It's been right at a year since the Fed first began raising interest rates in response to inflation that peaked at a forty year high. Control of interest rates is the only tool possessed by the Fed for combating inflation by manipulating the economy and they have used this tool in a drastic manner that has never before been seen. Now, in an entirely new economy to that from the previous few years investors find themselves questioning what actions the Fed will take next and how they will impact the world of investing. Today we look at a few considerations to help investors make an informed judgment for themselves.
What's the gameplan?
The Fed's most recent rate hike was only a quarter percent which is significantly less aggressive than the rate hikes we saw across 2022. One or two more hikes of this magnitude are likely, but ultimately the pause on rate hikes will be based on the Fed's confidence that the current interest rate level can continue to temper inflation. Once the Fed does pause rate hikes, there will be a period of waiting while rates are maintained at this elevated level. Historically, these periods of level rates last around a year but ultimately will be determined by how the Fed feels inflation is responding to the elevated rates and where unemployment goes in the economy. Typically, the Fed will begin to lower rates when they feel the economy needs to be stimulated due to high unemployment. However, since unemployment still remains at historical lows it remains to be seen if the elevated rates will increase it to the point where the Fed sees the need to lower rates for that specific reason. In summary, it will likely be early 2024 before we see any rate cuts from the Fed and they will likely be slow and cautious unlike the rate increases during 2022.
How should investors proceed?
Investors and particularly syndications using money from passive investors should always be cautious when it comes to speculating on the direction of the economy or timing on what the Fed will do. We ultimately need to be prepared for any situation as we learned during COVID and also the drastic rate hikes of 2022. That said, with the economy down when compared to the previous few years, now is a prime time to search for deals. Although the demand for returns is still strong in the multifamily asset class, prices have decreased due to the increased cost of debt. Some investors believe that distressed assets currently subject to floating rate debt will become available for purchase as the high rates persist. While we do not want to do deals that depend on improvement in the economy to hit projected results, we should be active in looking for deals that make sense as the highest returns are made in real estate when purchased in a down economy.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please check out our free ebook "Achieving Financial Freedom Through Multifamily Investing."