11/12/24 WealthBuilder Weekly Newsletter
This week, we delve into the latest rate cut by the Federal Reserve, what it means for mortgage seekers and real estate investors, and how the recent presidential election impacts economic policy and housing.
Key Takeaways
- The Fed's recent rate cut won't immediately lower mortgage rates due to broader economic pressures and post-election uncertainties.
- With Trump’s return to office, anticipated regulatory rollbacks could impact the real estate market, though changes may take time.
- In today’s economic climate, properties with strong cash flow offer the most stability. Investors should prioritize investments that perform well regardless of potential future rate cuts.
Rate Cuts Amid High Mortgage Rates
On November 7, the Federal Reserve announced a 0.25% rate cut, following a larger 0.5% reduction in September. This brings the federal funds rate down to 4.5%-4.75%, but potential homebuyers and investors shouldn't expect immediate relief on borrowing costs. Although rate cuts usually lower mortgage rates, current economic trends—such as high unemployment and election-related uncertainty—are keeping rates elevated.
Mortgage rates for 30-year fixed loans have risen to an average of 6.79%, higher than the September low of 6.08%. "As long as investors remain worried about the future, Treasury yields, and by extension, mortgage rates, will have a tough time falling and staying down," says Jacob Channel, senior economist at LendingTree.
What the Election Means for Real Estate
With Trump back in office, real estate investors are eyeing potential policy changes, especially around regulations and tax incentives. While a Trump presidency could mean less regulatory oversight and more incentives for real estate developers, it may also lead to higher economic growth, potentially driving inflation—and therefore interest rates—higher. Mike Fratantoni, chief economist at the Mortgage Bankers Association, anticipates a "higher growth economy, higher inflation, and hence, higher interest rates" under Trump.
For first-time buyers and moderate-income homebuyers, this could make homeownership even more challenging. "We should expect more volatility in the housing market," says Lisa Sturtevant, chief economist at Bright MLS. She predicts that Trump's policies might favor high-income individuals and existing homeowners, potentially making it harder for new buyers to enter the market.
Don’t Bank on Low Rates
Despite the Fed’s rate cuts, experts warn that mortgage rates may not dip close to pandemic-era lows. Lawrence Yun, chief economist at the National Association of Realtors, highlights that the budget deficit outlook under Trump could prevent rates from dropping significantly. Yun adds that further rate cuts from the Fed are unlikely unless Trump’s economic policies succeed in reducing inflation.
"Mortgage rates that low would require a significant economic downturn," says Fratantoni. "The circumstances that would bring mortgage rates down to that level again are not ones we’d like to see."
The Impact of Deregulation
A key focus of the Trump administration is expected to be rolling back regulations. For the real estate and lending industries, this could translate into easier loan approvals and increased building activity. However, Daryl Fairweather, chief economist at Redfin, cautions that housing supply may still remain tight, and affordability challenges could persist.
"Homes will still be in short supply, and the cost of borrowing isn’t likely to come down much," Fairweather says. "With Republicans in control, national housing affordability may not be a top priority, so the status quo could continue."
Final Thoughts: Focus on Cash Flow
In a time of economic and political uncertainty, investors should be cautious about relying solely on rate cuts or future economic conditions when making real estate decisions. The key to successful investing is in the fundamentals—specifically, targeting properties with strong cash flow potential that can withstand various economic shifts.
“One of the great things about real estate investing is that, when done well, it can succeed despite government decisions and economic fluctuations,” says real estate finance expert Stijn Van Nieuwerburgh. Instead of speculating on what might happen in the future, focus on properties that perform well now.
Practical Advice for Investors:
- Analyze Cash Flow: Ensure any potential investment property will generate sufficient cash flow after expenses.
- Look for Motivated Sellers: There are still deals available in the market from sellers willing to negotiate.
- Be Selective: Avoid speculating on future market conditions. Focus on deals that make sense in today’s climate.
With Trump's return, the real estate landscape is set for shifts, but the exact impact remains uncertain. As always, keep a close eye on economic indicators, adjust strategies as needed, and invest based on solid fundamentals.
Stay tuned for next week’s WealthBuilder Weekly Newsletter for more insights on navigating the changing financial and real estate landscape.
