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| John Oharenko |
Chicago, IL, April 1, 2024 – The unemployment rate, the annual GDP growth rate, and the inflation rate all hover in the 3% to 4% range. For now, the Fed feels comfortable maintaining current benchmark rates. As a result, no dramatic news seems to affect the real estate capital markets.
Yet realty market fundamentals show some unusual patterns, namely "Mortgage Term Inversion." In other words, short-term pricing remains higher than long-term debt, illustrated as follows:
Treasury Yield Curve Inversion – The yield curve has stayed inverted since the Fed took a significant stance against inflation in mid-2022. This inversion translates to short-term bonds yielding more than long-term bonds for a record number of days in modern history. The benchmark five-year and ten-year treasuries are nearly identical, but shorter-term treasuries (particularly one year or less) are priced at about 75 to 125 basis points higher.
Floating vs. Fixed Rate Pricing - Short-term rates are more expensive than longer-term ones. For example, agency-based floating rate programs are at about 7.5%. Banks and other adjustable-rate funding sources provide rates in the higher single-digit to lower teens. These higher rates continue to constrain new construction and redevelopment activity. In contrast, more favorable agency fixed-rate pricing starts as low as 5.25% to as much as 8%.
Market Uncertainty and Targeted Policies - A pricing gap of as much as 200 basis points between short and long-term debt indicates investor uncertainty in monetary policy and the economy's overall direction. Furthermore, agencies continue to target underserved realty markets with attractively subsidized pricing, focusing on maintaining and creating affordable housing.
John Oharenko, the Director of
the Real Estate Capital Institute®, emphasizes, "Mortgage Term Inversion
favors stabilized, performing properties, as well as affordable housing.
Lenders fear unproven cash flow, namely development risk, creating a vacuum in
the short-term funding arena."
The Real Estate Capital Institute® is a
volunteer-based research organization that tracks realty rates data for debt
and equity yields.
CONTACT:
John Oharenko
Executive Director
director@reci.com / www.reci.com
The Real Estate Capital Institute®
Chicago, Illinois USA 60622
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