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Unprecedented Impact of Soaring Interest Rates: What It Means for the Economy

You would have to be living on another planet not to feel the deleterious impact of higher interest rates. Just when we thought annus horribilis 2022 was finally in the rear-view mirror, the bond vigilantes have resurfaced to wreak havoc on both stock and bond markets simultaneously.

Since the Federal Reserve has been steadfast in its commitment to get inflation under control, inflation has dropped significantly from 9% to 3%. This is a huge positive, but the negative of these aggressive interest rate increases is starting to be felt everywhere by Americans looking to borrow money. If you haven’t been paying attention, these are the areas where higher rates hurt the most. 

READ: Higher Interest Rates — What Does It Mean for Consumers, Bond Investors and the Stock Market?

Home mortgage rates 

The latest 30-year mortgage rates have just hit 7.5%, the highest level since 2007. At these levels, first-time home buyers have effectively been shut out of the housing market and have no choice but to rent or live with their parents. So much for the American dream of home ownership.

Moreover, why would anyone move and give up their 3% 30-year mortgage unless they absolutely had to? Many wouldn’t. These factors have caused the inventory of homes on the market to stay low and prices high. Now there is serious talk of 8% 30-year mortgages, which was unheard of just two short years ago. These high rates have a massive impact on the economy; if people aren’t buying or selling homes, they aren’t buying items to fill up these homes, and consumer spending makes up 70% of GDP. 

READ: How Do Interest Rates Impact Real Estate Investing? 

Variable rate debt 

If you have loans that are floating or variable rate, then you better start paying attention to when this debt comes due. Americans got very comfortable with adjustable-rate debt. You might have borrowed money at 2% a few years ago, but that loan will adjust in the next 3-7 years.

The higher new rates could easily double or triple, which means your interest payments could double or triple when these loans readjust. You better have a plan for when that happens. Either save more money to pay these higher interest rates or sell your home or car and rent or lease. Neither option sounds very appealing. 

Credit cards, auto loans, margins or lines of credit 

If you can’t pay your credit card on time, aren’t paying cash for a new car, or need to borrow on a line of credit or margin, you are in for a rude awakening. These interest rates have skyrocketed.

Interest on credit cards is well over 20%, auto loans are 7%, margin rates typically start at 7.5% and lines of credit loans are approaching 9%. It is incredibly expensive to borrow money for anything. If you don’t need to borrow, don’t. And definitely pay your credit cards on time. 

Silver lining 

The silver lining with the massive increase in interest rates is that you can finally get paid a decent return on your savings or cash.

READ: Finding the Silver Lining Amidst Rising Interest and Inflation Rates

CDs and short-term treasury bills now pay well over 5%. This is simply a matter of supply and demand. Too much supply and not as much demand. Don’t leave too much money in your checking account at your bank. Move excess cash to a brokerage account. Ask your advisor about rates on CDs and treasury bills. With the Federal Government borrowing more and more money to fund the ever-increasing national deficit, short-term interest could stay higher for longer than expected.

The three major buyers of U.S. debt in the past have been the Federal Reserve, China and Japan. Now, all three have either stopped buying bonds completely or have significantly cut back their purchases, which means new buyers need to emerge to take their place, and now at much higher rates. These new buyers will most likely be institutional or retail investors who like treasury bills at these much higher rates. 

It is always darkest before the dawn. When interest rates get too high, consumers stop borrowing. If they stop borrowing, demand dries up, the economy slows, companies stop hiring and may, in some cases, lay off employees to cut costs. This is exactly what the Federal Reserve wants.

The only way to kill inflation is to slow things down dramatically; the only tools it has at its disposal are to stop buying government bonds and keep raising the short-term FED Funds rate. Today, this short-term interest rate is at 5.25-5.50%. Could it go higher? That is the question driving markets these days.

As Fed Chairman Jerome Powell likes to remind us at every press conference, moves in interest rates are data dependent, but rest assured if inflation doesn’t get back to its 2% target, interest rates will remain higher for longer.

 

Fred Taylor UPDATED

Fred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information.

Navigating the Economic Crossroads: Fed’s 11th Rate Hike and Its Impact on Investments in 2023

To no one’s surprise, the Federal Reserve raised short-term interest rates again during their July meeting. This was their 11th increase since the spring of 2022. As expected, the Fed Funds rate went up 25 basis points, or a quarter of 1 percent. The new rate is 5.25%-5.50%.

What remains unclear is whether this is the last interest rate increase for the current tightening cycle. If inflation continues to come down to the Fed’s 2% target, then it probably is. However, we won’t know until the end of the year because Federal Reserve Chair Jerome Powell will most likely keep his options open and the markets guessing. Rate decisions will be data-dependent, primarily on the monthly unemployment, PCE and CPI numbers. The great news is that inflation has improved from over 9% annually in the spring of 2022 to 3% today, so interest rate increases have worked to bring down inflation. 

As a result of this improvement in inflation, there is now a lot of discussion that we won’t have a recession in 2023 and Powell will have accomplished a “soft landing” that no one expected as recently as a few months ago.

READ: Finding the Silver Lining Amidst Rising Interest and Inflation Rates

So, what does this mean for investors investing in the stock and bond markets?

Stock Markets

The rally in the stock market in 2023 is reflecting a Goldilocks economy: not too hot, and not too cold. This rally began in earnest right after chip maker Nvidia released their blockbuster earnings report in May. This ignited a massive rally in AI and technology stocks. However, over the last month, this rally has broadened out to other sectors of the market, which is what is needed to keep the new bull market alive. Whether this can continue will depend on corporate earnings, inflation, and interest rates. So far, so good.

As I mentioned in my June article, there are other sectors of the stock market that are attractive. Dividend-paying stocks in the healthcare, financial, energy and industrial sectors look inexpensive compared to AI and technology stocks. Even international stocks are attractive and are trading at an average price-earnings ratio of 13 versus the S&P 500 Index Fund with an average PE ratio of 23.

Bonds & Money Market Funds

For investors who don’t want to buy stocks, bonds are a good alternative once again. Riskless short-term treasury bills yield 5.5%; money market funds and investment-grade corporate bonds pay 5%. If investors want to take more fixed-income risk, they can buy high-yield bonds that pay over 8%. Bond yields haven’t been this favorable since 2008 and the financial crisis.

The Fed will meet again September 19-20. Today the stock market is telling us there will be a soft landing in lieu of a recession, and no more interest rate increases for the rest of the year. It is difficult for investors to trust these rosy scenarios, jump on the bandwagon and chase this rally, particularly if they have been sitting on the sidelines. We could see a serious case of FOMO (“fear of missing out”) by the end of the year, and this is like adding gasoline to a fire.

Investors tend to hate watching the markets go up without them. This is why market timing is impossible. As our Beacon Pointe Chief Investment Officer likes to say, volatility is the price we pay to make money in the markets. However, if these three assumptions are wrong, whatever positive gains we have seen so far this year could evaporate. Being an investor is not easy.

 

Thumbnail Fred Taylor HeadshotFred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. 

Preparing for Economic Downturn: 4 Tips for Colorado Business Owners

Approaching the mid-way point of 2023, the economic downturn that many predicted would characterize Colorado’s economy this year hasn’t materialized. Despite uncertainty and rising interest rates, economic indicators appear to show a resilient market. But, there is a natural cycle of economic highs and lows that all business owners have to confront at times. As we approach the second half of the year, it’s a good time to examine your position and ensure you have some intentional strategies in place to avoid “survival mode” when a downturn does present itself. 

Balancing various economic variables in a way that protects profits and cash flow, especially in a downturn, is one of the biggest challenges that business owners must address. The most successful business leaders keep a finger on the pulse of economic cycles and are prepared with both short- and long-term plans to respond to variable market conditions. 

READ: 5 Ways Small Business Owners in Colorado Can Survive Inflation

Here are four tips that can help Colorado business owners prepare for a downturn: 

Proactively manage production, sales and workforce

These three functions of business, more than any other, can provide a steadying ground for businesses during periods of economic downturn or sustained declines in demand. Business owners can create a cushion to protect themselves from the market and avoid making knee-jerk reactions by getting ahead in these areas.

Look to optimize your accounting department and focus on data-driven forecasting. With better data, executives will have the upper hand when it comes to predicting slower periods. This information gives you more time to prepare and make sound decisions before you feel the full impact of a downturn. 

Human resources is another key area that can make or break a company’s ability to weather a downturn. Set up systems to ensure you have flexibility in managing your workforce. Avoid costly hiring-firing cycles that economic swings can set off by creating an all-the-time loyal workforce. Invest in workforce development. Look for opportunities to decentralize your management structure to offer more autonomy for decision-making. A culture that engages people will always be more resilient in tough times.

Work to ensure your product or service is creating essential value for your customers

Companies that create products or deliver services that people cannot live without will protect revenue during a recession because you’re unlikely to see major changes to demand. When the economy forces Coloradans to look for more ways to save, we naturally start evaluating needs and wants. Business owners who’ve positioned their product or service firmly in the ‘need’ category will fare better because a downturn has little impact on the value of something that consumers deem essential. 

Business owners can adapt their products and services to create more essential value by paying close attention to consumer trends and responses to market conditions. We saw many examples of this phenomenon during the COVID-19 pandemic. Companies shifted business models to stay relevant and meet changing needs; restaurants prioritized takeout programs while in-person dining was restricted; retailers developed the curbside pickup option; gyms pivoted to create on-demand programs for home fitness. Even though these industries likely experienced a decline, companies survived by adapting their offerings to hold value. 

If you experience a decline in sales, you can avoid rock bottom so long as your product or service provides essential utility for your customers. 

Diversify revenue streams

The ebbs and flows of the business cycle tend to vary across industry. The threat of a recession doesn’t necessarily mean doom and gloom for every industry as macroeconomic trends tend to affect different industries in dynamic ways. It’s an exceedingly rare economic event that challenges companies across all industries. 

What’s more common is that a downturn for some will be a boom cycle for others. Diversifying your business and creating multiple, and varied streams of revenue will minimize the impact of any slowdown.

READ: What Are the Safest Industries to Start Your First Business in 2023?

Solidify your capital management strategy

The old adage that cash is king holds true today. It’s no surprise that companies with reliable access to capital are going to be the best positioned to survive and thrive during economic downturns.

Analyze your working capital to identify opportunities for improvement. Can you decrease the amount of cash you have tied up in inventory with better data that allows you to predict demand and make your ordering of products more efficient? Another tactic to improve working capital, sit down with your vendors to identify opportunities for better terms. Finally, diligent credit procedures with your customers may allow you to more quickly convert sales to cash.

As with any area of business, relationships matter when it comes to capital, too. Having a strong relationship with your lenders is essential. Communicate with transparency and form a partnership with those who you borrow money from, ensuring that you are both ready to weather an economic storm together successfully.

If you have a solid financial foundation with accessible capital during a downturn, it can be an excellent time to take advantage of growth opportunities as acquisitions tend to pick up during recessions. Many companies need backing and support when times are tough. For example, the initial success of our business at Kodiak Building Partners was largely established as a result of the 2008 recession and housing crisis. Many of our first operating partners signed on with Kodiak as a holding company during a down period to access the financial strength the model offers. If you have a sound capital management strategy in place, your business is more likely to thrive during a recession. 

READ: Recession Ahead — How to Protect Your Financial Plan

Navigating economic downturns is a critical skill for business leaders. No one can predict with 100% certainty where Colorado’s economy will go in the next cycle, but business owners who work to create some protections with well-planned strategies will be better prepared to withstand a downturn, regardless of when the economic headwinds shift. 

 

Steve Swinney headshotSteve Swinney is Co-Founder and CEO of Kodiak Building Partners, one of Colorado’s largest privately owned companies. His experience as a financial executive spans more than two decades, with expertise in mergers and acquisitions, private equity-backed ventures, financial analysis, investor relations and overall business strategy.

Buying a Home in 2023 — High Mortgage Rates, Low Inventory and Tougher Approval Process

Have you tried buying a home lately? The pandemic days of 20 offers, waiving inspections and closing prices 15% above asking prices may be gone, but major issues remain. I am married to a realtor, so I can assure you I hear about it all the time; it still isn’t easy to buy a home. The new issues are high mortgage rates, low inventory and a tougher approval process. However, if you can navigate all the headwinds, owning a home can still be a terrific long-term investment.

READ: The Pros and Cons of Investing in Real Estate During a Recession

High mortgage rates

During the pandemic, mortgage rates on 30-year mortgages were below 3%. Today, they are around 6%. Variable rates were even lower. That is a significant difference for a first-time homebuyer. In fact, many younger people may not qualify because home prices haven’t come down commensurate with the rise in mortgage rates. This difference in mortgage rates could mean hundreds of dollars more on a monthly basis. As of March 31, nearly two-thirds of primary mortgages had an interest rate below 4%, and about 73% of primary mortgages had fixed rates for 30 years, according to Black Knight data.

No inventory

If homeowners don’t sell, “the movement up the ladder is sort of grinding to a halt,” said Sam Khator, Chief Economist of Freddie Mac. “It is getting much harder for first-time home buyers to jump into the market because of the lack of supply.” According to the National Association of Realtors (NAR), a healthy housing market has between four and six months of supply at current sales rates. The existing home market, which makes up most of the housing market, hit a record low of 1.6 months’ supply in January of 2022 and stood at only 2.6 months’ supply in March of 2023. 

Can’t move

People that were lucky enough to lock in a low mortgage rate of under 3% now don’t want to move because they can’t afford to pay double the interest payment. It doesn’t matter if their house is too small, in a bad location, or if aging baby boomers want to downsize. They are stuck in a home that may no longer work or be appropriate for their needs. They may have considered selling last year, but now it doesn’t make any financial sense to do so. Until interest rates drop, they have no choice but to stay where they are.

READ: LLCs and Real Estate Investing: Pros and Cons You Should Know in 2023

Tougher approval process

One nasty side effect of the recent regional banking crisis is that local banks and mortgage companies are under great scrutiny in terms of loans on their books. Buying a home requires more money down, higher credit scores and a longer job history to qualify today. The number of lenders that even want your business may have shrunk, too. Be prepared for approvals to take longer with even more paperwork than before.

Good investment

Is buying a home even a good investment? Odds are if you can stay in your home for more than five years, buy in a good location and don’t overpay, homes can potentially be one of the best investments you can make. Homes have acted as a great inflation hedge as well. If prices for goods and services keep going up, the price of your home should, too.

Baby Boomers who are selling their homes now after living in them for 20-30 years are making a small fortune. Typically, 70% of Americans’ net worth is tied up in their homes and because they are paying down the principal every month, they are building up equity in their homes over time. However, the cost of selling your home can be as high as 6% if you use a realtor, so you want to make sure you really need to move.

The good news is that your mortgage should be tax deductible. If you move but keep your home, you might be able to create a source of rental income and increase your cash flow. You would also be able to offset this rental income with depreciation and other expenses, so you shouldn’t have to pay taxes on the rental income.

READ: Purchasing a “Second Home” as Your First Property

The solution

Hire the best realtor you can find in your local market who might have pocket listings (they know about homes not currently listed but sellers would sell at the right price), have a mortgage lender letter ready showing you are a qualified buyer and finally take advantage of the 2-1 buydown concession. This buydown is a new financing tool because of higher mortgage rates.

Sellers are now subsidizing, in escrow, at the time of closing the first two years of the buyer’s mortgage at a much lower interest rate, 4% instead of 6%. After the two years are up, the mortgage goes back to the original rate. However, if mortgage rates are lower at that time, the buyer can refinance at a more favorable rate. Buyers must make sure they can afford the higher rate in case interest rates don’t come down.

Although buying a home has been difficult historically, artificially low-interest rates in 2020 and 2021 made it an incredibly attractive time to lock in a long-term mortgage. Today that isn’t the case. Higher rates are probably here to stay for the foreseeable future. My first mortgage in 1985 was at 13%, and when I refinanced at 10%, I thought it was as good as it would ever get. From that perspective, a 6% mortgage still looks like a great rate; we were just really spoiled for those two pandemic years.

The American Dream is still buying a home, and over the long term, has been a great creator of wealth in this country. I don’t see why this time in history is any different just because of higher interest rates. It could be much worse, like 1985.

 

Thumbnail Fred Taylor HeadshotImportant Disclosure:

Fred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information.

The Pros and Cons of Investing in Real Estate During a Recession

Regardless of your finances, investing in real estate during a recession might be a hard concept to wrap your head around, and understandably so. Although a potential 2023 recession won’t be like the Great Recession of 2008, which was directly related to the housing market, people and businesses alike are tightening belts in anticipation of financial hardship on an unknown scale.

READ: What Does a Recession Mean for Your Finances? 

A recession is broadly defined as an economic contraction or two consecutive quarters of GDP decline. A potential 2023 recession would impact various individuals and industries, especially the real estate industry.

Home prices rose in 2021 and stayed high in 2022 as more people sought new homes further away from city centers. Now, rising interest rates and daily layoffs will have some bearing on real estate in the coming months.

This doesn’t mean all hope is lost if you want to invest in real estate this year. Real estate buyers in good financial standing will still have options to invest in property. Here are some of the pros and cons of investing in real estate during uncertain economic times.

Pros of Investing in Real Estate During a Recession

1. Lower purchase prices for home buyers

Even the rumors of an economic downturn can be enough to drive down the demand for residential real estate. This decline in demand will likely lead to a decline in real estate prices, which spiked in 2022.

Home prices are not as threatened as they were in 2008, but interested and prepared buyers can take advantage of a likely dip in listing prices in hot real estate markets like Colorado’s.

2. Diversified assets

The stock market is one of the most visible ways a recession manifests for consumers. People who have money invested in the market may benefit from investing in real estate and other alternative assets while stock prices are on the decline.

3. Reduced competition

Despite the pros, investing in real estate isn’t part of most people’s recession finance strategies. Recessions often lead consumers to reduce their discretionary spending and instead shore up cash and emergency funds. 

The result could be the opposite of the buying frenzy many markets have seen since the start of the pandemic. With less competition for real estate, you won’t have to take as many risks to win any potential bidding wars.

Cons of Investing in Real Estate During a Recession

Higher interest rates

Many recession fears began when the Federal Reserve quickly drove up interest rates in 2022 to ease the effects of inflation. These high interest rates are still in place, making it more expensive for potential buyers to borrow money. Lenders are also likely to be more selective when evaluating candidates for a mortgage, prioritizing higher credit scores and increased down payment requirements.

READ: Higher Interest Rates — What Does It Mean for Consumers, Bond Investors and the Stock Market?

Increased personal financial risk

Recessions are unpredictable, but they often trigger an increase in unemployment as businesses let go of employees to cut costs. Before making a real estate purchase, make sure you have enough cash flow and stable income sources. If you were to lose your job or face any other short-term financial hardships, it could jeopardize your ability to pay for essentials. 

Real estate is still a costly purchase when you consider the associated closing costs and broker fees. Find ways to reduce some of these costs, such as working with a discount real estate agent or negotiating the total price.

Fewer people selling homes

If you’re planning to sell a property you already own in favor of a new one, a decline in listing prices could mean lower profits from the sale. Smaller profits will make it harder to buy a new, high-value investment property. 

Best types of real estate to invest in

If you have cash flow and income stability, a recession shouldn’t stop you from investing in Colorado real estate. Aside from a single-family home purchase, here are some alternative types of investments to consider.

READ: What Is the Difference Between Class A, B, C, and D Properties?

Rental Properties

A recession may slow down first-time home purchases, but people will still need housing. Purchasing a rental property provides another source of income for your household, whether it’s a short-term lease or a consistent vacation rental. Colorado in particular has become a desirable destination for remote workers who value the flexibility of short-term and vacation rentals, and an economic downturn might mean rental property owners are ready to sell.

As with any property investment, owning a rental property also means taking on landlord responsibilities and maintenance costs. Be sure to factor those in as you evaluate whether a rental property purchase is right for you.

Properties you can “flip”

For those with time, patience and the real estate knowledge to flip a house, banks and owners selling homes for cash provide an opportunity to turn a respectable profit on a real estate investment. But flipping a house isn’t as simple as reality television makes it seem. Ensure you have the cash on hand to make the purchase and cover any expenses incurred during the renovation.

If you’re not ready to take on the financial risk of a fixer-upper, try wholesaling to earn extra income from real estate during a recession. Wholesaling is a short-term strategy similar to flipping but that doesn’t require the wholesaler to purchase the property. Instead, wholesalers work as intermediaries to help eager sellers let go of their properties, accumulating capital in the process.

READ: How to Sell Your House in a Down Market — 6 Easy Tips

Real estate and REIT ETFs

Investors who want the financial benefits of real estate investing without the burdens of home or property ownership should consider real estate or REIT exchange-traded funds (ETFs). REIT ETFs add the diversity that real estate investment offers in a financial portfolio without the surprise costs of physically owning and managing a property. These ETFs are also often low-cost, an added benefit during a period of economic downturn.

Investing in real estate during a recession is still possible

A recession shouldn’t mean an end to your dreams of real estate ownership. Potential buyers with cash flow and strong credit can take advantage of the decrease in competition and listing prices. Real estate investment, like any investment, comes with risk. As a potential investor, it’s important to evaluate how much risk you are willing to tolerate in exchange for the addition to your portfolio.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more. 

Silicon Valley Bank Failure: Could Your Bank be Next?

If you haven’t been following the second-largest bank failure in history, you may want to start. To recap, Silicon Valley Bank (SVB) located in California was the 16th largest bank in the United States, with $209 billion in assets. Just a few weeks ago, it failed. Shockingly, the Silicon Valley Bank failure happened in just 48 hours. As it turned out, this was simply an old-fashioned 1930’s style run on the bank. Why is this important to you? Simply put, fear causes contagion, and if SVB could fail that fast, your bank might be in trouble, too.

Certainly, nobody wants another Great Financial Crisis like we had in 2008-2009. However, there are major differences between these two crises. The SVB problem wasn’t a credit crisis, as in subprime mortgages. It was a liquidity crisis, as in depositors took their money out so quickly that SVB management could not raise capital fast enough by selling more shares in the bank or their fixed-income assets. At the end of the day, the Silicon Valley Bank failure happened because SVB didn’t manage its interest rate risk. This caused what is known as a Black Swan event, defined by the Corporate Finance Institute as “an extremely negative event or occurrence that is impossibly difficult to predict.”

Silicon Valley Bank Failure: The Primary Cause

During the pandemic, there was just too much money going into banks at a time when the economy was shut down and nobody needed loans. Instead of this cash earning nothing, SVB bought longer-dated (duration) treasury bonds and mortgage-backed securities with very low yields and, as it turned out, at very high prices.

Last year, when the Federal Reserve raised short-term interest rates rapidly to almost 5%, the older bonds that SVB purchased back in 2020 were immediately underwater and showing massive losses. This was a real problem because it made their balance sheet look weaker and this alerted the credit agencies. SVB wasn’t the only bank to do this. This unrealized loss on the balance sheet for SVB shouldn’t have been a problem under normal circumstances. All SVB had to do was hold these bonds to maturity and they would get their money back and not have to take any losses. However, when depositors wanted their money back so quickly, SVB had no choice but to sell some of these bonds at a loss to raise the cash.

The other issue SVB faced was over 90% of the deposits in the bank were uninsured. The Federal Deposit Insurance Corporation (“FDIC”) covers up to $250,000 per depositor, but in this instance, most of the customers at SVB were start-up technology companies with much more cash in the bank than was FDIC insured. For example, the digital media player company ROKU had almost $500 million of cash deposited in SVB. As rumors spread that a Silicon Valley Bank failure was increasingly evident, venture capital firms urged their technology clients on social media to move their deposits out of SVB as soon as possible. When they did that, SVB ran out of cash and had to close their doors.

Government Reaction

To stem the panic and a similar run on the smaller regional banks around the country, the Treasury Department, the Federal Reserve, and the FDIC guaranteed all the depositors in SVB would get their money back regardless of the amount. Another move the Fed made, according to Politico, was “the Fed also announced that it would offer cash loans of up to a year for any bank putting up safe collateral — an action that, in theory, would allow banks to handle deposit withdrawal of any amount. The goal: to reassure people that they don’t need to take their money out at all.”

Unlike 2008, shareholders in SVB lost their entire investment. As President Biden and Secretary of the Treasury Janet Yellen have made it perfectly clear, taxpayers will not bail out SVB shareholders. The FDIC was covering the uninsured depositors in SVB with a dedicated fund to be used for situations such as these. Fees paid by banks cover this. Another idea under consideration by the FDIC is they would guarantee all loans, regardless of the amount, for the next two years. If they do this, then depositors wouldn’t have to move their money to one of the ‘too big to fail’ banks: JP Morgan, Bank of America, Citicorp, or Wells Fargo. Today it isn’t clear whether deposits above $250,000 would be covered in the event of another bank default, which is probably why bank stocks keep going down.

The Fed

It wasn’t too long ago that some economists were thinking the Federal Reserve would raise interest rates 50 basis points at their next meeting. Now odds favor only 25 basis point moves going forward. This is important because the Fed’s inflation fight might take a back seat to resolving the banking crisis first. There is also the possibility this latest crisis throws the U.S. economy into a recession which would help bring down inflation on its own. Perhaps that could be the silver lining to all this; however, no one could have predicted that just a few weeks ago.

READ: Finding the Silver Lining Amidst Rising Interest and Inflation Rates

Foreign Problems 

As if the Silicon Valley Bank failure, alongside similar failures of U.S. banks including Signature and Silvergate, weren’t enough this month, Europe has had its problems, too. Credit Suisse Bank in Switzerland has just been rescued by UBS Bank. Credit Suisse has been in trouble for years now, but the banking issues in the United States triggered worries about the solvency of this Swiss banking giant. At the 11th hour, UBS Bank took over Credit Suisse and hopefully stopped other European banks from going under.

What Is Next

While it may be too early to know if the rapid responses by the Fed, the Treasury, the FDIC, and UBS will be successful in calming markets here and abroad, at some point, fear will turn into greed and there should be some bargains in the banking sector. If investors can find value in battered regional bank shares, the hedge funds who have made a fortune shorting these banks will have to cover to realize any profits. If they start to do that, these stocks should recover. Only time will tell. The other side effect emanating from the demise of SVB will most likely be tighter government regulations of smaller banks with regard to interest rate risk on their balance sheets. Maybe next time banks won’t be so quick to buy treasury bonds and mortgage-backed securities thinking they were risk-free.


Thumbnail Fred Taylor HeadshotFred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. 

How Do Interest Rates Impact Real Estate Investing? 

Inflation is rising at a historic pace, putting pressure on budget-conscious consumers that hasn’t been felt in decades. Prices for goods and services have reached a year-over-year rate of 9.1%, the highest the U.S. has experienced since 1981, according to data from the Bureau of Labor Statistics.  

In addition to rising prices for everyday goods and services, home prices have leaped even higher than the inflation rate in the past two years. 

In the face of this inflationary climate, the Federal Reserve continues to raise interest rates in an effort to slow spending and tackle the economic problems Americans are experiencing. As a result, the housing market may experience challenges in the months to come. 

How will this affect real estate investors? Each portfolio is different, which means situations will vary. Here are a few things to consider. 

The Economic Impact 

The higher cost of borrowing results in more expensive credit card and loan payments, which usually encourage people to reduce spending.  

For most families, saving will become a top priority. Americans may be less inclined to go on vacation, visit restaurants, and spend unnecessary money. 

This conservative spending also translates to businesses, which may be more likely to reduce investments if the economy feels rocky. This can even have an effect on hiring. 

The Real Estate Market Impact 

When interest rates rise, buyers become more hesitant. They often analyze their pocketbooks, reevaluating whether it’s a good time to take out a mortgage — especially when high interest rates make borrowing more expensive.  

A downturn in prospective buyers could lead to more supply, prompting a drop in home prices.  

Your Existing Portfolio May Be More Profitable 

Rising interest rates can actually be good news when it comes to your existing properties because as interest rates rise, so does rent.  

Assuming you have a fixed-rate mortgage and your monthly payment won’t change, raising your rental prices to reflect the current market will increase your monthly income.  

Selling May Yield Strong Returns 

Investors who are planning to sell their properties may expect strong returns, but it depends on their situation. 

As interest rates rise, there may be less demand for housing because borrowing is so expensive. When demand is down, it can result in two different scenarios.  

If the property is highly desirable, buyers may be willing to make a competitive offer on the home, especially if they’re moving to escape high prices in other cities or states. However, some sellers will find that they must reduce their price to attract buyers. 

For investors who want to sell their investment properties, there are many options to consider when determining where to invest those proceeds. 

READ — Pros and Cons of Investing in Student Housing

New Investments Will Likely Cost More 

Unfortunately, real estate investors will likely face higher home prices, just like the average home buyer. 

Even if you find a property that would normally fall within your budget comfortably, rising interest rates can make your monthly payment more expensive.   

Even a 1% difference in interest rates can result in a difference of more than $100 on a home that’s priced at $200,000. Although that may not sound like much, over the course of a year, this small difference will add up.   

For investors who need to borrow much more than $200,000, the difference will be felt on an even more significant level. You may be able to shop around and find more appealing loans for your investment properties, but it won’t be easy in this economy. 

READ — How to Invest in a Rental Property with No Money Down 

How To Move Forward 

First, remember that real estate is a worthy investment strategy that can usually weather economic storms.  

Financial advisors recommend real estate investing because it can help Americans preserve and build wealth, and the value you’ll reap is much more predictable than other methods of investing, such as the stock market. 

As you evaluate your portfolio, think about your long-term goals and when you’d like to reach those goals. For some investors, it may be best to look for a real estate agent who can help you advance your purchasing goals, especially if you’re already in the business of flipping homes or have capital readily available.  

On the other hand, many investors may want to hold off on acquiring new property. There’s nothing wrong with patiently paying down your mortgages as you wait for the market to turn around.

Your investment strategy in the midst of rising interest rates and inflationary pressure will depend on your portfolio and goals. 

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is also a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.

Does an Inverted Yield Curve Portend a Recession?

The last time I wrote about the bond market was five years ago when interest rates were about to become inverted. When this happens, it simply means you can get a higher interest rate on a shorter maturity bond than on a longer maturity bond. For example, if you wanted to buy the 2-year Treasury bond today, the government would pay you 3.18% in interest. If you wanted to buy the 10-year Treasury bond, you would only get 2.95% in interest. Doesn’t make sense, right? Why would you tie up your money for an additional eight years and receive less in interest? You wouldn’t — unless you think a recession is coming. Guess what? The bond market is now predicting a recession. In fact, we may already be in one.

Today, bond investors think the Federal Reserve’s recent aggressive interest rate hikes will slow down the economy enough to throw it into a recession. We have already seen mortgage rates jump from 3% to almost 6% in the first half of 2022. This means numerous first-time homebuyers may not qualify for a new home. Interest rates on auto loans and credit cards are much higher, too. Anybody who borrows on margin from their brokerage account is paying an extra 2-3% from just a year ago.

These higher interest rates are going to make things a lot less affordable. If things get too expensive, consumers will think twice about making purchases. We are also starting to read about layoffs from the big tech companies in Silicon Valley and a slowdown in hiring on Wall Street. With unemployment at an incredibly low 3.6%, companies will ultimately need to lay off workers to maintain current margins and profits.

If the recession gets bad enough, the Federal Reserve will eventually have to cut interest rates to stimulate the economy. The irony is the Federal Reserve needs to raise interest rates high enough to kill inflation, slow down the economy, and cause higher unemployment, only to turn around and start cutting rates again. This interest rate cycle may take the next 3-12 months. In the meantime, investors in the stock market, homeowners, and workers will likely suffer.

Inverted yield curves are rare occurrences, which is why investors and the media pay such close attention to them. It happened in 1991, 2002, 2008, and most recently (and briefly) in 2020. There is also a very strong correlation between recessions and bear markets. We had bear markets in 1991, 2002, 2008, and in 2020. The difference this time is we are already in a bear market. Let’s see if the inverted yield curve is right: a recession might be just around the corner.

 

Thumbnail Fred Taylor HeadshotFred Taylor is a managing director and partner of Beacon Pointe Advisors’ Denver office. He helps individuals and families build wealth, live off their wealth and leave a legacy for future generations. A former economic advisor to Governor Bill Ritter, Fred has more than 35 years of financial services experience.

 

Important Disclosure:
Frederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.

How Real Estate Investors Can Survive a Market Downturn

When COVID-19 shut down much of the world in early 2020, the S&P 500 began a 34-percent plummet. Given the widespread impact of the virus, a significant drop was to be expected. Less expected, however, was the speed of the following recovery.

In just six months, the S&P 500 recovered most of its losses and more. This turnaround was one the fastest in history, bolstered by government programs that helped individuals and businesses to stay afloat during lockdowns.

While a real estate market crash is not inevitable, 2022 could see a slowdown in growth. As an investor, it’s important to prepare for what comes next.

Steps to Survive a Market Downturn

When the Fed announced a series of planned interest rate increases aimed at slowing down inflation, investors shuddered. After all, low rates have allowed first-time investors to enter the real estate market and veteran investors to rapidly expand their portfolios. With interest rates going up, housing stocks shrinking, and prices rising, it seems likely the market will experience a correction.

But preparing for a downturn is possible. For real estate in particular, there are six steps you can take to protect your investments and come out the other side stronger than before.

1. Plan for Worst-Case Scenarios

Start by figuring out where you would be if every tenant at each of your properties paid rent 30 days late. Go one step further, and calculate what would happen at 60 days or 90 days.

While you’re at it, imagine that your property occupancy rates dropped by 10, 20, or even 30 percent. Envision what would happen if the value of your property dropped dramatically.

While this might seem pessimistic, looking ahead to the worst-case scenario for your real estate investments can help you develop a plan to handle it.

2. Get a Grip on Expenses

There are two types of expenses: fixed, and variable. Fixed expenses are unchanging, and unlikely to be affected by a real estate market surge or a real estate market downturn.

They include things like:

  • Routine repairs
  • Property tax
  • Mortgage payments

Variable expenses can include improvements on properties that are unrelated to regular maintenance. Looking ahead to a market downturn, evaluate which improvements will give you the best ROI — and which can wait.

3. Cultivate Better Relationships with Tenants

The heart of your real estate investment isn’t the property you buy — it’s the tenants inside.

Don’t let worrying about money cloud the fact that real estate is, at its core, about people. Cultivating better relationships with tenants is key when the market gets tough. This starts with improved tenant screening, keeping your properties in good shape (even when the rent is late), and working with tenants who are struggling.

4. Stay Focused on your Goals

You got into real estate investment for a reason. Hopefully, you laid out both short- and long-term goals before you got started. A market downturn is a good time to revisit those goals and make sure you’re making decisions aligned with your objectives.

Ask yourself:

  • Is your portfolio as diverse as you’d like?
  • Are your properties performing well historically?
  • If you’re looking at potential purchases, are you compromising or sticking to your investment criteria?
  • Is there another investment space you can move into (e.g., FSBO properties)?
  • If you’ve liquidated a property, can you use a 1031 exchange to defer taxes?

If you haven’t taken the time to outline clear goals, use a potential market downturn as a time to look ahead with a clear plan.

5. Build Up a Cash Reserve or Open a Line of Credit

Even with perfect planning, you may find yourself in need of quick cash. Building up a cash reserve is the real estate investment equivalent of making hay while the sun shines.

Consider the following actions to help ensure easy access to the funds you need:

  • Open a line of credit on a property
  • Delay a major purchase and store the cash
  • Sensibly liquidate a property (before the market drops)

6. Don’t Panic

Panicked investors may be tempted to liquidate their portfolios, unloading stocks and properties before they lose a penny of profits.

Resist this urge. With housing starts and construction permits up heading into 2022 and home prices still on the rise, it’s wise to sit tight to see what happens. While strategically unloading poorly performing properties or other investments can free up cash, history shows us gradual corrections are more likely than disastrous downturns.

Stay informed, and don’t make hasty decisions.

Good News Going Forward

The good news is that even in some of the worst financial crashes, real estate remains remarkably stable. Taking these six steps can help stabilize your portfolio and protect you from whatever the future holds.

 

Luke BabichLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.

What does the Georgia Senate race mean for real estate?

Happy new year to everyone. It is crazy that we are still talking about the election … it seems like it is never ending.

Fortunately the Georgia senate runoffs were the last of this cycle. As Georgia flipped Democratic, treasury rates jumped to their highest since March. Why? What does this mean for interest rates and in turn real estate in both the short term and long term?

What happened in the runoff election?

Prior to the January 5th runoff in Georgia, markets were pricing in a split government with Republicans controlling the Senate and Democrats controlling the House and Presidency. All these predictions have changed with the Senate now controlled with a narrow majority by the Democrats. Markets reacted immediately to these changes:

After the announcement of the Democratic wins, yields have risen which means interest rates have also risen. Mortgage rates are based off the 10 year treasury so as treasury yields increase so do mortgage rates.

Can the fed “control” mortgage rates and other interest rates?

After the Democratic win, the 10-year treasury price dropped (yield increased). Remember yield and prices move in inverse in the treasury market so as price rise yields fall. It is also important to note that the federal reserve does not control long term interest rates, they can merely take steps (like buying bonds or mortgages) to control the yield curve.

Increased government spending without corresponding tax increases tends to push up Treasury yields partly because it portends more government borrowing and a larger supply of bonds.

In the short term we will see an increase in mortgage rates, how much depends on what happens with future spending bills. For example, will the new government pass a bill to provide 2k to every family as proposed in an earlier Democratic bill? Depending on what happens with spending we could see a jump in short term interest rates as the markets figure out how to price in the new administration policies.

Short term real estate impacts from a Democratic win

If mortgage rates move upward significantly this will cause a slow down in the real estate market as payments become more expensive; higher interest rates lead to higher mortgage payments.

With limited growth in income, houses become relatively more expensive and this essentially begins to price people out of certain houses. For example, someone might have been able to afford a 300k house, now they can only afford a 250k home due to the higher payments.

If rates rise enough this will slow the real estate market, how much will depend on how high the rates go in the short term.

Long term real estate impacts from a Democratic Senate win

Long term the impact of the Democratic win is much smaller. Even if there were a large stimulus push at the end of the day government spending does not drive the economy. The economy is driven by business growth ultimately leading to capital investment and hiring.

COVID-19 radically changed the business environment with bigger businesses getting larger and more efficient. For example, think of Amazon, they have their own warehouses, planes, and now delivery network in most major cities. This efficiency eliminated allot of excess in the supply chain saving huge costs.

On the flip side, think of a small business like a restaurant. Many are beginning to automate with online ordering eliminating labor and in turn expenses.

Knowledge industries are following suit with banks closing branches and eliminating thousands of positions due to the shift to online banking. All of these changes will hold back wages for many, hiring, and ultimately the economy.

According to the World Bank, “If history is any guide, unless there is substantial reform, we think the global economy is headed for a decade of disappointing growth outcomes”

Before the pandemic, the Bank projected that potential global growth between 2020 and 2029 would slow to a yearly average of 2.1%, from 2.5% in the previous decade, as a result of aging populations and lower productivity growth. On Tuesday the bank lowered its projection to 1.9%. Potential output assumes the world economy is operating at full employment and capacity.

The World Bank said the global economy is expected to grow 4% this year after contracting 4.3% in 2020. That 2021 projection is 0.2 percentage point lower than it forecast last June.

In the short term, the Democratic win will lead to higher mortgage rates as a result of increased spending. The higher rates should temper the torrid pace in residential real estate in the short term. Unfortunately, without substantial growth there will be little inflation in the future and long-term rates will drift back towards historically low levels.

Glen Weinberg is the COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek, the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, ColoradoBiz, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.