Rates Were Hiked: Here’s What Investors Should Do Now

0:00Interest rates are once again at the center of the housing market, but this week's two biggest rate stories are pulling in opposite directions. The Federal Reserve just raised its benchmark rate for the first time in three years, while President Trump is calling for rates to be cut all the way to 1 % or lower. Today, the whole panel is here and we're breaking down why the Fed moved higher and what all this could mean for mortgage rates, housing demand and your portfolio. I'm Dave Meyer here with Henry Washington, James Daynard and Kathy Fetgate to separate the headlines from what investors actually need to know.

0:37this is on the market let's get to it

0:45welcome to on the market the gang we're back together everyone i'm so happy to see you all this is making my week henry james kathy how are you guys oh so good kathy jumped off a mountain today so you're doing great yeah i did i i parasailed off an alp i mean that sounds so fun Yeah, we define fun differently, but to each his own. I'm not going to lie. It was really nice to have my feet back on the ground eventually. Well, it's great to be back together. It has been a while since we've all been here. And we've got a pretty big story here. It's making the news. Everyone in real estate is talking about it.

1:22The Federal Reserve raised interest rates for the first time since 2023. It's not a lot, just 25 basis points. But this is clearly the opposite of what I think most investors were expecting or hoping for, at least at the beginning of the year. I have my own thoughts about it, but I kind of want to open it up and hear what you all are thinking about this. Good thing? Bad thing? Are you mad? Dave, you haven't kept your thoughts private about this at all. You've been talking about this for, I think, a year. You actually converted me a while ago. I was like, he's nuts. He thinks that inflation is going to be persistent and that rates weren't going down anytime soon.

2:06And I was not liking your story. But then, yeah, I bought into it. And here we are. I don't like my story either, to be fair. I don't like that this is what's going on. But unfortunately, it's all playing out. Well, you know, at least the Fed was unanimous. 12-0 on raising the thing. When do you get that many people to agree on anything? Right. Which doesn't bring a lot of comfort, right? They all agree. And does it mean more? I mean, it sounds like maybe one more this year, maybe two. All I know is I don't want to do any more prediction shows because every time I predict something at the beginning of this year, I am completely wrong.

2:46I actually thought we were going into quarter four and the market was going to be red hot. Yeah, it's going to be ice cold. It is the shower you don't want in the morning, that's for sure. I don't know. I don't know that I feel the same way. I mean, does the rate hike suck for some traditional buyers? I mean, yeah, the higher the rates go, there's another subset of people that are priced out of the market because they just can't afford to own a home, which affordability is an issue. I get it. But you asked specifically how we feel about it. And I mean, the higher rates are and the less demand there is, the more opportunities I have to get properties at a discount.

3:27Now, the catch is, yeah, you can buy them at a discount, but can you hold on to them through the turmoil? That's the challenging part because as you guys were just talking about and what James is alluding to, it's hard right now to sell flips. If you're in house flipping, The business is challenging right now. And so if you're buying a great deal because the market's giving you this amazing opportunity, but you can't keep it and you can't sell it, then you're still in a tough position. So it's not just being able to buy, it's being able to buy and weather the storm or figure out a way to get your properties to sell, which is kind of what we've done over here.

4:05I'm with you, man. I actually think it's a good opportunity for buyers. I don't see this as necessarily a bad thing. I guess big picture, I think prices are going to start coming down like everywhere. Not a crash, but I just think in most markets, this is going to be sort of the straw that breaks the camelback. We've been in this gridlock for four years between buyers and sellers. And frankly, buyers have been holding back because prices and rates make things not pencil, but sellers have just been sort of stubborn about it. I think that's going to start to change. This low affordability is going to pull more buyers out of the market.

4:41And the only way people are going to be able to sell is to lower pricing. And so to Henry's point, if you're trying to buy things for the long run, that's the discount people have been waiting for for years. Everyone's saying, oh, buy when prices go down. Well, prices are probably going to go down. And I don't personally think that this is leading to a crash, which is kind of the scenario you want, right? You don't want to buy when things are absolutely falling apart. But if this is going to give people more negotiating leverage to buy things at a discount, To Henry's point, they still got a cash flow.

5:12You got to be able to hold on to them. But I think those opportunities are going to become more and more because rents probably aren't going to go down. And so if prices go down and you can get better prices and rents are the same thing, cash flow prospects are improving. You can walk into more equity if you're able to buy below current comps. If you're a buy and hold investor, I think conditions are now improving. If you're buy and hold, this is it. It really just depends on where you are. Here's the thing. Inflation is usually a result of a few things. Right now, we know it's partly because of this oil mess and oil prices being up, and that affects everything.

5:48But also, in the report, or at least in certain markets, AI is booming. And I am from California. I have family still in the San Francisco Bay Area. There is so much freaking money. Prices are going up insanely. That is true. Insanely. AI is creating jobs right now. I know there's all this fear that's going to take jobs away, but right now in certain markets, it's crazy. And so we're seeing, again, in the San Francisco Bay Area, prices going up hundreds of thousands of dollars over ASCII price. So it does just depend on the market that you're in. And inflation is actually good for real estate.

6:27If you're a buy and hold investor, owning a home over time in an inflationary environment can make you very wealthy. I just want to add one thing because I know it feels depressing, but time does pass. And I've been doing this for 30 years. This is what I tell people. As you know, I'm in Europe, jumping off of the Alps. The reason I'm here is because my daughter just got married. And when she was born, Rich and I set aside an investment property for this moment. And Dave, listen up, because you just had a baby. We could do the same when you just kind of set aside a house. We knew her wedding was going to be expensive.

7:06We knew that that would be stressful at the time. But when we bought this 20 years ago, knowing that it was for this purpose, all we had to do was refi, take all that cash out and pay for the wedding. It was specifically designed for that. I love real estate. And even though we put the loan on it, we refi, there's a loan on it, but it's still cash flows. So it's easy to get caught up in these, oh my gosh, quarter percent rate hike, but it still works over the long term. And I think that's what people need to understand. Man, you guys are just full of sunshine and bunnies this morning. You're a house flipper.

7:42You're a house flipper in an expensive market. I feel like I'm going through a motivational set. I'm like, all right, I got to get pumped. No, it's not great news. But I mean, at the end of the day, the rates didn't move much whatsoever if they moved at all. They went down. Yeah. Which I said was going to happen, by the way. This is a good thing for long-term rates, but keep going, James. Sorry. No, and that's like, you got to look at it because I had a bunch of people call me freaking out. They're like, I got all these houses for sale. I'm like, I bet I got more than you. But, you know, at the end of the day, we had to do that.

8:13Like, luckily, I've been listening to Dave for so long now. I'm like, oh, no, this is a good thing. That's what I was trying to explain. I'm like, this is a good thing because we got to get normalized. Yes. And one thing that I am seeing that could also be a good thing for you flippers out there, we're seeing so many canceling listings right now. Inventory is starting to shrink in some spots. Yeah. Because there's only a few buyers come in. The buyers don't like their houses, but the sellers are just staying tight. They're not really cutting price. What I'm looking at, like these canceled. And Dave, in our neighborhood, because me and Dave, me and Dave are listed in our third flip?

8:46Third, fourth? I don't know. But it's going live today, so you better be giving me good news. good news is we have no bad news there's no low comps there's no bad okay but in our in this little pocket when i was looking at it we have over 17 cancel listings in the last 12 months in this price point this is a market that never cancels that neighborhood it sells out all the time because people want to live there out of these 17 homes only two cut price interesting They just stayed on market for 90 days and then they canceled. Yeah. And so, you know, for people predicting a big crash, because people like 2008, I'm like, chill out.

9:26Like it's not, it's real estate. It goes like this, right? There's little waves. These things actually for flippers could help too, because inventory could dry up a little bit more. And we could see rate relief by that spring market. Now it's a good time to buy deals if you could hit that first spring market. I know going forward, I'm trying to chime everything for that spring. And if I can't, I am adjusting my numbers dramatically. Things seem like they're cooling in a lot of places because they are. But as I was researching for this show, I actually found another article that said that prices are cooling in 46 metros.

9:59So they've gone down since the previous month, but they're still rising in 54 other metros. So, you know, that is not a big signal to me that there is some massive crash coming. There's demand in certain markets and there's not in other markets. And that, I mean, that's just, I don't know, is that, that seems normal to me. Yeah, it is. I think that is normal. But I guess my thought is that rate relief just isn't coming. Like, I don't think we're getting below six and a half, like, anytime soon. And I mean, like, next year. And it doesn't even matter what the Fed does. Like, that, it's, we've gone past the point where what the Fed does even is going to impact more.

10:43It's true. The bond market is deciding everything. And there's just clearly a revolt in the bond market. They don't buy what the US government is selling. Literally, they are not buying. They are not investing in what the US government is selling. And so what are the ways that the US government can fix that? Well, they could control short-term inflation by ending the war. No one's even talking about ending the war anymore. That hasn't even been in the news. That's not coming anytime soon. And then the other real thing that is going to keep rates persistently high for the foreseeable future, maybe forever, is the national deficit.

11:24Like people, bond investors are worried that because we cannot control the deficit, that the government is going to print their way out of this. And that's probably right. That is a reasonable fear. And until that fear goes away, bond yields aren't going to go down meaningfully. And like I said this in the show the other day, but like you can't even say or forecast the deficit going down with a straight face. It's a joke. Like no one is going to do it. We haven't had a balanced budget in the U.S. for 26 years. Like so you have to just think about like what mechanism is going to bring rates down.

11:58I don't see one. And so that's why I just think we're in for this like not a crash, but persistently downward pressure on home prices. because the affordability is too low. And now I think people are going to just say like seven, six and a half, seven is the rate. And they're going to not buy things expecting to be able to refinance. And that's going to push home prices down in a lot of places. Not 20%, but are we going to see three, 5 % declines next year? I think so. All right, everyone, we got to take a quick break, but we'll be back with the whole panel right after this. Most deals don't fall apart because of the numbers.

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15:08Welcome back to On The Market. Let's jump back into our conversation about what the Fed is doing and what it means for your portfolio. Well, it's interesting that you say that because in preparation for this show, the article I wanted to talk about, and I say I wanted to talk about, What I really mean is I want to get Dave riled up and get him to talk about it. Because one of my favorite things to do on this planet is to get Dave on a soapbox because it is effing hilarious. What is it going to be about? Well, I mean, it's about the rates, right? Because right after the decision, President Trump came out and said that he demands that 1%, he wants 1 % interest rates.

15:47And he said that right after the Fed decision. Now, I'm bringing this up because this is an article that's out there. It's something that he said. Somebody somewhere is going to read this and think there's a situation in which this can happen. And so I want to hear from you guys, specifically, Dave, on like, OK, is it even a possibility? Like what situations have to happen for rates to get that low? And what does that mean? Do we want that? Like, how does that impact us or not? Okay, here we go. First and foremost, I think what Trump is talking about is the federal funds rate, not mortgage rates.

16:27Because it came out right after the Fed decision. And so just to be clear, that is the one interest rate the Federal Reserve controls is the federal funds rate. It's basically what banks borrow and lend to each other at. It's kind of the lowest baseline for interest rates across the economy. It is not what dictates mortgage rates. And so big picture here, could it happen? Yeah, for sure. Like the FOMC, the people in the Fed who vote on monetary policy could absolutely choose to get the federal funds rate down to 1%. It was at zero during COVID. It was at zero during the GFC. So like there is precedent for interest rates to go that low.

17:06The problem that the Fed has is that if they do that, it is going to completely backfire and have the opposite effect of what everyone wants. Because the reason bond yields are going up and mortgage rates are going up is that people are afraid of inflation. And if you lower the federal funds rate when we already have an inflationary environment, that is usually fuel to the fire of inflation. You get more of it. Exactly. So if you're a bond investor and you see the federal fund rate go down to 1%, you're going to stop buying 10-year U.S. treasuries at 5 % and you're going to demand 6 % or you're going to demand 7 % to compensate for the risk of inflation.

17:48And when bond yields, when 10-year treasuries go from 5 % to 7%, what does that do to mortgage rates? That takes them from 7 % to 9%. And so this would have a really bad impact on real estate, in my opinion. This is why I've been rooting for rate hikes, not because it's good in the short term. It's not helpful for real estate in the short term. But long term, we need to control inflation. That is the way we get back to persistently better rates and to a better environment. And I know a lot of this on both sides is politically motivated. But like if you're just truly rooting for the long term health of the U.S.

18:26economy, which I am, job number one is to win the battle against inflation. So I was that's why I was happy to Even though that means some of my properties, the value is going to go down on paper. James and I might be screwed on this flipper listing. Oh, no, we're not. We got good fun going out. But anyway, that's my take on this. Was that riled up enough for you, Henry? I felt like I wanted a little more heat, but I'll take it. That was a very reasonable and honest approach to answering that question. Because headlines are headlines, right? They're clickbaity, but this actually happened. And I feel like that's part of what we do on the show is like, let's talk about what it really means for people and take the clickbaity out of it.

19:14I mean, I think like would commercial real estate investors like the federal funds rate at 1 %? Probably. Because those loans are much more tied to the federal funds rate than the 10-year-year treasury. They just work a little bit different. So that would be helpful for commercial real estate. But for residential, it would backfire for sure. Would the U.S. treasurer like that rates down to 1 % so that the interest on the debt would be lower? They sure would. They would sure like that too, but just doesn't work that way. I think this is a great time for the seasoned or kind of mid-tier investor to be evaluating the portfolio and seeing what's performing and what's not performing.

19:56And taking a look at things they've bought recently to see how those are performing. And then make some decisions about how you want to go about continuing to grow. Because if I'm a buy and hold investor who's looking to grow, I'm probably looking to see how I can get a little bit more aggressive in this environment while there's opportunity to buy at a discount. And if I'm a flipper, then I'm looking at the market and this I am doing, then I'm taking a hard look at the last 30 days of properties that have gone under contract or sold and figuring out what price points are selling, what neighborhoods are selling, how long were those on the market?

20:40What amenities did those have? What did they like? I am analyzing all of that hard because if I want to be profitable in this market where things are a lot slower, then I've got to do what people want. And what people want right now is not what people wanted even 60 days ago. Like the market's moving quickly. And so this is when you really need to be analyzing. Another thing you could do as a real estate investor in this environment, and I'll be actually talking about this at BP Con. which is going to be awesome and coming up very soon. I'm so stoked, yes. But yeah, it's harder to find cash flow today in an inflationary environment.

21:20So how do you do it? Well, you've just really got to look at the expense side. And so that might be, how do I cut insurance costs? How do I - How do you cut insurance costs? Because I'm trying. Yeah, I mean, one way we're doing it, we have a single family rental fund in Texas and we were able to put all those properties under one insurance policy, and we dramatically lowered our costs actually that way. So there, again, I'll be speaking in detail about how to do that, but shopping it around, trying to pay points, especially if you're a buyer today, and builders, it's actually going to be my next story.

21:56So I'll save it for that. But how do you pay points to lower the payment? But right now, it'd be really, really important. Again, if you're a buyer, make sure that you're getting every inspection possible so that you don't get stuck with costs you're not expecting because it costs more to fix things. Everything is going to cost more. So get more inspections than you would normally get to just be to protect yourself. I love the idea of paying down points, Kathy, right now. I think that's such a good move in this environment because I don't, as I've told you, I don't think rates are really coming down in any meaningful way anytime soon.

22:29And the move right now is to buy long-term, in my opinion. Better assets are coming for sale, better quality assets. So you want to buy something for 20 years, get a concession from the seller or pay down the points so you can lower your interest rate into the fours. Yeah, it's like 20 grand up front, but a lot of times the seller will pay that for you. Or you negotiate on price and then use the savings to buy down the rate. That's what, to Henry's point early in the show, like that's a way you can buy a great asset and be sure that you hold on to it through this downturn until things get better.

23:02and obviously you just have to buy at a good price. Like that's just kind of the name of the game right now. All right, we got plenty more to talk about, but we have to take a quick break. We'll be right back. I just booked a trip to the coast and I cannot stop thinking about it. Waking up early, walking somewhere I've never been, finding a little cafe with no plan except to see what the day brings. A few days to explore, try new restaurants, smell the salt and citrus in the air, and remember why we left to travel in the first place. That feeling of being somewhere completely new, that's what keeps me chasing the next trip.

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