at p/e or whatever, the stock market is in part just an index of Americans excess savings plus it’s a unstated policy of the government that stocks go up, where as housing people are obviously very very aware of how much thier monthly payments is/ how much rent is, plus it seems that is actually a push to lower housing prices at least relative to inflation. The 3rd thing that has reshaped my entire opinion of the tax advantages of real estate, is seeing my 88 grandfather holding five quite valuable illiquid properties, long story short it’s a mess, it’s causing family drama, he is in zero shape physically or mentally to manage them, the all have cap-ex needs, again these were amazing buy’s literally multiple properties he bought for under 50k that are now worth over a million but there is probably a time and a place for owning real estate, so I don’t really have a need to own more than maybe a few properties into retirement. As far as office I remain intrigued by it, also at least in our area condos have been brutally hit and I think offer a “deal” without quite the downsides to office, I tend to think office/retail in suburban and even pandemic boom markets (I’ve started investing on the eastern shore of Md and have considered some office deals there) offers the best risk/reward of office because you have a population boom coupled with ultimately still a low supply of office space, where as urban areas have lost population and have a huge glut of supply, I think the ultimate fate of a lot of urban office trends towards zero/land value.

[Mike Dymski]

Quote from @Dustin Tucker:

I'm going to go out on a limb, and say the dumb money keeps buying treasuries like they are going out of style, which continues to push the rate lower.  The fed's cut will be too late and they will be playing catch up, as defaults and Job Layoffs continue to mount.  Additionally, we will see the unemployment rate tick up another .5%, to 4.9+ maybe even over 5%.  

Bond fund holders are making a strong return with both high yields and fund values increasing with rates declining.  And if your thesis is that unemployment will continue to increase, bond rates will continue to decline and that bond rally will continue.  Part of the inflation challenge is caused by this...investors are getting high yields and spending that money (and now they are getting increased fund values with rates declining).

[Paul Azad]

Hi Scott, consider USFR for zero risk cash, earns 5.4% holding 8 week Floating rate note US treasuries

or for mild risk cash, consider BKN - BlackRock's Muni fund, earns 5.6% tax free, which for you would be >9% tax-equivalent yield, and if rates fall, the BKN etf will rise considerably, which though will be capital gains taxable :(, It holds intermediate term Municipals that are all GO, general obligation, so they can always tax us dumb schmuck citizens to pay off the notes instead of defaulting, so low risk but not zero risk for cash. ie (Orange county '90s)

Inflation has already resolved, the 3 month trailing core PCE is at 1.5%, well below FEDs 2% target, so they will likely start cutting soon as the 12 month trail falls in line, that's why Powell changed his verbiage so much last Wednesday, and FOMC minutes speak of 150 bp cuts before the end of December as their expectation per their Dot Plots, the only question remaining is consumer spending,(>60% US economy), if falling like McDonalds/Starbucks/Uber saying then unemployment will accelerate and then possible recession, then 10yr yield falls even more, and bonds values would rise like Mike just said above. But falling 10/20/30 bond yields don't translate into rising CRE values as down GDP means more store closings, lower NOI, lower office rents/industrial etc, etc.

e.g. I'm an LP in 24 retail big box centers, we just lost 3 Conns Home stores out of 174 closing in 15 states plus closing their 280 Badcocks furniture and more stores too. This was due to finance arbitrage like many retail bankruptcies, They were selling furniture/TV/appliances for 2 decades financed at 3-4% and borrowing at 2-3%, now their billions in floating rate notes are at 7-8% but only getting the fixed 3-4% for the washing machines etc They lost 77 mil last year and rising fast so had to Chapter 11 to stop the bleeding.

Next 1-2 years will be very interesting in markets/CRE etc.

[Stephen Keighery]

Interesting thought but rates are already going down as the 10 year yield decreases. I think the rates will go down before the Fed Cuts and once it cuts it will stay about the same because its already priced in. 

[V.G Jason]

Quote from @Scott Trench:

Ready for some nerdery? 

I believe that the Federal Reserve is going to cut rates by 25-50 bps at it's September meeting (no emergency cut), but that 30-year fixed rate mortgage rates will rise to upper 6s low 7s around the same time, and Commercial borrowing rates, including for multifamily, will increase as well. 

Here's the bet: 

- "Unemployment" is not about to shoot up. This is important, because the only way the Fed gets aggressive about rate cuts is in the face of skyrocketing unemployment. Immediately after the weak jobs report, we saw unemployment applications come in way below projections.

The economic pain people and businesses are facing in 2024 is real. But, unemployment, as measured by the US Census is unlikely to explode. Why? Two Reasons: First, because 50M people in this country either work gig jobs or are illegal immigrants, when they lose their jobs or have their hours scaled back, it doesn't show up on official unemployment stats. Second, when Boomers lose their jobs, they often simply retire, and they are an enormous generation. 

 - Core Inflationary pressures remain high. A rate cut in September is more symbolic and a signal to markets that the Fed is cautiously optimistic that they've tamed inflation than actual dovish Fed Policy. We have 10,000 boomers leaving the workforce each day, and this will continue for years. There are not enough Gen Z-ers to replace them, and that puts pressure on (legal citizens) wages, partially offset by immigration. Oil prices remain a huge X factor, and housing prices (at least with respect to rents) are being held back by the most supply EVER being built and coming online here in 2024. Supply won't abate until at least middle of 2025, but when it does, inflationary pressure on rents will be very high indeed, especially if I'm right and rates stay high.

- The Yield Curve will begin to normalize (uninverting): Even as the Federal Funds Rate begins to drop, the yield curve will finally begin it's march towards normalization. Even if the Fed lowers rates by a full 100 bps over the next 12 months, to 4.25%, the 10-year, in a normalized environment, should be at 5.5% (+125bps over the FFR). While it won't get all the way to 5.5%, it will creep towards 5%, and occasionally tick past it, with high volatility. Yield curve has been inverted for nearly 2 years now. It won't stay that way forever, so enjoy it while it lasts...  

- US Treasuries, with each passing year, are "less safe", putting upward pressure on yields: Regardless of the election outcome, neither party is about to solve the budget deficit. US Treasuries will not see their credit rating improve, and will, within the next 12-24 months get another (small) downgrade, inching up treasury yields. We aren't in "US is going to default and is an inherent credit risk" at 6X national debt to tax revenue ratio, but we are getting close to "let's be wary" territory for creditors. Imagine a $185K income earner ($100K after tax) having a $600K mortgage. Not crazy, but if that mortgage becomes $650K, $700K, $800K, you begin to feel a little apprehensive and need more interest in return for incrementally higher risk. 

So, even as the Fed lowers the Federal Funds rate, and as we see the spread between the 10-year treasury yield and the 30 year mortgage rate shrink, upward pressure on the 10-year from longer-term foundational pressures will see mortgage rates tick up or or at least hold steady.

While this is neutral/slightly negative news for home buyers, it is very bad news indeed for our friends in the commercial real estate world, who are really seeing the best case scenario for the 10-year right now. I think this is your moment, friends in the multifamily space, and that if you let it pass, you might not get better terms.

It can, and, I believe, will, get WAY worse for borrowers in the multifamily and CRE spaces.

 4 months later and the underlying points were right on, the 10 year shot up higher than you probably thought though. 

The 10 year is going to continue to create resistance in the mortgage/cre field. I'm very curious about q4 earnings, especially a couple of weeks post inauguration when the price of speculation has caught some growth stocks faster than any tangible earning profile or directive in the future. For REI, it got giddy sellers end of September now reaching back out to me. Have had more calls in the last 7 days than I have had the 2.5 months prior combined.

Timing is very hard to predict, but I am curious on the view today 4 months out to early March.