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July 6, 2017

In June 2017, the U.S. Federal Reserve, as expected, raised interest rates by 25 basis points – the fourth hike since December 2015 – pushing the effective funds rate to 1.16 percent, the highest since October 2008.

According to JLL’s Chief Economist, Ryan Severino, the Fed’s increases remain slow, by historical standards. The real question is: will this be the last rate hike for 2017? Furthermore, what are the impacts for real estate?

“Sentiment has turned against a third hike in the final quarter of the year – the futures market believes that there is only a 47 percent chance of a third rate hike by the end of 2017,” Severino says. The market is reacting to a softening in inflation data, which brought the headline CPI below the Fed’s two percent annual target rate for the first time since November 2016.

A price war between U.S. wireless service providers and a slowing in residential rental growth are the headline factors behind softening inflation. Furthermore, consumers have become more cautious about spending their money as faster economic growth has not materialised as many had expected.

“If prices and wages don’t rebound this summer, that third rate hike could be off the table,” Severino says. “A third rate hike remains possible – stronger wage growth and higher inflation would help to make the case. However, if the Fed begins unwinding its balance sheet as planned, that could put upward pressure on long rates, steepen the yield curve, and give the Fed some extra cover to keep raising the Fed funds rate.”

“However, the ultimate decision won’t be made until we get a more complete view of the economic data from the second and third quarters,” he says. “That provides the Fed with time to delay a decision until December and by then it will have a clearer picture of the economy’s performance for all of 2017.”

However, Severino argues the Fed’s tightening of monetary policy ‘remains more bark than bite’ – between October 2014 and December 2015 its signals about quantitative easing and interest rate hikes did not result in a significant slowing of economic growth.

So, what does this outlook mean for real estate markets? Either way, scenario, according to Severino, will have minimal impact on property

“One hike at the margin tends to have little impact – the real impact will come from the cumulative change in rates over time,” he says. “Over the last few years we have seen the end of QE3 and -4 rate hikes of 25 basis points each, with little to no discernible impact on real estate.”

Furthermore, “the current pace of increase remains slow, while the amount of rate increases remain modest, as compared to previous tightening cycles,” explains Severino. “The Fed funds rate remains low by historical standards and below our estimate of the neutral short-term interest rate. By our forecasts, we remain roughly 140 to 190 basis points below the neutral rate, so the Fed has room to further increase rates without jeopardising the expansion in the economy and real estate market. Although other factors could have a negative impact on the commercial real estate market, the current level of interest rates should generally support the market.”

Severino says low inventory in the U.S. residential market means existing home sales are expected to hold steady, despite declines in pending home sales.

“Quietly, existing home sales have recovered from the housing market downturn. New home sales should rebound after a relatively weak April. New home sales are recovering at a far slower pace than existing home sales. Overall new home inventory continues to increase, which is a good sign: greater investment in housing would benefit the overall economy.”

In general, it seems the outlook for real estate is positive.

“The way I describe it is good, but not great,” says Severino. “Expectations are moderating, but this is logical. Nothing fundamental has changed about how the economy works – there’s been no significant tax reform, no change to infrastructure spending – at least, not yet. Therefore, we should not expect the economy to perform different until any such changes occur.”

Ryan Severino
JLL's Chief Economist

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