Finally, the time has come for the Fed to start cutting rates in September. Because of this, real estate investors are likely to benefit from the difficult situation in the next few years, after two difficult years.
Mortgage rates peaked in October 2023 but rose again from December 2023 to April 2024. Now, we can safely assume that rates should continue to trend lower as the Fed begins to cut the short end of the curve. As the economy softens, interest rates will likely remain muted.
In the spring of 2024, we saw wild bidding wars, but the work slowed down for two important reasons. First, a significant number of buyers are waiting for confirmation of price cuts before entering the market. Second, with the November 5, 2024 presidential election coming up, many consumers are choosing to wait and see who will be in office before making the biggest purchase of their lives.
Given the decline in mortgage rates and the current hesitancy among buyers—especially during the second half of the regular year—there is an opportunity to buy real estate right now at better prices. Fall and winter are my favorite seasons to shop because of the less competition.
Demand for Real Estate May Increase Higher
In my podcast with Ben Miller, CEO of Fundrisewe discuss how negative real estate spreads are delaying investment committees from approving real estate deals. A negative spread occurs when the cost of borrowing exceeds the yield on the asset, causing purchase prices to fall sharply.
However, if we see neutral or positive spreads—mostly driven by falling interest rates—we will likely experience increased buying activity, pushing prices higher.
That said, the future remains uncertain. Mortgage rates can stay low or rise again, dampening demand. But if the Fed starts reducing the Fed Funds rate while long-term rates rise, we will see a steepening yield curve, which is usually a bullish sign for the economy. As long as the Fed continues to cut rates, real estate investors should benefit from the positive momentum.
We’re already seeing real estate ETFs like XLRE and VNQ hit 12-month highs, as well as public REITs like O, SPG, DLR, and PSA. This increase is expected to reduce costs and increase operating income. As a result, there may be an arbitrage opportunity to invest in private real estate funds that have not yet revised their Net Asset Values (NAVs).
Planting Properties During a Multi-Year Average Cutting Cycle
Click the play button on the embedded player to listen to our conversation, or go to an apple again Spotify direct listening.
Here are my show notes from my interview with Ben Miller, CEO of Fundrise about what’s next for real estate.
Main Theme:
Interest rates are the most important driver of real estate prices, surpassing performance improvements. Apartments are likely to gain significantly by the end of 2025.
Real Estate Market Insights:
Apartments: A class of high performance goods. When people can’t afford to buy houses, they rent—which benefits apartment owners.
Office Sector: Dealing with a permanent drop in demand of 30-50%, combined with a cyclical drop. He is still not willing to buy the property.
Industrial Sector: Moderately pro-cyclical, driven by asset flows in the economy. The best property class after Apartments.
Economic Outlook:
Forecasting Recession: A moderate recession is likely, which could be bad for stocks, but good for housing.
Boom-Bust Cycles: Mainly due to over availability and lack of availability. The industry is grinding to overbuild from 2020-2021, and there is likely to be a slight shortage again in 2025+ given the underbidding from 2022-2024.
Class A properties yield 5.5%-6%, meaning the market could be “cleared overnight” if borrowing costs fell to these levels or below, creating a real estate boom.
Investment Insights:
Making Financial Decisions: Institutional investors are holding back on buying real estate in 2023-2024 due to negative real estate deals (where interest rates exceed purchase prices). This prevents deals from passing investment committees. However, in order to succeed, funds must invest against and against consensus.
Population Growth Is a Major Driver of Real Estate Prices: Strong growth in Texas, Florida, North Carolina, South Carolina, and Georgia is driving real estate demand. The apartment sector could be the biggest winner in the second half of 2025 due to low availability, high migration, and low interest rates.
Country Trends and Government Policies:
Down Town: The collapse of large cities due to reduced demand for office space. The ripple effect of government revenue and attracting more businesses. It doesn’t make sense in blue cities, however, you understand that there are opportunities for geoarbitrage within cities.
Government Policy: A potential $25,000 credit for first-time home buyers and developer incentives could impact the housing market. Therefore it may increase the prices of imported goods which may reach the mortgage financing and credits.
Investment Outlook:
Equity markets don’t price in recessions, but credit markets—they’re a better predictor. Therefore, Ben does not buy government stocks, and buys bonds, real estate, and corporate funds instead.
Student Questions
Share your thoughts on investing in real estate at the beginning of a multi-year interest rate reduction cycle. Are you bullish, neutral, or bearish on the residential and commercial space, and why? Do you think supply could outstrip demand despite the huge housing shortage, especially from 2022-2024 when lending rates rise?
If you are considering investing in private real estate, look no further Fundrise. They manage private equity funds focused in the Sunbelt region, where valuations are low, and yields are high. Fundrise specializes in residential and industrial real estate, offering investors diversification and income potential.
Currently, Fundrise manages more than $3.5 billion for more than 500,000 investors. I have personally invested over $270,000 through Fundrise, and they have been a proud sponsor of Financial Samurai for years.
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