Wild Fires, Rising Rates & What’s Next For Housing
The recent L.A. fires are expected to become the costliest blazes in U.S. history. First-hand accounts from borrowers who have gained access to fire-ravaged areas in the Palisades and Malibu describe scenes that are nothing short of apocalyptic. Our hearts go out to the friends, colleagues, and clients who have tragically lost their homes. With the economic toll forecasted up to 50 billion and rising, the impact of these fires on the conscience of our residents in addition to the significant emotional and financial cost to rebuild, will be an unfortunate toll on our city. Thoughtful work needs to be done to ensure the safety of our residents. Plain and simple, our elected officials failed us. We are better than this.
In parallel, we remain concerned about the Federal Reserve’s decision to lower short-term interest rates despite sticky inflation and an overall healthy economy. Speculative trading in high-beta AI stocks, cryptocurrencies, and meme stocks, combined with historically tight spreads on high-yield bonds, signaled that financial conditions weren’t as restrictive as many believed. Lamentably, this is proving true. The 10-year Treasury yield surged to over 4.70% from approximately 3.60% before the Fed’s jumbo rate cut in September. While the consensus expected the entire yield curve to drop alongside the Fed’s decision, the opposite has occurred. Factors such as the Trump administration’s “America First” policies and tariff threats appear to be inflationary while mounting national debt alarms the bond market. This presents both a challenge (consumers face the highest interest rates in over 30 years) and an opportunity (policymakers may be forced to address these issues).
The pressing question now is how these elevated interest rates and the rising cost of living will impact asset prices. If rates climb further, we anticipate a reset in both single-family and commercial real estate values. The rising cost of living, combined with steep financing costs, has made homeownership increasingly unattainable. If the expectation of declining rates fades, downward pressure on home prices will be needed to attract buyers. In California, where Insignia Mortgage operates, higher insurance premiums in fire-prone (and highly desirable) areas will add further pressure. On the commercial side, equity in properties purchased at market value over the past few years has been significantly impaired, with higher cap rates and increased fixed costs eroding returns. Meanwhile, businesses and consumers alike face elevated loan costs as business and auto loans often track the 10-year Treasury, leaving interest expenses stubbornly high.
The equity markets to date have been resilient. However, as interest rates move up toward 5% at some point, equities will not be immune. With the S&P having risen 20% plus in back-to-back years, it is unlikely that the run-up in equities will continue. In fact, we would not be surprised to see the equity indexes move lower.
Despite these challenges, there is hope. A pro-business administration may drive economic growth to help rebalance incomes against the higher cost of living that has persisted since COVID. From our perspective as a real estate lender focused on entrepreneurs, we’re observing mixed conditions across industries. Clients in technology and advanced industries are thriving, while others—such as plastic surgeons, retailers, and manufacturers who saw significant demand post-COVID—are now experiencing slowdowns.
