The big news that emerged from last week’s Federal Open Market Committee meeting was the group’s choice to forgo another rate hike.
Previously, the central bank had raised interest rates at every meeting since March 2022 (with 10 rate hikes in total). The June decision marks the Fed’s first rate break in more than a year.
Fed. Chairman Jerome Powell revealed this in his post-meeting briefing with reporters. He also looked at key real estate topics, including the impacts of a potential commercial real estate crash and a “bottom” housing market.
Here are the takeaways:
Commercial real estate
Powell and Co. apparently take a possible CRE crash “very seriously” – and in particular the potential impact it could have on the banking sector.
The problem, he says, comes down to the large share of commercial property-backed loans held by smaller, more regional banks. If CRE landlords fail to repay their loans due to declining demand for office space (vacancy rate now sits at 13%, according to CoStar), banks with large CRE holdings feel the pain. the burn. In fact, at Signature Bank, which sank in March45% of its loan portfolio was backed by CRE.
If demand for office space continues to falter, it could lead to more closures in the world of smaller banks. Beyond this sector, however, Powell does not expect a downward trend in CRE to have a significant systemic impact.
“We expect there to be casualties,” Powell said. “There will be banks that have mergers, and those banks will suffer greater losses.”
Powell says the Fed is monitoring the situation closely and will consider CRE’s performance in future pricing decisions. Currently, however, it looks like the potential damage is contained.
“It looks like something that will be around for a while, as opposed to something that will suddenly hit and head into systemic risk,” Powell said.
A “bottom” housing market
Powell also touched on the housing market in his comments, specifically pointing out how “interest-sensitive” the industry is and how that could impact the market going forward.
Although Fed rate hikes do not have a direct impact on long-term mortgage rates, they tend to move in the same direction. And since the Fed started raising its rate last March, 30-year mortgage rates have risen from 3.89% to 6.7% today, according to Freddie Mac.
“Activity in the housing sector remains weak, largely reflecting rising mortgage rates,” Powell said. “It’s the first place, really, or one of the first places, that’s either helped by lower rates or held back by higher rates. And we’ve certainly seen that over the last year .
He is right. Demand fell due to rising mortgage rates, and sales and prices fell steadily for months. That seemed to turn the page early this year, however, when prices started to climb, albeit slightly, according to the Case-Shiller Index.
Powell says this could be a sign that we have reached – and already started to recover from – the bottom of the market. Will it be a quick recovery, though? Probably not, at least until mortgage rates recover.
“We now see housing bottoming out and maybe picking up a bit,” he said. “I think we’ll see rents and property prices feed through into housing service inflation, and I don’t see them going up quickly. I see them wandering at a low level.
This month’s Fed meeting should not be interpreted as a sign that the bank has finished raising rates. Although his measures have brought inflation down slightly, we are still not at the level of 2% sought by the Fed. And according to the latest FOMC projection materials, the majority of FOMC members expect at least two more 25-point rate hikes this year.
The Fed will meet four more times this year: July, September, October and December. CME Group’s FedWatch tool currently has the possibility of another rate hike to 74% for its July 25-26 meeting.
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Note by BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.