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Episode 47 | Interest Rates: Real Estate Strategies and Fed Uncertainties

Episode Summary: 

In this episode of Real Investor Radio, Craig Fuhr and Jack BeVier discuss the current state of interest rates and the potential impact on real estate investors. They address the uncertainty surrounding the Federal Reserve’s rate cuts and the market’s loss of faith in the Fed’s ability to drive inflation down to 2%. They also explore the role of the Fed in the mortgage market and the challenges of predicting interest rate changes. The conversation highlights the importance of owning real estate as a hedge against inflation and the potential benefits of investing in hard assets.

*The following transcript is auto-generated.

Craig Fuhr (00:00)
All right, we’re live. Welcome back to Real Investor Radio with Craig Fuhr and Jack Bevere. Jack, good to see you.

Jack BeVier (00:07)
Great to see you sir, good morning.

Craig Fuhr (00:08)
Man, we’re going around the horn today doing some quick hits. Hope folks like these. Jack, we get calls every day from real estate investors around the country. Some who are mom and pop, own a few houses, wanna grow the portfolio, fix and flip guys. We do loans, everything from $100,000 up to $5 million, Jack. And so we talk to folks every day. The phone rings off the hook here at Dominion, thankfully.

And lately, I wouldn’t say it’s a ton Jack, but I get a lot of people that are on the fence with regards to interest rates. You know, what’s the Fed doing? We were promised three rate cuts this year. We’re not seeing them there. They appear to be on the fence. What you’re you know, and what’s happening is, you know, we will send out a loan quote and they’re

you know, the rates are the rates. And so they’re like, Well, you know, we’re probably going to wait for a bit and see how things go over the next several months, because we think there’s going to be a rate cut. And so, you know, let’s have a quick discussion about that, Jack, about, you know, we’re obviously in an election season, and, you know, what do you see coming down the pike? You’re one of the smartest guys I know. So I think you have an opinion.

Jack BeVier (01:22)
Yeah, sure.

I do have an opinion. So the, you know, it’s often wrong, but yeah, I got an opinion. So I was, I got really excited at the big, everyone got really excited at the beginning of the year because Powell came out and gave his, you know, three rate hike in 2024 speech, which was like a dramatic reversal on all of his posturing previously, which was very, very hawkish.

And so the market just like, you know, that they, they wanted that news, right? They wanted to, yeah, the stock market shot up mortgage prices came down. You know, everyone believed that this hawkish fed governor, um, or fed chairman was, had, you know, was committed to driving inflation down to 2% and the fact that he felt confident enough, someone who had been so hawkish for so long, felt confident enough to say,

Craig Fuhr (01:55)
Instant exuberance.

Jack BeVier (02:19)
we’re going to have three rate decreases inside of this year. Everyone’s like, we’ve, you know, we must’ve, you know, we, we’ve, yeah, we’ve bested this beast, right? Like, and, and then for the next several months, the inflation data came out higher than expected, higher than expected, higher than expected, and we’re still there. And so he’s started to back off and Hey, we’re just going to pay attention to the data and you know, this, you know, nothing’s ever set in stone. Um, and

Craig Fuhr (02:25)
Turn the corner.

Jack BeVier (02:49)
with each new inflation print, which is a bit too high or higher than on to be on target for 2%, the market in my opinion is losing has lost faith that the Fed will actually be able to drive us down to 2%. And I think that those comments were, I’ve said this in a previous episode, a tremendous mistake.

Um, because he had the plane coming in for landing and this nice soft landing to hit 2%. But then he, with those comments, he pulled up at a hundred feet and we’re just gliding over the runway right now and not going to touch down. And my, in my opinion, not going to touch down and we’re, yeah, we’re running out of runway and, um, I don’t see us gliding into 2%. And so, you know, he’s got to jam the nose down or.

Craig Fuhr (03:33)
Now we’re running out of runway.

Jack BeVier (03:45)
do another circle and try again in 2025, right? And circle back around and try again in 2025 to get inflation back down to 2%. But as a result, the mortgage market has lost faith that he’s gonna get there timely and has continued to price to keep rates up. And so we’ve seen that unfortunately in the mortgage market where I think, God, if you look at the five year treasury curve, I was looking at the other day, it was like this beautiful glide path down and then

ever since January, it’s ever since February, it’s started to climb right back up to where it was. And, you know, it’s super frustrating. We thought that we were like, past, you know, it’s been a tough couple years from an interest rates point of view, right? Like everyone’s tired of paying so much for money. Like that everyone’s everyone is tired of giving their lender all of their money, right? It’s it’s freaking annoying. Like, we borrow a lot of money. So I’m tired of working for them to

Craig Fuhr (04:19)
That’s right.

Jack BeVier (04:42)
But the, you know, but I think that the issue is that now I, you know, I’m not sure when we’re gonna get on a path to 2%. I don’t believe that we’re currently on a path to 2%. I think we’re just gliding across the, you know, gliding over the runway right now in anticipation of this election season. And I think that maybe once there’s, you know, after we get past the election,

there will then be the political will because someone’s got four years to sort things out to then make the adjustments necessary, which in my opinion may include a rate hike. Like everyone’s still talking about two rate decreases by the end of the year. I’m personally, we’re not getting anything this year. Maybe they throw one in like perfunctory in the fourth quarter just before elections, but for political reasons only and try to declare victory before the election. But then

Craig Fuhr (05:13)
Yeah.

Jack BeVier (05:38)
have to, as soon as they’ve won again, whoever it is, whoever wins, then has to actually do the hard work of actually getting us down to a, to a, to 2%. And we may have a either flat or even a bump, I think is well within the realm of possibility. So I’m, I’m not a, I’m not a decreases this year camp guy.

Craig Fuhr (05:59)
Well, let’s play it out, Jack. Let’s say that between now and the election, we’ll talk about whether or not there’ll be an election in a second, but between now and the election, even if there was, let’s say, two rate decreases, or frankly, I don’t think there’s going to be, so let’s play the game with one. It’s always going to be a quarter, right?

And so what would that mean? What do you think a quarter point rate decrease would mean for the average investor on Main Street? I’m a guy who owns 20 houses. I’m thinking about refining out five of them right now to get some cash out. Rates are sort of hovering in the low to mid sevens right now and I think there’s going to be a rate decrease sometime in October because we have a November election. First of all,

I don’t know if it trickles down to the five year, which all of these products are based on. But let’s say that it does. What could possibly be the rate differential at that point? And how much difference is it going to make to the average investor?

Jack BeVier (07:05)
Yeah, and that’s the point. I think even if there’s two rate decreases this year, I don’t think it trickles down to the five year. I think that, keep in mind what the Fed is adjusting. They’re adjusting the target overnight borrowing rate for banks, what banks can borrow at. Right now, I don’t borrow from, I’m not borrowing from banks. Banks are so disconnected. I feel like the, I even feel like the private lending and secondary market, like the…

has evolved so much that banks are no longer as influential, they’re not as influential as they used to be even, even five years ago, and especially 10 or 20 years ago. And so like, frankly, I feel like the fed is working with, you know, blunt, like they’re blunt tools that are also not sharp at the edges, right? It’s like trying, it’s using a screwdriver that’s stripped.

Craig Fuhr (07:40)
Absolutely.

Jack BeVier (07:56)
And so they’re trying to connect with the economy, but they just don’t connect it. But the edges of their screwdriver are stripped and they just don’t connect with the economy through the fed funds rate like they used to 20 years ago. So I think that that’s, you know, they’re got a blunt, dull instrument that they’re working with. So even if they did a rate decrease, I don’t think that trickles through to main street, like that, that’s not going to affect the, that’s not going to be a material decrease increase to the profitability of main street businesses, a 25 or 50 basis point decrease. Um,

Craig Fuhr (08:23)
Yeah.

Jack BeVier (08:26)
And so I don’t see that really like having much of a stimulus effect on the economy. And I don’t see lenders saying, hey, yeah, you know what, I’m willing to accept a lot less money for my, a lot less return for my money right now. Because Main Street doesn’t feel like there should be a rate decrease, right? Like who on Main Street feels that like the economy is overheating right now? This is like a labor shortage driven…

Craig Fuhr (08:53)
Look.

Jack BeVier (08:57)
You know, this is labor shortage driven inflation still, you know.

Craig Fuhr (09:01)
Well, I also think that when you pump an additional two to three trillion dollars into the economy over a few years, it’s obviously going to have an inflationary effect. And we’re living in this era of sort of finance capitalism at this point, which is always sort of the end era of, you know, most developed, you know, empires, which is, you know, hey, thanks. Thanks for listening, folks. Here’s your good news of the day.

Jack BeVier (09:19)
empires.

Craig Fuhr (09:25)
you know, it’s not and when we’re and we’re adding, you know, a trillion dollars of deficit, I’m sorry, debt to, to the national debt every, every 100 days now. You know, I don’t. And so I was just reading an article last week where, you know, Yellen is having a hard time selling 30 year treasuries. Nobody wants to buy 30 year American paper right now because they have no idea where the dollar is going.

Jack BeVier (09:25)
Yeah.

Craig Fuhr (09:55)
Even 10 year paper is difficult to sell. And that is why there’s so much pressure on the five year right now, Jack, because the five year bid is cool. I can make my spread and I’ve only got risk for five years. And so I think that’s putting pressure on the five year at this point, because there’s just, look, nations are getting out of the dollar. And so China’s not buying any more of our debt. Yeah.

Jack BeVier (10:24)
Yeah, I’m

crazy to me like it seemed like the return necessary to try to predict what the world is going to look like in 30 years. I you know, I think that becomes a much a very illiquid security. And that’s not good for us, right?

Craig Fuhr (11:06)
We just don’t have the balance sheet that we had in 1950 and 1960 and then in 1970 where we had a recession. We didn’t have the balance sheet that we had today back then to take us out of sort of the inflationary environment that we were in. We weren’t obviously an industrial society back then. We are no longer an industrial society. And so I think America just looks a lot different today.

And we have, you know, DC who appears to have no lack of appetite to pass, you know, a $7 trillion budget with a $2 trillion per year deficit. And so I just think that we, in terms of, you know, breaking it down for folks that are listening who are either, you know, advanced investors with large scale portfolios or guys that are just looking to, you know, get up to 10 or 20 or 50. I don’t.

see a material effect happening on interest rates by the end of 2024. None whatsoever. Don’t see it.

Jack BeVier (12:10)
Yeah, I don’t either in the short term. The here’s the silver lining though, right? Like this, the silver lining for me is that I believe everything. I do believe everything that you, that you just said. And so the, and you know, compounded with that as a demographic shift where we’ve got a lot of people who are leaving the workforce right now and not a lot of people replacing them. Um, and the, unless AI bails this out from a massive productivity increase point of view, which we’re like, I don’t know.

really hanging our hat on right now in my opinion, because we don’t seem to be planning for any of these shifts. So we’re really hoping that the productivity gains from AI are going to like bail our asses out of this situation. But if that doesn’t happen, the only way to resolve that situation, those budgetary issues is to inflate your way out of it. And so though I think we’re in a long, you know, higher for longer interest rate environment, the best hedge on that is owning real estate. So like, I hate paying these rates.

Craig Fuhr (12:57)
That is right.

Jack BeVier (13:09)
but I love what I’m using that money to invest in because I feel like it’s like the best hedge. I like if I’m gonna invest in anything at these rates, you know, using borrowing money at these rates, it would be to invest in bricks, right? Like I love, yeah, hard assets. So you can’t borrow money to buy gold. Yeah. Just because it’s just because of rents, because rents are inflation adjusted. And so if we have to inflate our way out of the budget issues that we seem to refuse to

Craig Fuhr (13:21)
Hard assets, right? And explain quickly why that is, Jack.

Jack BeVier (13:40)
tackle, we’re going to have increasing prices and that’ll pass through to rents. And residential real estate has annual adjustments for inflation through rent adjustments on an annual basis. So, frankly, nothing is really better than houses for an inflation hedge.

And so while it offends my sensibilities to pay our banks these rates and our lenders, these rates, I keep adding rentals. It’s harder right now to make the to make the numbers work because debt service coverage ratio is tighter because of where the rates are. But I do feel like I’ve got like a nice put right. So like if I buy this house with it with these rates, if rates if I’m wrong and rate, which would be great. Right. If I’m wrong and rates come down.

I’ll refi and I’ll achieve the lower rates. If I’m right, then I’m paying these higher rates but I’m locking them in for a 30 year period which I still think is a, I don’t know, a structural mistake, but that’s the structural mistake that Wall Street’s making, not me, not on Main Street. And I’ll be able to increase, so if I’m right and I get to lock in this interest rate and rents are going to increase over time,

at a high enough rate that it will be profitable over time. So I feel like I still like bricks for this reason. Like that’s still my favorite asset class to invest in. So we’re continuing to add rentals as a result of that.

Craig Fuhr (15:14)
I agree.

Well folks, we appreciate you taking the time to listen to this quick hit. I’m Craig Feuer with Jack Bevere. Thanks for listening to Real Invest Radio. We’ll talk to you again soon.

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