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The Real Deal Los Angeles

Pick your poison: Strong GDP growth makes interest rate hike more likely

US economy grew at a rate of 2.9 percent in Q3

October 31, 2016 08:30AM
By Konrad Putzier

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Janet Yellen

Janet Yellen

From the New York website: New Gross Domestic Product figures released Friday showed the U.S. economy is growing at a strong pace. That’s great news for the real estate industry, right? Not entirely.

The flip side of the economy growing at an annualized rate of 2.9 percent in the third quarter – up from 1.4 percent in the second quarter – is that it makes rising interest rates more likely.

The yield on 10-year Treasury bonds (a key benchmark interest rate) rose to 1.85 percent Friday – the highest level since May. A strong economy makes it more likely that the federal reserve will raise short-term rates at its December meeting, which would in turn put upward pressure on long-term interest rates. Higher long-term rates, in turn, make real estate financing more expensive and put downward pressure on prices both in commercial and residential real estate.

“For both single-family rental (SFRs) investors and first-time buyers, higher interest rates will further tighten inventory across the nation,” Stephen Hovland, director of research at investment platform HomeUnion, wrote Friday. “Fewer SFR deals in fewer areas will pencil out, requiring additional due diligence on the part of buyers.”

But strong growth and rising rates may still be preferable to low rates and slow growth. Blackstone Group’s real estate head Jonathan Gray recently claimed that people are paying too much attention to interest rates.

There’s a (false) sense that owning real estate is the same as owning a bond,” he said in an interview with CNBC last week. “Real estate, like stocks, can see earnings growth. And that’s what we’re seeing today because of favorable fundamentals.”

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