By most accounts, the Fed will hold steady after raising the federal funds rate by a quarter point up to 5.25% In early May. A reuters vote found that 102 of 116 economists thought the Fed would raise rates this year, and 30 believed they would lower it.
Inflation has come down from its high of over 9% last year 4.9% In April of this year, it may seem that the Fed should now reverse course. But Bank of America chief economist Michael Gapen said, “Inflation is more than double the Fed’s target rate, and the unemployment rate is lower than every FOMC participant’s estimate of the natural rate.”
Yet, with inflation halving in the past nine months, several recent bank failuresAnd recession warning signs-Many people, including myself, have been predicting for over a year -There are still reasons to think the Fed will begin to reverse course on rates. If not in late 2023, then probably in 2024.
One should always be careful with economic predictions, but with that caveat in mind, I would bet that interest rates in May 2024 will be lower than they are today. In the short term, things look good for interest rates.
In the long run, though, not so much which this article is about.
Upward pressure on long-term interest rates
If you spend much time in real estate investment forums, you’ll hear something like “Even now, interest rates are low by historical standards”. A lot of old-timers like to reminisce about “back in the day” when they had to walk several miles uphill in the snow both ways to school and how “we didn’t know how good we had it And so on.
And the older ones (about whom we’ll talk shortly) are right. just look at the average 30 year mortgage rate That explains it for the last 50 years.
It’s hard to imagine rates being in the high teens of the late 70s and early 80s, but they were. (Of course, real estate was still very cheap back then.)
While rates are likely to be back in the 5s and maybe 4s in the next year or two, when we zoom out to the next decade or two, we’re likely looking at the period between the Great Recession and about 2025. Must have been The era of obscenely low interest rates will not be seen again in our lifetime until 2027.
It has become a strange notion that the Federal Reserve can do whatever it wants with interest rates and thus keep them low for as long as it pleases. And yes, the Fed has plenty of power to bring rates up or down, but it has to do so in response to economic realities that it cannot control. If not, either inflation will spiral out of control, or the economy will come to a standstill.
Furthermore, its power is not infinite. And what’s to come will be beyond the Fed’s power to control.
Perhaps the most important trend going on in our economy is that our population is getting older. In a hypothetical society where there is no immigration, and each generation has as many children as the previous one, a graphical representation of age should look like a pyramid with the highest numbers at the bottom (i.e., younger) and up until you’re older. It should be reduced till then. It hits zero at around 100.
Instead, the American demographic pyramid looks like this:
As you can see, it looks more like a tall house or tower than a pyramid where the population doesn’t start to “ceiling” until around 62. baby boomer generation (children born between 1946 and 1964) were the children of the Silent and Greatest Generations (1901 – 1945), who had many more children than subsequent Generation X and Millennials, as well as the Boomers themselves.
Thus, the American demographic pyramid doesn’t look like a pyramid at all.
What is happening now that many baby boomers are starting to retire. About this 10,000 baby boomers Every day more are reaching retirement age, and many more are leaving the workforce. In such a situation, a lot of production is also going on.
On the one hand, it should be noted that immigration is unlikely to affect this trend much. average age of an immigrant in the United States is 47 years, which is slightly higher than the average age of Native Americans (37).
As geopolitical strategist Peter Zehn says, people behave quite differently as they age, and this will have a dramatic effect on the economy. As he explains, “Mature workers tend to spend less, as well as the wealthier people in their societies.” ,the end of the world is just the beginning,
In older times, this didn’t matter so much because “simple mortality means they don’t exist in great numbers. Fewer savers, more spenders. Supply and demand. Borrowing costs remain high.”
However, the Industrial Revolution began to change this.
“Early industrialists experienced longer life spans and lower child mortality rates, allowing their population to triple. At the same time, industrialization spurred massive urbanization, which over time led to smaller families and an aging population.” Hui.
But things didn’t change dramatically until the end of the Cold War.
“In the world from 1990 to 2020 … all the richest and most upwardly mobile countries in the world were in the capital-rich phase of the aging process at the same time. During that three-decade period, there have been countries in which many are late-forty-to-early-sixty-somethings, the age group that generates the most capital … Collectively, their savings have The supply of capital has been pushed up while the cost of capital has been pushed down. For Everything, everywhere,
“Mortgage rates have been the lowest in history and advanced governments have been able to borrow at sometimes negative rates, while major stock markets continue to seek higher and higher ground … The explosion in industrial production and technological development over the past decade has led to large The combination of the sluggish Bretton Woods system in scale and the massive amount of mature workers are the reasons for this demographic moment. and their money,
Not only will the labor force shrink, but the composition of investments will change dramatically as retirees take their savings and reinvest them in “high-earning stocks, corporate bonds and foreign assets for inflation-proof, stock market crash investments.” Will be made.-proof, and currency crash-proof.” In short, 70-year-olds rarely gamble on new startups.
It is a global phenomenon. In fact, the United States is actually nowhere near the worst in terms of its demographic pyramid. pyramid of chinaFor example, the origin is upside down (or, more accurately, bloated in the middle) and tilted slightly to the left because the one-child policy caused a male surplus.
Zihan’s predictions for China are dire indeed,
“China’s future is not a utopian myth of Chinese supremacy. China’s future is not even some vague expectation of inevitable regional dominance. China is powerless to defend or maintain or change the system on which its economic existence and political unity are based.” The future of China belongs to those who are fighting to the death to continue to exist as a truly unified country.non-aligned nation,
Zihan’s prognosis for the world in general is poor. He anticipates globalization breaking down and being unable to source enough food and raw materials or finished goods to sustain civilization in its current state. He is expecting a billion people to die from famine, disease and war during the next 20 years.
That being said, I am skeptical of some of Zehan’s claims. Beyond his analysis of Japan, he doesn’t properly address how technology may also be part of the labor shortage caused by retired boomers in countries like China. we seem to worry together AI will eliminate all jobs And also that there won’t be enough workers to maintain civilization. Honestly, who knows what the mobility of the labor force will be like?
Zehan also believes that the elders will behave as they did before despite the crisis. While this may mean people will have to push back their retirement age (or, in places like China, perhaps no retirement at all), a change in behavior could dramatically blunt their pessimistic outlook.
Finally, he believes that the US-led world order has created stability that cannot be matched in a multipolar world. There is certainly some truth in this, but we must also acknowledge that the US has also destabilized places like Iraq and Libya. The absence of a US-enforced globalized order may be far less destabilizing than Zeehan predicted.
Zihan is also quite optimistic about the United States, and here, I also think he overstates his case. the united states of course some of the key benefits are, especially geographical; Year-round rivers, navigable rivers covering much of the mainland, fertile and contiguous soil, a coastline with several natural harbors, and no potential military adversaries nearby.
The population trend of America is also not as bad as others. But he does bear some risks, including Erosion of Dollar HegemonyA national debt balloonand the dangers of growing political polarizationWhich is as bad as it has been in living memory.
Future Outlook for Real Estate Investors
Regardless of whether or not Zeehan overstated his case, it is clear that the demographic breakdown of the United States (and the world at large), as well as retrenchment from globalization, will lead to an upward trend on interest rates over the next few days. And is going to pressurize. decade.
This will also put upward pressure on inflation and, unfortunately, will put much more pressure on food than on assets like real estate.
Around the world, populations are expected to decline, making property in many places less valuable than ever. This is not true in the United States, as any slight decline in population from our flattened population pyramid will be fueled by immigration. There may also be an exodus of capital to the United States from other countries with worse population pyramids, which may reduce upward pressure on interest rates and inflation.
Still, such capital inflows are unlikely to do much more than cushion the landing. The days of asset appreciation will outpace inflation to a great extent and probably even do the opposite.
And investors should expect interest rates similar to those seen in the ’90s, if not higher. So when rates are likely to come down in the next year or two, I’d aim for fixed mortgages over adjustable-rate loans.
And if you have a 30-year fixed mortgage at 4% or less, I’ll cover your life.
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Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
