By MJ Vukovich, Executive Vice President
“Is the economy is headed for a “soft landing?” has been an underlying question percolating in conjunction with many articles written lately on recent economic data prints. So, I wanted to delve into what that means, what it might look like, and what that could do to the interest rate and real estate markets.
First off, when we talk about a “soft landing,” we’re referring to the economic impacts of the Federal Reserve’s drastic interest rate increases. Achieving a “soft landing” would result in curbed inflation while avoiding a recession and getting the economy down to a growth number that the Fed assumes is sustainable in the long term.
Generally, that growth number is GDP growth around 2-2.5% per year. In the heaviest inflation months over the last couple of years we were above 9% annualized growth numbers. If we hit this soft landing, we would avoid going into territory where the economy shrinks, referred to in a technical way as a recession. This sounds like it’s a good thing; and it is, overall. However, in any slowdown of any kind, there are positives and negatives.
As the Fed has been raising rates, many around the real estate world have had major disruptions to their business flow. Transactions have fallen apart, some purchases that seemed attainable are now too expensive, and values of real estate (houses, apartments, and other commercial real estate) have all had some level of value decline.
This is all due to the rapid increase in rates that the Fed has put into place to slow inflation. In that way, the Fed has done its job. However, if the Fed sees the soft landing as possible, they may take longer to begin cutting their benchmark rates, leaving these rates higher for longer and further causing damage to values in real estate.
If that happens, it is likely to cause some trouble for loans coming due in the next couple of years that are on the balance sheets of banks and other lenders throughout the country. This could create a negative spiral and have a significant negative impact on the real estate market as a whole.
Furthermore, for those who got into low-cost, long-term fixed loans, it may keep them from making sales or trading properties. That will further slow the flow of funds which has a drag on the industry and the economy.
While the rest of the economy may end up over-shadowing the pain that is felt in real estate, there is likely to be some intervention unless rates can come down quickly enough to avoid a number of major default issues with lenders and losses on the real estate side of the world. While a soft landing sounds good, the major changes in the economy always have winners and losers. If we get a soft landing, real estate could be one of the losers.