For the past five years, interest rates for industrial property loans have been the lowest since Eisenhower was President.
For the past two years, commercial real estate experts have been predicting the end to cheap money and a rise in mortgage interest rates, but here we are, still waiting for even the slightest increase.
The impetus behind such low cost of capital is the 12-bank US Federal Reserve system, charged with the responsibility to keep inflation and employment balanced to allow for healthy economic growth.
They do so by regulating the volume and flow of capital by manipulating its cost.
In its effort to restart economic expansion back in 2008, then Fed Chairman Ben Bernanke and his Board of Governors moved its own benchmark rates to near zero and that’s where they remain today.
In December, the Fed made its first move to normalize its monetary policy and begin the process of weaning the economy off artificially low cost of capital with a nominal rate hike.
Things have not gone well since then and experts are now second-guessing the move that was made despite lackluster domestic growth and a global economy in crisis.
So Why No Rise in Mortgage Interest Rates in Orange County?
The answer lies in the fact that mortgage rates are generally tied to the yield on 10-Year US Treasury Bills, which move up and down on a daily basis.
The 10-Year, which is considered to be a no-risk investment, is used as an index and lenders add a risk premium or “spread” over the index to determine the interest rate on a mortgage. Since the yield on the 10-Year has been held down by the Fed’s cheap money policy, rates for mortgages remain low. The yield on the 10-Year is also being influenced by foreign investors who buy them to steer clear of the turbulence in the global economy.
The extra demand they create for T-Bills pushes prices up and yields down. So, even if the Feds takes more action to raise domestic interest rates, foreign investor interest in T-Bills will help keep yields from moving higher. That’s why we now believe that 2016 will remain a bargain when it comes to borrowing money.
If money stays cheap, does that mean property values will continue to move up?
Our answer is yes, but we think the rate of increase will moderate because we may be approaching a natural high point in the real estate cycle.
Orange County Industrial Property Pricing
Pricing for industrial property in Orange County is now above the previous market peak of 2007 and US economic growth just doesn’t seem to gaining any momentum. That may be a signal for some to take a more cautious approach to business expansion, which would impact demand for industrial real estate later this year.
Actually, a little cooling off period could be a healthy thing for the industrial market.
A slight rise in vacancy could free up quality product that is in such short supply right now. And, property owners who have been riding the wave of rising prices may see 2016 as a good time to become sellers, freeing up inventory for buyers to acquire with those low interest rate loans.
How will changing market conditions such as a rise in mortgage interest rates affect your real estate strategy going forward? Whether you make a move or stay the course, we are here to help you make good real estate decisions. Give us a call.
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