1st Quarter 2016 Hotline
by Joe A. Hollingsworth, Jr.
Despite much ink being spilled about the Fed’s “liftoff” last month, the increase seems to be accompanied by little disruption in the financial markets. The market operation went smoothly in a single afternoon, and short-term rates have adjusted to their first increase in nearly a decade accordingly. At first glance, the real estate markets seem to be reacting with calm and a focus on 2016. Such equanimity is probably warranted, for there are several reasons the “liftoff” isn’t a huge paradigm shift.
First, the rate increase wasn’t much of a surprise. Fed Chairwoman Yellen invested much of the year signaling an increase was coming and imparting the gradual nature of the subsequent moves. While speculation as to whether it would be October, December, or January was a favorite sport for journalists, investors had long been factoring a commencement of rate increases into their forecasts and analyses; for at least a year, it was a matter of when, not if.
Second, as our previous article detailed, the “liftoff” would garner big headlines but ultimately be a tiny move towards normalization. Rates are far from “normal” ranges, and, while a small move begins a directional shift, the march back to that range will be very long.
Third, and perhaps most importantly, real estate tends to perform best in rising rate environment. Generally, rates are rising when the contextual macroeconomic environment is strong leading to improving property fundamentals. Reasonable inflation, declining unemployment, business expansion, and credit growth are all indicia of an
environment where interest rates would be rising and where occupancy and rental rates would be increasing. Such examples would include the mid-1990s or mid-2000s.
By no means is this a minimization of the first rate increase since 2006, but, with all the speculation about which meeting the change would occur, the larger picture might have been lost. There is a time for extraordinary measures, and there was always going to be a horizon at which they would no longer be needed. Last week’s “liftoff” may be the “shot heard ‘round the world,” but it’s probably just the start to a marathon not a revolution.