Will the FED Finally Slow It’s Role?

Posted By: Neil Shea ICOR Blog & News,

Following the Silvergate & Silicon Valley Bank fallouts, one thing that has been fresh on a lot of analysts’ minds is if we are going to finally see an end to the Federal Reserve’s rate hikes to tame inflation.  The latest banking collapses are the latest fractures the Fed has caused in the financial system as a result of its aggressive rate hikes.  In less than 2 weeks, rates plunged more than 60 bps, only to pop back up another 40 bps.  We are in volatile times and fear is starting to surface in the financial markets.

As more consequences of the rate hike cycle become exposed, the more likely the Fed will be forced to slow future hikes.  However, so long as inflation is high, the Fed won’t stop completely. Don’t count on rates falling dramatically any time soon. Those same high rates are partly responsible for low housing inventory. Many sellers are having a difficult time justifying selling a home with a mortgage locked at historically low rate, only to purchase a new home with a considerably high rate.

Nonetheless, in high appreciation markets like Denver, homes that are priced right are selling in this tight inventory market. Rate buy downs fees are a popular seller concession both for new construction and resale alike. According to John Burns Real Estate Consulting’s National Mortgage Trends, 17% of new home mortgages involve rate buy downs.  If your investment strategy is new construction sales or fix and flip, be sure to budget at least 2% seller concessions if you want to remain competitive.

Finally, for the rental housing market, John Burns Real Estate Consulting noted solid rental demand for single family REITS in the 4th quarter of 2022, although rent increases moderated. If your strategy is long term or you are implementing the BRRR strategy be sure to underwrite conservatively at market rents. Look for loan options with short prepayment penalty periods. Rates might not come down much this year but limiting prepayment periods to 3 years or less will allow you to take advantage of lower rates in the future while limiting your costs.

Stay focused and happy investing!