Category: Jason Schmidt (3)

Interest Rates, Federal Reserve Interest Rate Announcement

Federal Reserve Rate Increase

ORLANDO, FL – March 20, 2018 – The Q1 Federal Reserve meeting announcement is tomorrow, March 21st, with new Chairman, Jerome Powell, and the hot topic is a rate hike. At the beginning of the year, there were four planned rate increases, each estimated to be +/-0.25% bringing our total annual increase of the Federal Funds Rate to 1.0%. What I see many debating now is whether there will be three or four. Personally, I do not think we will even see three with the Fed wanting the keep the gas pedal on the economy.

The announcement of four projected increases came early in the year on the heels of an estimated 4%-5% GDP growth trajectory in the first quarter. Rate increases would be used as a measure to control inflation and slow economic growth to stay within the targeted 3% growth range while outpacing natural inflation.

The Atlanta Fed just released its most recent economic growth prediction for the first quarter, 1.8%. This is much, much lower than anticipated and not a good indicator of an increasing interest rate discussion. Total economic growth has not hit the target for rate-driven economic controls.

Interest rates, in the context of monetary policy, are used to control the cost and flow of money. Rates are increased to slow borrowing and spending, then decreased to increase borrowing and spending. At 1.8% growth, if that prediction turns out to be the actual growth for Q1, total economic production is not anywhere near a level where it needs to be slowed. Total economic activity needs to increase in order for rate controls to become a factor.

WHAT I THINK WILL HAPPEN (Two Scenarios):

The Fed will likely not be hot to slow down an already slow-moving economic engine. On a high level, if rates are increased without matched economic production, not only will government budget deficits rise faster than they are already planned, the markets are likely to react with equities moving further downwards.

1) Most Likely Scenario: Because the Fed wants to maintain the appearance of a healthy moving economic recovery, rates will be increased tomorrow by a nominal 0.25% or 0.125% to avoid having “egg on the face” of its lumbering monetary policy.

The markets are already anticipating this rise and traders are positioning themselves as though it is a guaranteed certainty. From there, the increase discussion in the June meeting will likely be pushed off if there is not a significant increase in total economic production over the next few months.

As the US government remains in its obstinate method of operation, there is no major economic policy on the immediate horizon aside from steel and aluminum import tariffs, a cumbersome issue itself, and the pending reform of Dodd Frank, which could actually relieve some regulatory restriction on small and mid-sized institutions and free up capital for lending. If this were to pass the House vote in the coming few weeks, Q3 would likely give us the first indications of the success or stagnation of new capital deployment.

This atmosphere of major economic initiative absence could very well lead to no further rate increases in 2018 in hopes of moving total, end-of-year GDP growth to the targeted 3% benchmark.

Overall, this scenario would not be bad for the mortgage market in terms of cost, but not so good an indicator of the Fed’s overall outlook of the US economy, given its 4%-5% early year GDP growth predictions.

The Fed’s reaction to the 1.8% GDP prediction is sure to set the tone for the balance of the year and what to expect from a policy position.

2) Secondary Scenario: A rate increase does not happen tomorrow. The Fed will cite the 1.8% Q1 outlook and will then push off the discussion until the June meeting when we’ll see that 0.25% or 0.125% rise and no further increase discussion until the December meeting.

HOW TO REACT TO MARKET CHANGE:

We have arrived. Those looking for the top-of-the-market should look no further. When the market turns, and it will, it will turn quickly. In residential markets, I expect that by Q3/Q4 we will begin to feel the slowing value effects through extended time-on-market and a more apprehensive buyer pool, as national news may begin to question economic policy and direction.

If there are any positive, pro-business initiatives passed, the narrative of the market condition may delay that timeline, but it will play out nonetheless.

Buyers and sellers of real estate alike must be prepared to react quickly, adjust accordingly, and not become entrenched in their starting position.

In the short term, as rates rise nominally, value adjustment must be top-of-mind in order to appropriately respond to affordability or yield concerns.

In the long term, whether you’re in the commercial or residential sector, we have to plan in consideration of an overall value correction, with an emphasis on reduction of acquisition yield pricing and mindfulness of hyper-valuation.

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About Stockworth Realty Group

Stockworth Realty Group is a concierge real estate brokerage serving the Orlando area.  Created by Tavistock Group, a globally respected real estate developer, Stockworth was founded to service the real estate needs of luxury clients outside the gates of both the Isleworth and Lake Nona Golf and Country Clubs. Stockworth has a successful track record in Central Florida and averages more than four closings per week with a dedicated, select group of experts.

As the preferred referral company for Tavistock Development, Stockworth has the privilege of serving as the official relocation company for Lake Nona’s Medical City, the United States Tennis Association and many other major employers in Central Florida. Nobody knows the Orlando real estate market better than our team who has been entrusted for years to relocate some of Central Florida’s most exciting new companies.

With experience in the fast-growing and dynamic marketplace of Central Florida, Stockworth Realty has a very experienced and sophisticated team to assist you in finding creative ways to get you the highest price and the quickest sale. To learn more about Stockworth, visit www.stockworth.com for more information.

Media Contact: Sara Cohen; 407-909-9936; scohen@stockworth.com

Jason Schmidt-ForbesCouncil, Interest Rates, Forbes Real Estate, Orlando Realtor

Jason Schmidt, CCIM, of Stockworth Realty Group, accepted into Forbes Real Estate Council

Forbes Real Estate Council Is an Invitation-Only Community for Executives in Real Estate

ORLANDO, FL – March 14, 2018 – Jason Schmidt, CCIM, Director of Operations, Stockworth Realty Group, has been accepted into the Forbes Real Estate Council, an invitation-only community for executives in the real estate industry.

Jason Schmidt joins other Forbes Real Estate Council members, who are hand-selected, to become part of a curated network of successful peers and get access to a variety of exclusive benefits and resources, including the opportunity to submit thought leadership articles and short tips on industry-related topics for publishing on Forbes.com.

Forbes Councils combines an innovative, high-touch approach to community management perfected by the team behind Young Entrepreneur Council (YEC) with the extensive resources and global reach of Forbes. As a result, Forbes Council members get access to the people, benefits and expertise they need to grow their businesses — and a dedicated member concierge who acts as an extension of their own team, providing personalized one-on-one support.

“We are excited about Jason’s acceptance into the Forbes Real Estate Council and what value this will bring to our community. Jason’s knowledge of the real estate industry will now be further cemented and help raise the industry standards,” Mark Hayes, President of Stockworth.

Scott Gerber, founder of Forbes Councils, says, “We are honored to welcome Jason Schmidt into the community. Our mission with Forbes Councils is to curate successful professionals from every industry, creating a vetted, social capital-driven network that helps every member make an even greater impact on the business world.”

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About Stockworth Realty Group

Stockworth Realty Group is a concierge real estate brokerage serving the Orlando area.  Created by Tavistock Group, a globally respected real estate developer, Stockworth was founded to service the real estate needs of luxury clients outside the gates of both the Isleworth and Lake Nona Golf and Country Clubs. Stockworth has a successful track record in Central Florida and averages more than four closings per week with a dedicated, select group of experts.

As the preferred referral company for Tavistock Development, Stockworth has the privilege of serving as the official relocation company for Lake Nona’s Medical City, the United States Tennis Association and many other major employers in Central Florida. Nobody knows the Orlando real estate market better than our team who has been entrusted for years to relocate some of Central Florida’s most exciting new companies.

With experience in the fast-growing and dynamic marketplace of Central Florida, Stockworth Realty has a very experienced and sophisticated team to assist you in finding creative ways to get you the highest price and the quickest sale. To learn more about Stockworth, visit www.stockworth.com for more information.

Media Contact: Sara Cohen; 407-909-9936; scohen@stockworth.com

 

About Forbes Councils

Forbes partnered with the founders of Young Entrepreneur Council (YEC) to launch Forbes Councils, invitation-only communities for world-class business professionals in a variety of industries. Members, who are hand-selected by each Council’s community team, receive personalized introductions to each other based on their specific needs and gain access to a wide range of business benefits and services, including best-in-class concierge teams, personalized connections, peer-to-peer learning, a business services marketplace, and the opportunity to share thought leadership content on Forbes.com. For more information about Forbes Real Estate Council, visit https://forbesrealestatecouncil.com/. To learn more about Forbes Councils, visit forbescouncils.com.

By: Jason Schmidt, CCIM

Senior Market Analyst

Stockworth Realty Group

Updated: October 10, 2016

 

The analyst in me, that side of my personality that loves pouring over mountains of data to find that glimmering and shiny key to unlock all of our investment potential really, and I mean REALLY, wants to write a lengthy dissertation tying in the trajectory of rates and associated values with economic policy overlaid with historic market performance and trends, all sprinkled with that bit of magic pixy dust outlining and defending my position on where we are in real estate markets and where I think they will go….but, I’m not going to do that…very simply I’m going to tell you why I feel that now is the time to both buy and sell.

Why buy?

Buyers are able to capitalize on low interest rates and mitigate risk against future downturns.

Why sell?

Sellers are in a position to maximize disposition value.

What are the Details?

Real estate is a funny thing. In a way it is like food. We need it. We cannot survive without it. As you read this, unless you are on a plane, you are somehow on or in real estate. Whether you are at home, in a classroom, at your office, in a warehouse, in a hospital or even driving, you are on real estate. As a species we have always intuitively understood its value. As the old mantra goes, “location, location, location.” To this very day, wars are fought over who controls various areas of the world and countries lay claim on pieces of dirt to which they feel they are entitled to ownership.

In our everyday context, for a large portion of the U.S. population, real estate is something used as merely a physical space to live or work; somewhere to raise our families, operate our business and/or house all of our stuff. If we start to scratch the surface and look at the make up of existing real estate types, according to the U.S. Energy Information Administration, of the combined +/- 120 million housing units and commercial buildings in the U.S., only +/-5% of that portfolio is represented by commercial buildings (excluding manufacturing, industrial or agricultural facilities), with the +/- 95% balance being residential units. However, according to the National Association of Realtors in its 2016 Investment and Vacation Home Buyers Survey, less than 20% of residential purchases in 2015 were for the purpose of investment.

Personally, I view real estate as an asset, something far more powerful than simply where we live or work. Think about it, there is a very simple and quantifiable reason behind why a bank will lend money to buy real estate and why it will not lend money to buy a stock. Real estate is a tangible and, historically, appreciating asset that serves as its own collateral, whereas a stock is a gamble against corporate performance, something that has little to no actual value. This is something on which we all have a basic grasp, but what many people do not consider is how one can use real estate as a major income and revenue stream-producing asset to amass a portfolio and acquire real and measurable wealth.

On the highest level, when we consider where to invest money, we will often ask three basic questions, in no particular order: 1) What is my return? 2) When will I receive my return? and 3) What is my risk? There are literally hundreds, if not thousands, of companies, industries, markets and indices to invest your money; and knowing where to start can be overwhelming.

In a basic sense, there are three tiers of risk to consider, all with corresponding returns, low risk, moderate risk and high risk:

1

Your returns, though, are matched with the potential for loss:

2

Considering historic performance, real estate, within the risk vs. return spectrum, has consistently presented itself in the middle of what we think of as the two extremes in today’s market, the stock market (high risk, high reward) and the bond market (low risk, low reward). Real estate though is something quite unique when compared to common investment alternatives…you hold actual physical ownership of the asset. If you lose $100 in the stock market, it’s gone. If you lose $100 on a real estate deal, but own the real estate, you still retain the asset to later monetize and recover your loss, even having potential to capitalize on future performance and profits.

Now, let’s take a quick look at the market today. We have all seen that values have been consistently climbing for the past several years. Though there are many more moving parts to this equation, simple supply and demand theory tells us that since our supply is low and demand is high, values are and will continue to rise, at least for a period of time. If you’re in the real estate industry, you’ve seen this first hand.

Not adjusting for inflation, national median home value (MHV) is near its highest peak, and in commercial real estate markets, to me, it feels like with each passing week cap rates are being driven lower and lower. That then begs the question, if values are so high and, by all appearances, it is a “seller’s market” from a value perspective, and if history repeats itself with a correction of these high values, what is different and compelling about real estate purchasing today as compared to previous peaks in the market?

Let’s look at 2005, arguably the peak of residential markets in the U.S. At the beginning of Q4 2005, MHV was +/-$244,000 and a 30-year FRM was trading at +/-6%. Today, MHV is +/-$293,000 (20% increase in value) and that same FRM rate is hovering around 3.4% (43% reduction in borrowing cost). For a residential property, a $250,000 mortgage at 2005 rate levels, equates to roughly $1,500 in monthly principal and interest payments. At today’s rate, that same static payment will provide you with a loan of almost $340,000; a $90,000 or 36% increase in your borrowing capacity; or, on a $250,000 purchase, a +/-$400 (26%) payment reduction.

$250,000 30 YR FRM COMPARISON:

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4

5

These historically low borrowing rates are driving both residential and commercial users and investors to capitalize on the use of leverage. According to a recent report from CoreLogic, over 70% of residential buyers (personal and investment use) financed their purchase, levels we have not seen since 2007; and when considering the declines and equity corrections following the 2008 recession, we are at a very interesting place in the market in comparison to the previous 2005-2006 residential market peak.

Post 2008, some investors and homeowners experienced portfolio value declines reaching or exceeding 30%, and although a devaluation of this magnitude would again be devastating, current leveraged purchasing power and the relative low cost of debt service provides a borrower a much greater hedge against a repeat of extreme value correction.

Blended average cap rates for single family and multi-family properties in the U.S. are currently in the 6.5%-7.5% range depending on your market, and, saving the discussion of return on equity and levered returns vs. non-levered returns, even factoring premium interest rates for investment property as opposed to private use, the return vs. cost of capital debate leans heavily in the direction of leverage. With borrowing cost for investment real estate sitting in the 4.5% range, considerable margin for profit after debt service remains; and considering a worst case scenario with large scale devaluation, rental markets generally perform well in those conditions, further bolstering the return position of the investor.

Comparing the cost of capital today as outlined above with that of 2005, an investor is able to sustain a much greater devaluation than in previous market cycles. We all know that as rates tick up, and they eventually will, value will commensurately decline. The conditions surrounding the decline in value and increase in overall borrowing rates are not entirely known and can be the topic of much longer writings, but today’s market conditions, despite high value levels, remain supportive of both selling and purchasing real estate.

Those looking to sell are in a position to either maximize value from a long-term hold or recapture potential losses sustained had they purchased in previous market peaks. Alternatively, investors are now in a position where refinancing and maximizing current leverage potential can allow for more favorable performance considering future long-term holding and declines in value.

In today’s market, when leverage is deployed, an equilibrium exists amongst the parties to a transaction. Sellers are maximizing their value potential and buyers are maximizing their leverage potential. In the history of real estate and finance, we have not ever seen this particular set of market conditions co-exist. Today is truly the day where everyone is able to grab a piece of the pie and carve a path for their future success in the market.

 

Download Full Report:

Why Buy Real Estate – October 2016

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