Property Management Blog

Lower Interest Rates! What Does it Mean for Me?

Bob Preston - Thursday, August 8, 2019
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On Wednesday August 1, 2019 the Federal Reserve reduced its funds rate for the first time since the financial crisis in 2008. We have many of clients calling and emailing me asking "what does this mean for me and the San Diego residential rental market?".  My response is something like this:  "too early to tell but the big picture for the San Diego rental market continues to look strong."

Now keep in mind that I am not an economist and don't claim to be an expert in this field.  I have however, talked to several in the past 6 months including Jordan Levine, Deputy Chief Economist of the California Association of Realtors, during an extensive interview for my podcast back in May.  Anyone interested in listening in on that podcast can find it on the Property Management Brainstorm website at this link:  How the Economic Outlook Affects Real Estate Investors.

As Jordan Levine and other economists have pointed out to me, despite the recent economic expansion, low unemployment, and low interest rates, 2019 has seen half a year of skittish consumer confidence. One of the leading indicators of the health of the California real estate market in home sales, currently being recognized broadly as being in the midst of a "down year" in 2019. One has to ask themselves why? Most economists will point to political instability of the trade wars with China, US Federal Government shut down earlier in the year, and the impending presidential election of 2020. There are socioeconomic factors as well, with Baby Boomers selling their homes to cash out on equity and in many cases leaving the state, but Millennials not picking up the slack due to their desire to lead a more mobile and flexible lifestyle.

Most economists will also agree that a recession may be looming on the horizon in 2020 and 2021. One indicator of a coming recession is a current phenomena known as an "inverted yield curve".  The yield curve looks at the percentage return an investor will get on different government bonds based on the time of maturity. Typically, the higher the rate of return, the higher the inherent risk in the investment. With an inverted yield curve, it becomes that of a "U" shape, with shorter term securities and bonds paying a higher rate of return than one might get on money invested for a longer period. The inverted yield curve, therefore, is telling us that there are fears in the investment community about the economy in the near term. The investment rate may go up again if you go out far enough, hence the "U" shape. Inverted yield curves are historically a very good predictor of a coming recession.

So, the Fed's rate cut is in response to a slew of data showing the economy is slowing:  the inverted yield curve, slowing job creation, softening demand for manufacturing, low inflation, and signs of slowing global growth with trade wars.

While NCPG does not have a crystal ball, and I'm reiterating I'm not an economist, many of these factors are pointing to continued strength in the single family home rental market. If there is a recession, and people aren't buy homes, commons sense tells us the rental market would continue to be strong in 2020 and beyond. With interest rates so low in 2019, the investment opportunity to purchase rental homes is also quite strong and will likely remain so while the rental market continues to stay strong. 

So there you have it.  I hope this helps provide good information on the Federal funds rate cut and what it might mean to you as a residential real estate homeowner and investor!

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