Peaked at +140% off lows. This is peak efficient markets!
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Jury remains out on whether inflation is going to be stubborn. Let’s take a look at the changes on the Dec 18 24 FedWatch market since that post on February 5th.
350-375 2.5% → 0%
375-400 20.4% → 1.7%
400-425 36.8% → 13.4%
425-450 27.9% → 31%
450-475 10.3% → 32.2%
475-500 1.9% → 16.9%
500-525 0.2% → 4.3%
525-550 (current) 0% → 0.4%
We remain at a 0.0% chance of higher rates, which I still think should be priced in. We now have a low non-zero chance of current rates, which should probably be a bit higher. We’re now up to a 21.2% chance of cuts of 50bps or less (was 2.1%) and a 53.8% chance of cuts of 75 bps or less (was 12.4%).
This seems much more reasonable. Although I still think higher rates should be priced in at low single digits, current rates should be priced in around high single digit. The rest probably isn’t too far off. I think I’m pretty good at identifying stuff that’s priced at/near 0% or 100% that shouldn’t be, but I’m not going to pretend to be able to accurately peg the odds of cuts of 50bps or less outside of a very broad range.
They aren’t raising rates. The Fed does have to care about politics some. The reality is they blew bubbles on command from Trump, mostly because he was willing to yell at them in public about it. They realize that causing him to get reelected would be all they would ever be known for if they fuck this up.
I think we see the 2 reductions they already signalled 90%+ of the time regardless of economic conditions with the absolute worst case being seeing the economy is doing well enough and Biden is far enough ahead that they can get away with standing pat.
But I think if they stand pat the bags currently holding all of the commercial real estate debt will become very apparent because they’ll all be busto, loudly and publicly. I think a lot of those are going to end up being pension funds and other dumb institutional money. I’m praying the Saudi’s are holding a large fraction of the bag.
It’s a big heavy bag though we all better pray there aren’t any cute exotic derivative bombs out there tied to this mess. We all know the rich kids love IBGYBG and 98% of the people on Wall Street in 2024 didn’t grow up poor.
To be clear, the risk of raising rates that IMO exists is mostly due to geopolitical risks. There is a lot of instability in the world right now, and there are definitely things that could go sideways and cause bad inflation again.
I don’t think rate cuts necessarily help the Main Street economy as much as they help Wall Street and save some of the CRE bag holders. Especially because infrastructure spending should ramp up and should help Main Street. I don’t think there’s a lot that’s not currently being done that would be done with rate cuts that would help Main Street. You could argue more housing starts, but it would also loosen up money for institutional investors to buy up houses, so I’m not sure that it really helps the average person.
Yeah so if the Fed knows or even thinks there are bombs out there as a result of the leverage being wound up through the financial system, the odds of rate cuts are nearly 100%. But even then, there’s the question of how far they need to drop them to get those people off the hook and whether that’s feasible. Assuming it’s not like 2008-2009 with the derivatives wound through our system, I don’t think the Fed is going to prioritize saving the bag holders over its normal mandate.
Everyone in a position to know more than the publicly available information is expressing a lot of confidence it’s not wound through the system, but then again, it was pretty much the same in 2008. Up until about a week before it was going to go under, did anyone outside AIG know AIG was totally fucked and going to take down the global financial system without a bailout?
Housing is a weird case where the rich guys and the plebes both benefit from the same thing. Lower interest rates = more housing, it’s really that simple.
Usually, yes. But if private equity and REITs can access capital at lower interest rates than the average person’s mortgage rate, they can take out huge loans and make all cash offers and the plebes don’t actually get much if any relief on housing.
In the current situation, I’m pretty sure that a lot of PE and REITs did that, and they likely need to roll it over soon - if the rates don’t drop enough they may not be able to, there may be a firesale, and the plebes would benefit.
So I’m not sure if the conventional wisdom holds in this particular instance. It depends on how soon they need to roll stuff over, what rate they need to get them off the hook, and how much of the housing market they’re currently controlling.
This is not true, I work at a bank, REITs are currently paying more than homebuyers. They have floating rate facilities that are currently 8+%.
Gonna be a lot of carnage in the REIT space. Blackstone’s flagship REIT is not generating enough cash flow to cover debt service, you can only imagine how bad it’s going to be for some of these dogshit non-traded private REITs that exist only to pay kickbacks to financial advisors and enrich their slimeball owners.
Won’t they just roll them up into their other REITs at a discount and then IPO them at a discount? The big fish still win, and retail gets fucked.
ETA: The private ones. Blackstone doesn’t want to drag their name.
I know you know what you’re talking about on this, so please walk me through this if I’m missing something. Did they borrow at floating rates in 2020-2021 when they went on buying sprees? I thought they got like 3 to 5 year rates and needed to roll over somewhere around now.
Either way… If they’re at floating rates, that means that they are currently artificially propping up rent prices because they can’t rent it for less (or much less) than their cost to service the debt, right? So they desperately need a rate cut or they have to sell? So if they’re going to be forced to bail in a firesale, they lose and the average guy trying to buy a house or get affordable rent wins. If they are able to hang on, the average guy loses (it stays the same which is bad for the average guy) right?
If they’re at fixed rates, the same logic applies but it’s more of a hard deadline and an all at once time bomb, right? They’ll suck every last dollar of cash flow out that they can, give themselves the nicest golden parachutes they can, then let it all go to shit. But again, a rate cut to a certain threshold saves them, doesn’t it?
Maybe I’m missing something but it feels like there’s a range here where if the rate is cut below a certain threshold, it saves the REIT/PE guys. If it is cut but doesn’t hit that threshold, it helps the little guy and doesn’t help the REIT/PE guys but does help the homebuilders and non-stupid not over levered REIT/PE guys (if there are any of those lol). If it’s not cut at all, then the bad guys are fucked, the homebuilders may struggle a while, and the little guys may get a break in housing prices but not rates.
Please don’t let this be a Riverman curse. That’s some carnage I am here for.
What something rents for is almost entirely uncorrelated to what the owner paid for it. Rent is set by what the market will bear, period.
Most REITs went on buying sprees with floating rate debt, but bought interest rate caps. Now the caps are expiring, their debt service is exploding and their properties are worth anywhere from 20% (apartments) to 75% (Class B or worse office) less.
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Actually down, or just up at a slower pace?
In many markets, actually down. There is a fuck ton of new supply coming almost everywhere.
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Supply affecting rent prices is controversial right now
Yeah, the shelter component of CPI should trend from around 6% towards 4% over the next year. This is good, but I’m not sure if Reuters blew the quote (lots of non-financial reporters don’t know the difference between inflation coming down and prices going down), or she’s hinting at data that isn’t public, because I haven’t seen any national data on rent deflating. It’s definitely happening in some regions.
So let’s say a REIT or a PE firm has seen the debt service explode, and that’s going to make it unprofitable to rent the unit out at the price the market will bear. Are they going to:
- Rent it out at the market rate, bleed money, and go under when they run out of liquidity.
- Attempt to sell off the properties (let’s assume SFH for this example) and get out alive.
- Try to shoot the moon and increase rent to their break even point.
My thought was that the answer isn’t going to be #1 unless they’re capitalized well enough to ride it out, which it sounds like they’re not. I guess a lot of it depends on the decision makers’ compensation structure, as well.
But this is from the question of whether rate cuts help the REITs or the average person. So if the rates stay at the current levels, the REITs and PE take a beating right? Probably a significant drop in housing prices when they go under or unload, I assume. That’s good for the average person.
If the rate drops far enough, the REITs and PE wiggle off the hook, right? Or are they so fucked at this point that the rate can’t drop far enough?
Please stop twisting my points. I said rent doesn’t always respond to supply/demand, not that supply doesn’t affect rent prices. I gave a specific example, with a real world case study.
I assumed that you think your situation as described is applicable in some sort of way more generally to the rental market. If that’s not your point, then I’ll apologize for misreading it.
It’s applicable to more than one building/company, definitely has a significant impact on entire neighborhoods of big cities at times, and I don’t know how big the impact may be across entire cities or as a % nationally. I assume a lot of big developers use their current buildings as leverage to build new ones, and will thus end up in that situation if rents should drop too much and their real estate holdings values should drop that much.
Basically leverage can distort what basic market forces would ordinarily dictate.
Rental rate is first metric they look at but occupancy rate has to be the second, right? And while devious management on a brand new building might focus on higher rents because you can handwave away low occupancy rates, a low occupancy rate on a “mature” building would not just be a bad stat, it would make management look terrible and incompetent.
So while have no doubt what you said happened and does happen from time to time, doesn’t make sense that it would be a big structural issue.