President-elect Joe Biden nominated former Federal Reserve Chairwoman Janet Yellen, the prior head of the Federal Reserve, to become the next Treasury secretary. The “market” loved the pick, should you? What does a Yellen pick for treasury mean for interest rates? How will this impact real estate?
Dovish monetary policy
Doves tend to support low-interest rates and an expansionary monetary policy because they value indicators like low unemployment over keeping inflation low. If an economist suggests that inflation has few negative effects or calls for quantitative easing, then he or she is often called a dove or labeled as dovish.
Yellen has been classified as Dovish since her time at the federal reserve where she emphasized “full employment” and less focus just on inflation. She was hesitant to raise interest rates to early in the economic cycle after the last crisis.
Rates low for a while
With the appointment of Yellen, there is widespread consensus that rates will remain low for a considerable period of time. Yellen will work closely with her colleagues at the federal reserve to continue an “expansive” monetary policy. This will keep treasuries and mortgage rates at historic lows for a bit longer. Many economists are predicting low rates for at least 2 or 3 years if not longer.
Real estate will keep on going up with low rates
The primary driver of real estate is rock bottom low rates. The 30 year mortgage is well below 3% substantially increasing the buying power of prospective purchasers. Furthermore with rates so low there is considerable demand for real estate as an investment. Real estate is considered a safe haven asset. With treasuries running so low and the stock market hitting records, there is a huge demand for diversification into real estate. Low rates and demand for yield will continue driving the real estate boom.
Will we get too much air in the balloon and pop?
Very rarely has the federal reserve engineered a “soft landing” where they reduce/remove monetary accommodation in order to let the markets function. We saw this in the last cycle where interest rates never rose much off their lows. Before the pandemic, the federal reserve should have raised rates to normalize monetary policy and give itself ample “breathing room” to fight the next crisis. Unfortunately this did not happen which limited how much the federal reserve could cut rates and stimulate the economy.
Yellen’s treasury and the current fed could very likely continue the easy monetary policy too long. When monetary policy is too accommodative, imbalances grow in the economy. These imbalances are referred to as bubbles. For example, the stock market just hit record highs, but earnings for many companies have fallen precipitously due to the pandemic. Low interest rates are the fuel on the market rally.
The low interest rates are also causing the huge rally in real estate prices as investors hunt for yield and buyers can afford more house. Unfortunately monetary policy eventually normalizes and or the market corrects for the bubble that has formed and things end very badly.
Summary
In the short-term Yellen’s pick was a welcome surprise to the markets and real estate will continue its historic rally. The million dollar question is how long this will last. Will Yellen keep monetary policy too loose for too long creating market imbalances and leaving the next fed in a precarious situation or will she be able to engineer an elusive graceful exit from an accommodative policy? Although we don’t know the answer yet, now is the time to start being alert for market imbalances / bubbles throughout the economy including real estate.
Additional reading/resources
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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