Rate Cuts Are Good For Real Estate. Right??

“Signs of an economic slowdown are becoming more visible now, but fears that the Fed needs to make bigger-than-usual 50 basis point cuts to avoid a recession are also not strongly supported by the data.”

-Scott Anderson, Chief U.S. Economist at BMO Capital Markets

Hi Nuvo Community,

The Fed's Dilemma: Rate Cuts at a Critical Juncture

Setting aside the obvious impact of higher mortgage rates and housing unafAs the market anticipates up to 100bps of rate cuts by the end of 2024, there's growing speculation about the state of the economy. Rate cuts are often seen as a tool to support growth, but the timing of these cuts raises questions. Historically, rate cuts occur late in the economic cycle—often signaling more serious concerns beneath the surface. The current pricing suggests that the market sees these cuts as a potential lifeline, but the key issue lies in why they might be necessary.

The downward revision of payroll data by over 800,000 jobs over the past year has sparked concerns that the labor market may be weakening faster than expected. The market has begun speculating on whether the Federal Reserve will cut rates by 25bps or 50bps in September. If the Fed opts for a larger cut, it could be seen as a sign that the economy is in more trouble than previously thought.

The big question now is whether these rate cuts are a response to imminent recession risks or just part of a plan to ease monetary policy after an aggressive tightening cycle. If the latter, then 100bps of cuts seems excessive. But the market’s focus is clear: upcoming labor market data will heavily influence how the market perceives cuts.

History is not on the Fed’s side. With exceptions in the mid 80s and 90s, most cutting cycles correspond with recessions. Maybe the Fed can pull off what they did in the mid 90s leading up to the dotcom bubble. The chart below highlights rate cutting cycles and corresponding recessions (gray bars).

The Real Estate Perspective

Real estate owners are cheering on rate cuts as they anticipate lower financing costs, which could spur transactions and investment. However, this expectation only holds if cuts aren’t accompanied by recession fears. In which case lenders may tighten credit standards and uncertainty in the broader economy could freeze investor sentiment. The availability of debt and equity would likely diminish, making it more difficult for potential buyers to transact.

Market Reactions: Jobs Data

Just two weeks ago the Fed was much more vague about rate cuts. Last week in Jackson Hole, Jay Powell essentially told the world that cuts are coming soon. Unexpected beats or misses on jobs data are likely to have bigger impacts than usual over the next couple of months. A 50bps cut following weak job data, for example, might send signals that the Fed is worried about a more significant slowdown, triggering market volatility. Investors are likely to interpret larger cuts as an admission that the economy is struggling. 

On the other hand, if jobs data is strong and inflation data remains under control, 100bps by year end seems excessive. It would basically mean the Fed is openly admitting they made a big mistake - they should have started the cutting cycle sooner and now they’re playing catch up. 

Implications for Real Estate

The market expects lower interest rates to benefit real estate investment by reducing borrowing costs. After the last 18 months, real estate professionals deserve a break. However, if these cuts correspond with broader fears of a recession, the real estate market may be thrown another curve ball.

All the best,

Yuri - Your Real Estate Investigator

Credit: Brian Underdahl, Chief Executive Officer, Nuvo Capital Partners

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