The Fed Signals a Reversal in Rates

0:00The Federal Reserve might actually be raising rates in 2027. If you look at prediction markets and what traders believe, they are now actually saying the Fed will raise rates by September of 2026. What does this mean for real estate? What does it mean for you? Today on On The Market, we're digging into the latest news, including what's happening at the Federal Reserve, interesting data about HELOCs, and an AI office boom that could help guide your next investment. This is On The Market. Let's get into it.

0:38Hey, everyone. Welcome to On The Market. I'm Dave Meyer, joined by James Daynard and Kathy Fecky. Kathy, James, did you have it on your bingo card this year that the Fed would be raising interest rates in 2026? Yeah, as soon as we started attacking, I ran. Yeah. Yeah, I guess. I guess come March, April did seem, it got more probable, but man, start of the year, I would have lost a lot of money on that bet. Well, let's get into it. Today on the show, we are going to be talking about the Federal Reserve ad nauseum. We will get into what this means for real estate investors and where things are likely to go.

1:18But we also have two other stories to share with you. One about the AI office boom and what an opportunity this might be for certain types of investors, and how HELOCs are sort of becoming popular again, and how real estate investors should be thinking about using them in their own portfolio. So let's get to it. Our first headline for today, this comes from Reuters, but it's probably on the cover of every media outlet in the country right now. It said, Traders now see the Fed raising rates by September 2026. So this is like specific to the next couple of months. And just to provide some background here, most people, myself included, beginning of the year, were expecting the Fed to probably keep rates somewhat steady this year.

2:07But most people were betting on one to two rate cuts because inflation was getting under control in January and February. were down in the low 2 % job reports were doing well. And it just seemed like that would be an okay move to make. As of March and April, after the war in Iran started, inflation has gone up dramatically. It was up 4.2 % now year over year as of May. That is a significant increase. And it's kind of across the board. If you look at the CPI, the PPI, the PCE, all sorts of different ways to measure inflation, it's up on all of them. So the Federal Reserve, following their mandate to keep inflation under control just yesterday, announced that they're holding rates steady for now.

2:54That was their June meeting. But they're indicating to the market that don't expect rate cuts and maybe you can expect a rate hike to try and get inflation even further under control. So that's the background. Kathy, what do you think of this and what does it mean for real estate? Well, it is ironic, I think, I will say, because the president has been wanting lower rates. He kind of caused this to be the opposite. And he chose Kevin Warsh, which he probably thought he could control. and the opposite is happening there. So some of the interesting things that happened at the Fed meeting is that the language is changing.

3:40There was no talk about hitting 2 % inflation. I think his line was, the committee will deliver price stability. So that was a lot more vague. Do you think that's intentional? Because they might accept a higher inflation rate in the future? Oh, for sure. So that is probably something the president agrees with. It was like, obviously the president wants lower rates, but with inflation, that's just not going to happen. And what is especially interesting is that most of the Fed officials voted for probably, I think it was nine of them, voted that there would be rate hikes. Just so people know, it's not that they didn't vote, but they like indicate.

4:22Indicated on the dot plot. On like where things are going. So yeah, a lot of people have signaled that they think a rate cut is in the future. Thank you for that correction. Yeah, signaled it. No, no, just want to clarify. Yeah, that's right. But Warsh didn't put a dot on the dot plot like he's not projecting. And so there's speculation that he's just not going to be speculating because there's so much unknown where the next vote is going to be. So it's very interesting that Trump's pick is maybe not the puppet that some people were thinking it would be. I'm not that surprised. I like I Kevin Warsh has been a Federal Reserve governor.

5:06I think he understands how this works. I also think he knows if he came in and cut rates right away in this inflationary environment, we would undermine the credibility of the Federal Reserve. And that could backfire. Like if they if I think if they cut rates yesterday, we would have seen bond yields go crazy. Right. Like we would see mortgage rates go even higher. yesterday because people would be fearful of inflation and that the Federal Reserve wouldn't be taking their responsibility to control inflation seriously and that they were just going to cut rates to try and stimulate the economy. Inflation would be damned.

5:42So I actually think this was a better move for mortgage rates than cutting rates in the meantime. Yeah. But it is interesting. Even if inflation gets under control and they cut once, like we're not getting significantly lower federal funds rate for a while. If there was only a camera in the White House that we could see the reaction right now. Would you be watching it real tough? Yeah. And I think he even talked about that. He knew that about 30 days ago that this was going to go sideways economically when Trump was talking about it. Because he said, he's like, yeah, it's going to get a little hairy for a second.

6:18But like Dave said, you know, the fact that he came in, I mean, the announcement yesterday is, yeah, it makes sense, right? Inflation is going up. The problem that we all had before was we knew inflation was going up. We were being told it's transitory. And then now we're in the mess that we're in now. Right. And so we got to make sure that we stay on top of that. And as much as I wanted. Rates to be cut and us to get interest rates down. I mean, as an investor, that's what we want. Right. A little bit cheaper money loses up the market. The long term benefits. We have to keep this inflation under control.

6:51They're making the right calls. But what I'm wondering is, you know, with this Iran deal, if it goes through and stays, what does that do to inflation and how much will that drop? Because I saw oil dropped even. I mean, would it close 5 % lower yesterday? A lot. It's like 80 bucks a barrel yesterday. So, I mean, it was up at 110, but it's been hovering around 100. So it's probably down 20 % this week. Yeah, it's I mean, and so like as we see energy fall, if the straight opens up, what is that going to do to these inflation numbers? Because, I mean, a lot of what we're seeing on the spike in pricing, at least from a consumer standpoint, I can tell you one thing right now.

7:26Shipping is a nightmare. Getting your product on time because they're trying to, like, load up their transits and getting, like, appliances and things delivered to you nationwide. Everything gets lost and delayed. But also, it is going up on price. Like, I mean, people are charging more because fuel costs more. And if energy goes down, it might knock inflation down quite a bit in the next, like, month. Possibly. But you have this other side of the equation that the economy is kind of booming. And I'll be talking about that in a bit. And that can create inflation as well. My guess is that we will see a peak to inflation in the next month or two, right?

8:07Like on a year over year basis, probably. Let's just presume peace deal gets signed and it stays. We don't know. But like, let's just presume that happens. It's kind of like the analogy of like, you know, when a snake eats something and it kind of like works its way through the snake over time and you can kind of see that bulge. Like, I think that's what will happen with inflation. Will it get worse? probably not because the thing that was driving inflation up will be cured, but it still has to work its way through the system. It doesn't just snap back. Prices are probably not going down. We've seen this in COVID, like companies, service providers, not lowering their prices again, right?

8:46So we're going to be stuck for at least next year in the data, seeing higher inflation. I also think there are certain, you know, we can get into this, but food costs are likely to stay high because fertilizer costs and inputs to food prices, that matters for a whole year. Like the whole crop season, we're going to see higher food costs. And these things, supply chains don't just snap back together. All the analyses I've read say that oil prices will probably stay high for the rest of the year. And it'll probably be three, six months before supply chains are really back to their optimized self.

9:25So probably not getting worse, but I do think we're going to see inflation stay in the threes for the foreseeable future. Whether the Fed is comfortable with that or not is a new question I think we will be thinking about. But as long as the labor market stays as good as it is, I don't know if they need to cut rates. I will also say this, though. Part of me thinks this is a bluff, the raising rates thing, is because the thing the Fed has done a lot over the last couple of years is like, tell the markets ahead of time so that they don't freak out. And I don't know if they necessarily actually think they're going to raise rates, but I do think they kind of want to send a signal to the market like, hey, we're going to be really serious about inflation and we will raise rates if we have to.

10:15If I was betting today, I'd say rates stay flat for the rest of the year. Yeah, that's what the article I read was saying is basically with this new Fed chair, there wasn't as much forecasted. In fact, he didn't forecast at all. So that part of the Fed's job, which has been very specific language at every FOMC meeting, that signals markets to do stuff before it happens. And that may be changing. and it makes sense because every day is a new day and you don't know what's going to happen tomorrow. It's very hard to forecast. Totally. So it's more data driven potentially. Yeah, I mean, that's what Warsh also said publicly.

10:57He doesn't think the Fed should be saying as much publicly. So we'll see. You know what though? But he's not wrong about that. They come out and they say things. Even when things are trending the right way, they're like, but it's like they're this constant rain cloud. It's like, dude, pop a Xanax and get a little happier when you're delivering the message. Like, it is your delivery in the message, right? You can say the same thing, but say it two different ways. And I will say Powell's a brain cloud, period. Like, the delivery was never good. And a lot of the things that he was saying was good.

11:33It's just how he was saying it, not the way it should be going. And then you get the media hyping everything up. But I don't know. No, I think this inflation is going to slow down a little bit quicker. I mean, oil dropped dramatically. And that is the key driver when you look into these inflations. And I know we got good job reports. Those things are going on. But I think that was pretty strong even going in to this inflationary period. And so I'm hoping that this deal works out and we see a little bit of just relief across the board, not just for interest rates, but just in general, like things, getting people to work.

12:10Every time I hear the labor report, I'm like, it's the complete opposite on what we're dealing with every time. In Seattle, it definitely is. It's polar opposite. I can tell you there's a lot of people looking for work right now, especially in the construction industry. Builders are laying off people. There's well-qualified bodies coming to the market to work, and they are not getting job offers. I have not had this many subcontractors, project managers, superintendents reach out to me for work. probably like this reminds me almost like 2009 days where it's like you got work you got work like we are getting harassed right now not a great sign for seattle but i think like it is the labor market data is super weird i personally think we've seen a lot of increase in the partial employment data like the unemployment number doesn't tell the whole thing a lot more people are like partially employed or underemployed they call it where it's kind of they're working fewer hours or less than their full capacity, whatever it is.

13:08And so we're seeing that increase. But James, I mean, I think there is a good chance you're right. If inflation gets under control and the labor situation that I feel like everyone is feeling but is not reflected in the data starts to show up in the data, then we could maybe see rate cuts. But I don't know. Vacation is expensive. Your empty place doesn't have to be. If you're heading out of town and your home is sitting empty, you could list your space on Airbnb while you're away and turn those unused nights into extra income. And with Airbnb's co-host network, getting started is more straightforward than most people think.

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15:24Let's talk, though, instead of guessing, let's talk about what people should be doing about this right now. Kathy, do you have any advice for real estate investors about how to handle this? Well, I found it, as we discussed, very interesting that 2 % inflation target was not mentioned. And every word that comes out of, you know, worse his mouth is intended. That's how it always has been. The Fed chair signals. signals to the markets what's going on. So that signal is perhaps this 2 % target that just came out of thin air. I mean, who came up with that and why may be not as important. So we'll see.

16:06But if that's true, and let's say it's 3 % or between 2 % and 3%, who knows? What we do know is that real estate is one of the best hedges against inflation. Inflation is kind of good for us investors if you own the hard asset. That has historically been the case. Houses, buildings, they're all made of things that inflate. We're seeing it now. I mean, James just said it. It's hard to get the materials that you need to get things built. And when you have a property that already has those things, inherently the value of it goes up. All you have to do is Go to FRED, type in FRED, which is the St.

16:48Louis Fed, and type in home prices over the past decades, and you'll see it just consistently goes up. It's not even necessarily that the value of the property is going up. It's that inflation has gone up and housing is affected by that. Rents tend to go up over time as well. So if you want to hedge against inflation, it is real estate, hands down, hands down. And with my story, I'm going to talk about even why that's even more important today. Great advice. James, any advice for people on how to handle this or outlast this confusing situation? You know what? Randomly, like the last two weeks, I've been geeked out on bills and credit cards, like just everything.

17:30I don't know what it is. I went into like hyper, we got to cut the stupid bills. And so like, I know personally right now, just because costs and everything are going up, like, you know, household costs, inflation, it's harder to make money right now. Like the margins are just a little bit different. And so like I went into between personal business, we audited all of our weird expenses. And I'm like, all right, let's just start cutting fat, right? Because that's what you should do, right? Create more margin, create more profit, create more room in your in your daily life by going through and everyone should do a subscription audit on everything they do.

18:04Oh, no, it's too depressing. Oh, my God. Do not wait more than 90 days for everyone listening. Because this stuff adds up into real money and it turns into years of time, especially with businesses. And the other thing is, you know, one thing I have learned over 20 years is when it gets this confusing, like you think this is going to happen, this is going off, like nothing seems to be making sense. It is the best time to buy. Because everyone's confused, like that analysis paralysis is a real thing and people just lock up. And when people lock up, there is a lot of really good opportunities out there.

18:41So as confusing, as scary as sometimes real estate may be or investing may be, that is when you want to look the hardest. Now, update your buy box. You don't go buy in the next average deal. It has to hit different requirements. But there is some really good opportunities. And not because we're in some free fall and the market's crashing. It's because everyone is frozen. And when people are frozen, you get to pick what you want. And so just double down, keep your eyes open. Don't go rush to buy, but there is buys out there. I mean, I have more flips going on than I probably had in the last couple of years with this show, everything coming out.

19:17Doesn't feel great right now. We're going to sell a lot of things, not great. I am also buying$3.5 million in flips next week. Wow. You're so brave. The math works, right? Like it's like, all right, just punch holes in it. And if you just punch enough holes in it and it still floats, buy it. I don't know, I saw your Instagram. there's more than holes in those properties you're buying. Well, it's great advice. I think basically the fact that we have this inflation, the Fed's not doing anything, I think means this market that we've been in is here to stay. And it's going to be the same kind of thing James was just talking about, opportunities to buy cheap.

19:57And as Kathy said, this is a good long-term inflation hedge. So if you can find good deals, low competition environment is a good place to try and buy, but you got to be disciplined and find the really good deals because there's a lot of trash out there as well right now. Kathy, what story did you bring today? My article is from the Wall Street Journal, and the title is The AI Office Boom Feels Like 2000 All Over Again. Now, if you were around then, and I know some of you were just little toddlers, but back in 2000, there was the dot-com boom and then bust. And I am from San Francisco. It was good for me because we were buying real estate then, but there was a big bust because so much money went into dot-com boom that it was oversold and there was a massive housing recession in, I think it was 2001, but right afterwards.

20:50Now, shortly after there was another boom in housing in San Francisco. But according to this article, it's not as bad as it sounds this time around. So the office boom is happening because of AI, but companies and landlords have gotten wiser. They learned. Some of us actually learn from the mistakes that we've made in the past. So this time when they're leasing, they are looking at the fundamentals of the company. Who would have thought, you know, instead of just leasing to a startup that borrowed all this money and has shown no income for years. They're leasing to AI companies that do have income.

21:29These are companies that can handle the leases. So there isn't as much concern that all this office leasing is going to result in a bust. Interestingly enough, New York City is seeing the greatest boom from this. San Francisco, of course, but the third city was Austin. Austin is just absolutely booming in office leases. It says 34 % increase in Austin jobs that use office space compared with 2019. This is a big deal. I got to tell you, if I had the guts that James has, I would be buying all over Austin. I know. Even if it doesn't make 100 % sense today. I know Tarl Yarber has said that. It's like, I can't make these things cash flow.

22:16I just think Austin's on the verge of booming again. You would buy office or residential? Residential. Residential to keep up. All these jobs are coming in. People are having to go back to the office. And there are more and more corporate headquarters moving to Austin. The fundamentals are there. It's just, it was oversupplied. Too many builders came in, but that I think it's going to be absorbed. And if I had the guts to be negative cash flow for a bit, I think people are going to see massive equity growth in these cities. I have a niece who is a realtor in San Francisco. People are doing crazy stuff, hundreds of thousands of dollars over asking price again, because of the AI boom there.

22:57Yeah. San Francisco is going nuts. It's going nuts. I think it's up like 11 % year over year. It's crazy. Yeah. You know what? In Seattle, typically falls San Francisco. Yeah. Yeah. Yeah, that's what I'm putting some eggs in a basket and I'm buying here. I'm like, you know what? We seem to chase about six to nine months behind. And that's so wise, James, because about six to eight months ago, I had someone on my show that was from San Francisco saying that, and I am from San Francisco, I don't live there now, but he was saying there's properties you can get here that are 2009 prices. I mean, 2009, remember that was like cheap.

23:36So just a year ago, you could buy so cheap in San Francisco and those days are gone. And I remember thinking, gosh, if I had the guts, I would buy some negative cash flow properties in San Francisco and make a few hundred grand just in a year. I think that's the opportunity happening in Austin right now and possibly Seattle, like you said, James. I was talking about Austin last time we were on. You know, like when you're looking at rebounding markets, right? And rents were down, values were down. and there's that rubber band effect. And I was like, this is a market that is going to pop. And I think we should do it.

24:13Dave, you want to go buy something in Austin? I'll do it with you. You want to do it? Yeah. Let's do it. I don't know. It's not enough for me. The idea that we're going to get some more AI jobs is not enough for me to buy a not cash flowing deal in a city. I don't know. I do think it's interesting, following the economy and jobs and where these are going does make a lot of sense to me. And if you're in one of those markets and understand one of those markets, you might want to do something like James and Kathy are recommending, but not for me right now. We got to take one more quick break, but we'll be back with On The Market right after this.

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