Broad Thoughts On Economy, Real Estate & Direction Of Interest Rates
Market Volatility and Economic Trends
This past week saw significant market swings, with technology-focused equities taking a sharp hit on news that Chinese firm Deep Seek may have developed a more efficient and cost-effective way to use large language models. Nonetheless, U.S. equities rebounded by the end of the week, as buy-the-dip investors capitalized on lower entry prices. Mid-week, the Federal Open Market Committee (FOMC) convened, and kept short-term rates unchanged as expected, maintaining their wait-and-see approach. Bond yields remained flat following the announcement. However, late Friday, equities dropped lower and bond yields rose higher after President Trump announced new tariffs on a range of imports, with the markets reacting to the potential inflationary impact of trade restrictions.
Inflation and Housing Market Pressures
The Fed’s preferred inflation gauge, Personal Consumption Expenditures (PCE), met expectations. However, inflation appears to be flattening rather than falling, meaning that prices are still rising—aggravating the cumulative cost of living increases over the past several years. Housing costs have climbed alongside interest rates, creating an affordability crisis for younger home buyers, step-up borrowers, and empty nesters. Many homeowners remain reluctant to sell, unwilling to give up 3% mortgage rates in favor of significantly higher financing costs. This dynamic has stifled the existing home market while benefiting large homebuilders, who can offer mortgage buy-downs, build at scale, and outcompete smaller builders on cost.
Banking and Distressed Real Estate Opportunities
Anecdotally, some banks that anticipated lower rates by now are reassessing their approach to impaired borrowers. Higher input and financing costs and rising cap rates have made real estate investing challenging—except for those in private credit. If banks begin applying pressure, opportunities for distressed property acquisitions could emerge regionally.
Credit Markets and Speculation
Corporate interest rate spreads remain historically tight, suggesting too much liquidity chasing too few deals. The ongoing speculation in crypto, AI, and meme stocks further reinforces the idea that cash remains abundant in the financial system. While some industries—such as real estate, manufacturing, and autos— struggle due to reliance on low debt yields, many sectors appear largely unaffected by higher interest rates.
