For the fifth time this year the Federal Reserve has increased rates, this time by three-quarters of a percentage point in September. This has brought the federal funds rate to the highest level since 2008, and overall, the rate hasn’t increased this much in a single year since the 1980s. If that’s not concerning enough, it’s likely that there are more increases on the horizon at the two remaining meetings of the Federal Reserve this year.
As you can see in the chart below, the rising Federal Funds rate is heavily correlated to other benchmark rates: the WSJ prime rate, the 5-year Treasury rate and the 10-year Treasury rate.
| THIS WEEK 10/4/22 | 1 MONTH AGO 9/1/22 | 6 MONTHS AGO 4/1/22 | 1 YEAR AGO 10/1/21 | 2 YEARS AGO 10/1/20 |
Fed Funds Rate | 3.08% | 2.33% | 0.33% | 0.08% | 0.09% |
WSJ Prime | 6.25% | 5.50% | 3.50% | 3.25% | 3.25% |
5 Year UST | 3.90% | 3.39% | 2.55% | 0.93% | 0.27% |
10 Year UST | 3.67% | 3.26% | 2.39% | 1.48% | 0.70% |
All the market analysts I’ve heard predict that rates will not only continue to rise higher for the remainder of the year, but also will stick around for longer than originally expected. If we look at the below chart showing the Federal Funds Effective Rate for the last 22 years, it indicates that we may have a long road ahead of us in this current cycle. Back in February of 2007 rates hit 5.26%, and in July of 2000 they skyrocketed to 6.54%.
The best approach I can recommend to borrowers is to lock in your rates now. While it’s true that a rate from any point in the past few years is better than today, it also holds true that a rate locked in today is much better than 6, 12 or even 18 months from now. Many of our clients are forward rate locking to get ahead of future rate increases and to ease some of the uncertainty that is coming.
The part of the equation that’s not as obvious with higher rates is that the higher rate will limit a borrower’s leverage as loans will be debt coverage constrained. Valuations are coming down, and properties that previously underwrote at 65-70% leverage with low rates will only be 50-60% leverage with these higher rates creating downward pressure on valuations. For many owners, the value of a rate lock is protecting the loan amount and taking the risk off the table of needing to pay down a loan for a cash-in refinance 6, 12, or 18 months from now. The rate lock more importantly takes the leverage risk off the table.
I have a wide range of options to help you find the best loan terms and rate. Get in touch with me today if you’re interested in learning more about the services I provide through Gantry.