Impact of Fed Rate Changes on Real Estate

• By the conclusion of 2024's first quarter, the office vacancy rate in the United States had reached a post-COVID high of 17.5%.

• There was a vacancy rate of more than 17.0% for the second consecutive quarter, representing an increase of 40 basis points from the end of 2023.

• The percentage of vacancies was 16.2% a year ago. 20.4% was the Class A vacancy rate, a 130 basis point increase from the previous year.

• 120 million square feet of new supply, as determined by construction completions, more than quadrupled the reported demand for the quarter.

• After surpassing 100 million square feet every quarter for nine quarters, from 2021 to mid-2023, development started to decrease, with a total of only 58 million square feet between January and March.

How can interest rates affect your life?

Let me put this into perspective with a little example...

Jane, a first-time homebuyer, saved diligently for years to buy her dream home priced at $400,000. Initially, with mortgage interest rates at 3%, her monthly payment would have been around $1,349.

However, due to economic changes, interest rates rose to 6%, increasing her monthly payment to approximately $1,919.

This $570 increase made the house unaffordable for Jane. Additionally, the cooling real estate market added to her hesitation. Consequently, Jane decided to delay her home purchase, hoping for more favorable interest rates and market conditions in the future.

Due to the increase in interest rates over the past few years, the real estate industry has been under tremendous pressure in the US.

Since the Federal Reserve began hiking interest rates in March 2022, prices in the United States, which has the world's largest commercial real estate market, have fallen by 11%, wiping out the gains from the previous two years.

In the meantime, borrowers should expect mortgage rates to remain near their current levels...

What is the FED and how does it affect Mortgage rates?

The Fed has two main jobs 1 is to maintain price stability and 2 is to keep unemployment low. The types of rates that mortgage lenders offer you may be indirectly impacted by adjustments the Federal Reserve makes to its benchmark rate, known as the federal funds rate. This will consequently affect the monthly payment amount for a home.

To dive deeper...

In recessions, the Fed reduces interest rates to boost the economy and raises them during strong economic times to preserve stability.

When did it start and what do we see today?

The Federal Reserve has raised interest rates seven times since the beginning of 2022 to counteract the country's high pace of inflation and raise the cost of borrowing for both consumers and companies. At a period, these rate increases have varied from (0.25%) 25 basis points to (0.75%) 75 basis points.

The Federal Reserve has decided to keep interest rates unchanged for the seventh consecutive meeting. The federal funds rate target range will continue to be between 5.25% - 5.50%. 

The Consumer Price Index for May indicated a slight decrease in inflation from April, but not enough for one to support a reduction in interest rates.

The Fed noted in its meeting statement that "inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee's 2% inflation objective."

The central bank also said, "The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%."

The next FED meeting will take place on July 30-31. The central bank will have to come up with a decision on whether they are ready to start cutting interest rates or not.

We can all get our beds ready for nap time because the Fed is likely done raising interest rates at this point.

Interest rates are unlikely to rise in 2024 from where they are today. If anything, they're likely to fall.

As we ride the waves of federal interest rates and their impact on our economy, it’s all about staying savvy and ahead of the game...

From your dream home mortgage to your favorite coffee shop's expansion plans, these rates play a starring role in our financial story. By staying in the loop, we can make smarter moves and keep our wallets happy.

Unvarnished founder Scott Gillen has nabbed the first buyer for his sprawling, $69.5M five-estate Malibu spec community, called The Case, and is working to close a second

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