Every quarter, The Wall Street Journal publishes an Economic Forecasting Survey establishing a consensus forecast from a panel of academic, business and financial economists from institutions such as Visa, Wells Fargo, Fannie Mae, Goldman Sachs, Citi Group, Oxford Economics, KPMG and the NAR. This April the panel came to the consensus that the forward looking Federal Funds rate curve would fall over the next 24 months. A declining forward-looking interest rate curve incentivizes real estate investors to hold onto their existing assets. Here’s why:
- Lower financing costs: When interest rates, and therefore financing costs, are expected to decline, it will be cheaper to borrow money to purchase properties in the future. Investors are incentivized to hold their assets, especially if they believe that interest rates will remain low for an extended period.
- Higher property valuations: Lower interest rates tend to increase property valuations, as investors are willing to pay more for a given stream of future cash flows when the discount rate is lower. This means that real estate investors may be able to fetch higher prices for their assets in a low interest rate environment, making it more attractive to hold onto them.
- Limited investment alternatives: In a low interest rate environment, investors tend to struggle to find alternative investments that offer attractive returns. This is particularly true for fixed income investments, which tend to offer lower yields when interest rates are low. As a result, real estate may become a more attractive investment option for investors seeking higher returns, which could help support property values.
Overall, while a declining forward-looking interest rate curve doesn’t mean all real estate investors will hold their assets, but, , it does make it more attractive for them to hold because of increased financing costs, decreasing property valuations, and more abundant investment alternatives.
