Summer technically ends the third week in September. The Mortgage and Bond Markets could make one nostalgic for a summertime fair complete with cotton candy and roller coaster rides.Indeed, the fixed-income markets have been supplying both – there has been a steep drop in interest rates for long-term loans to nursing homes and apartment properties. “It's truly a borrower's market," says Serafino Tobia, director of US Agency CMBS and bond trading for Greystone.
But the opportunity to borrow at low interest rates might not last. Just nine months ago, most economists actually expected interest rates to keep inching higher for the foreseeable future. Rates could start rising again, if growth expectations about the economy here and around the word stabilize, concerns over US-China trade wars subside and capital markets investors become more optimistic about the stock market (igniting concerns of higher inflation expectations).
Low interest rates, thanks to the U.S. Federal Reserve
As of mid-August 2019, through the lending program of the Federal Housing Administration (FHA), typical borrowers could get long term loans for their nursing home properties with interest rates at about 3.75 percent all-in (including HUD MIP).
As recently as December 2018, market sentiment was for higher interest rates. Officials at the U.S. Federal Reserve had been regularly raising their benchmark Fed Funds rates since late 2015, and those rate hikes had finally begun to push long-term interest rates higher, such as the benchmark yield on 10-year Treasury bonds.
For example, in November 2018, typical FHA multifamily borrowers received interest rates fixed at about 4.75 percent, according to Tobia. That's the highest FHA interest rates had been in years. At the time, the benchmark 10-year Treasury rate was above 3.20%. As of mid-August 2019, 10-year Treasuries were about half that – just 1.58% at the close of business on August 14, 2019.
Fed officials raised the Fed Funds rate in December 2018,but then reversed course immediately thereafter, announcing further rate hikes were unlikely in 2019. In July, the Federal Reserve cut the Fed Funds rate by 25 basis points. “Most market watchers are thinking the Fed will drop its rate another 25 basis points again soon," says Tobia.
“Fed officials are cutting their Fed Funds rate despite the fact that the unemployment rate is close to historic lows and the gross domestic product is growing between 2 percent and 3 percent a year," says Tobia. Usually, when the economy is this strong, Fed officials set their interest rates relatively high to reduce inflation in the cost of goods and services.
However, the rate of growth in the consumer price index has stayed stubbornly low – well below the two percent per year Fed target for inflation. Economists also worry that the U.S. economy may begin to slow down because of disputes with its major trading partners or the effect of a strong U.S. dollar on exports. “Fed officials may also be cutting interest rates to be more in line with the very low interest rates set by central banks in Europe and Asia (and protect the value of the US dollar and the portion of the US economy tied to exports)," says Tobia.
Low-interest rates might not last
There's no guarantee that interest rates will stay low -- past performance is no guarantee of future results. Only late last year, economists expected the Federal Reserve to continue to raise interest rates. That expectation could easily return if inflation begins to grow.
The capital markets are currently focused on the stops and starts of a trade war between the US and China. In the beginning of August, President Trump expanded existing tariffs on another $300 billion in Chinese imports. Then, by the third week in August, the Trump administration announced a suspension of these new tariffs through the end of the year to protect the holiday shopping season in the U.S.Most economists and bond market participants are concerned that US tariffs -- and likely countermeasures by China -- will slow economic activity and may put the US economy into recession. The lower interest rates currently in the bond and mortgage markets are reflecting these concerns.However, to the extent that Trump and his Chinese counterpart Xi Jinping can cut a deal on trade and lessen the concerns, the stock market will likely rally, and bonds and mortgage rates will move higher. “If trade tensions resolve while unemployment is still low, it's hard to imagine the Fed Reserve would resist calls to raise rates once again," says Tobia.
With the current low rate environment, Tobia encourages borrowers to consider locking in financing for long-term debt to take advantage of the favorable conditions for property investors.