By now we all know who the next President will be so what does this mean for interest rates and Real Estate? The first thing we all need to remember is that our government does not control interest rates it controls the information the Federal Reserve uses to determine the direction of the interest rate that the Federal Reserve (the Fed) controls and that is the overnight lending rate for Banks to borrow from the Fed. When the bank’s cost of money decreases it usually means that the banks will lower lending rates to the public. The Fed bases its decision on the direction of the overnight lending rate based on how the economy is performing. The President can’t control the interest rates, but he can control the economy so any changes that we might see happen will not happen until at least the 2 quarter of 2025.
The reason I say we won’t see any significant changes to the interest rates like we see in the Stock Markets immediately is simply that it takes time for an economy to go through changes. The Interest rates are set by the economy, not by policy. Policy can change the interest rates, but it will take time to show up. The Stock Markets rallied after the election as the Stock Markets are speculative in nature and the Stock Markets see the new administration to be more business-friendly and see that money will eventually open back up and flow more freely in a lower tax environment. We have to remember that the new President is not sworn in until January and it will take time to transfer power and get new people and policies in place. Then we probably won’t see the effects of the policy changes for months afterward. We are still in the same business cycle which means we must go through some pain before it gets better.
This current business cycle is one where we still have inflation and a contraction of the job market. This will not change overnight, so we need to be patient. Business cycles are generally not controlled by the government, but the government can have significant effects on it. The policies of the current administration will remain in effect until the new administration takes power. Once the new policies of the new administration take effect it could take months for them to show up in economic numbers that the Fed uses to control the rates. The wild card is that there are still 2 months of the current administration, and they still have the power to make changes to the economy in the short term that could last months into the new administration.
I do see economic hope on the horizon; however, we have to go through the business cycle we are in currently to get to the new one. This will probably be a bit painful as interest rates will still be in the 6’s and 7’s until we start to get to a place where they can go down. This place is where inflation is under control. We also must remember that Interest rates go down with negative economic news such as a recession. The Fed will lower interest rates if they think the economy needs to be stimulated, we are not there yet. This is why the Fed only lowered their overnight lending rate by .25% as was expected by the other interest rate markets. The Federal Reserve’s next meeting to determine if they will lower their interest rate will be in December. The time between now and then we will get to watch the data they will be using unfold in front of us and that is how economists make their predictions on what the Fed will do at their next meeting.
All this means that we will be in the business cycle for at least the next 6 months. In that time, we will be in this current cycle before any new policies from the government can take effect on the economy. So, I see employment softening still and I see inflation coming down as people don’t have extra money to spend on things to drive inflation up. I also see a softening of the Real Estate Market where it is changing from a seller’s market to a buyer’s market with the Real Estate prices slipping a bit in order for sellers to sell their homes. I do not predict a crash like 2008, but I do see a correction. I see mortgage rates dipping to the 5’s in the late 1st quarter of next year and that should bolster the economy. We will not see rates in the 2’s and 3’s again, in the near future, unless something drastic happens that is outside of the current business cycle. I hope this helps you with how this system works and you can plan for your financial future.