Personal Wealth Management / Expert Commentary

Ken Fisher on Interest Rates' Impact on Real Estate

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher shares his thoughts on how interest rate changes may be affecting the US real estate market. First, Ken says while short-term interest rates have continued to climb, long-term rates—which typically have a bigger influence on real estate activity—have fallen since October 2022. Ken also mentions other factors influencing the supply and demand of both commercial and residential real estate markets likely play an important role.

Ken points out that residential and commercial real estate markets have stabilized compared to the previous year. Prices for single-family homes have held up because homeowners who locked in low mortgage rates over the last several years are reluctant to sell now, constraining supply. Ken acknowledges that while work-from-home policies spurred by the COVID-era may have lowered demand for office buildings in city centers, offices only comprise a small portion of the commercial real estate market. Demand for multi-family residential properties, the largest component of commercial real estate, remains strong. While interest rates changes can affect sentiment, Ken says the other major supply and demand factors have a greater influence on real estate markets.

Transcript

We get a lot of concern that rising interest rates will have impacts on residential, commercial real estate markets. And I understand why that concern is. And in fact, there's already been some of that. And you know that, I'm sure. Let's delve into that a little more, though, because there is a normal tendency for people to believe falsely that rising interest rates are one thing. Rising interest rates are not one thing. There's the short term rates and the long term rates. Sometimes they move together, sometimes they move opposite. Sometimes one is moving and the other is not moving.

The fact of the matter is, over time, short term interest rates by themselves don't really have some significant impact on any real part of real estate. Long term rates do, because real estate transactions are typically financed with long term debt. You know that. The fact is, and will remain that long term interest rates are lower today than they were last October, a point that a lot of people miss.

While short term rates have continued going up. I revert to my prior point. Short term rates and long term rates are not the same. Don 't necessarily, but sometimes do. Don't necessarily move in the same direction. Sometimes they move opposite, sometimes one move, sometimes the other moves and they don 't necessarily move together. Long term rates peaked last beginning of October and have been falling irregularly since. And it is that which impacts residential and commercial. Now, residential real estate in price got whacked last year. But this year is not getting whacked so much.

In fact, prices have been relatively stable. Volumes last year got whacked in home building in residential, but have been more stable this year. Commercial is a real interesting trade off because first. And this is wacky in the way we do accounting. But when we think of commercial, we think of office buildings. Well, actually, office buildings are only about 16% of commercial. The biggest part of commercial is multi-family residential. Going back to residential as opposed to single family homes, which is apartments. And the apartment market fell some last year with residential, but is also buoyed relative to single family homes by the very large number of very young people.

While the millennial generation moving out of their parents houses over that time period and steadily looking for places to live and typically not having the money to buy a big, expensive single family home. Maybe they do that when they're older, but now, no. The office building market definitely has been impacted by the work from home function causing vacancy rates in cities to be high. But the vacancy rates in cities being high because of work from home are really just impacts the folks that own the commercial buildings. Does that create some default risk for banks? Yes. There 's a lot of people that fear that'll ripple over into the banking crisis.

Well, as I 've told you in other videos and can speak to also this month, the banking crisis isn't a crisis. It 's some single banks that got themselves into some problems and hasn't actually had systemic failure or crisis. But I revert to a point I made before. All of office building is only 16% of total commercial. The fact is there 's also shopping centers and and and in that world is kind of going along sideways. So overall, I would say interest rates aren't the big force here. Long term rate, which is what impacts them, have been relatively benign since last October.

Getting better. A lot of people, and one of the reasons it 's residential isn't doing as badly as people would have expected it to do when they just saw the big increase in long rates last year before October when they started coming down. One of the reasons that residential done better than people thought is because an awful lot of people who had very low mortgage rates before gotten two, three, four, five years ago and more don 't want to put their house on the market, sell it to only go and buy a house today at a much higher interest rate than what they secured once upon a time. So the supply has been constrained.

In the office building market. That's 16% of commercial. One of the reasons it 's not doing worse than people would have expected is because there's very little starts because the entitlements necessary to build these office buildings, most of which are in or close to city centers, have been almost nonexistent in recent years as cities have been so tight on regulations that relate to building. So the supply has been constrained, the demand is down, but they kind of somewhat the ones tended to offset the other.

Overall, is it interest rates? No, it 's these other factors that are driving features. Thank you for listening to me. I hope you found this educational and useful. Subscribe to the Fisher Investment YouTube channel if you like what you've seen, click the bell to be notified as soon as we publish new videos

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