Walker Webcast: The Economy, The Fed and The Real Estate Impact

Article originally posted on HERE on May 17, 2023

Q1 2023 has had its share of economic-related news, from bank failures to continued increases in the Effective Federal Fund Rates (EFFR). During the May 10, 2023 edition of the Walker Webcast, Walker & Dunlop Chairman and CEO Willy Walker hosted a panel of experts who discussed the roller-coaster economic situation – and the impact on real estate.

A piece of good news? Issues aren’t as dire as what’s being reported in the media. Aaron Appel, Walker & Dunlop’s Senior Managing Director, said that yes, banks have been under the gun. But when it comes to closures, “there’s really no contagion effect,” he said. In fact, the markets do have liquidity. “There are so many different alternative lenders in the market today versus what was there 15 years ago.” Certainly, many of the borrowers might not like the available options, he said. But there is leverage available for good projects and assets.

On the multifamily side, the forced selling that had been feared at the start of 2023 hasn’t materialized, according to Kris Mikkelsen. In fact, “the conversations we’re having with sellers is that if you have the ability to long with an asset and rid through this period of instability, then you should absolutely do that,” said Mikkelsen, Walter & Dunlop’s Executive Vice President, Investment Sales.

And single-family builders are busy, racking up market-share gains in the new-home market. Relocations also have a lot to do with it. Ivy Zelman, CEO of Zelman & Associates, pointed out that homebuyers are starting to step back into the market. But the reason for transaction slowdowns isn’t the demand side, but rather a lack of supply. Adding to the issue is relocations. Many homeowners in higher-expense regions are selling their homes and moving to more affordable cities. Said Zelman: “There’s a bit of musical chairs going on.”

But despite the expectation that EFFRs might decline by year-end 2023, the panelists pointed out that  not everything is roses. Zelman said companies are pulling back on capital expenditures and expansions, creating almost a self-fulfilling prophesy of a troubled economy. Mikkelsen agreed with this assessment especially in the area of multifamily. “We can get through deceleration of fundamentals,” he said. “But once you start to see negative trends showing up and manifesting itself in the rent roll, it becomes harder for Aaron to go finance it, or for us to go sell it at a price that a seller will be pleased with.”

Certainly, EFFR cuts at the back end of the year might seem to be a good thing, as it could generate a more friendly rate environment. “But what that mean for the underpinnings of the economy and asset fundamentals is a delicate balance,” Mikkelsen said.

Furthermore, the economy still has a great deal of life. Consumers are still spending their money. Just not on hard goods. “People want experiences,” Appel pointed out. “That still costs a tremendous amount of money.”

Added to this was a better-than-anticipated job report. When it comes to unemployment, “the Fed is fighting yesterday’s battle,” Appel said. The baby boomer generation is moving into retirement, a trend accelerated by COVID-19. That population hasn’t yet been replaced. “We just do not have enough skilled laborers in the market,” Appel added. Because of the current scenario, “it’s going to be almost impossible for (the Fed) to crack unemployment without dangerously harming the economy in the long run,” he said.

When Walker asked where the Dow Jones Industrial Average and Treasury bills would by Dec. 31, 2023, Appel predicted that the Treasury would be between 3.00% and 3.15%, with the Dow at 30,000. Mikkelsen said he anticipates a drop of up to 10% in the S&P 500, with T-bills between 3.25 and 3.35%.

But Zelman had a different take. “I think it’s going to be more of a slow bleed,” she commented. She confessed that she was baffled by the equity markets’ almost giddy hopefulness about a potential EFFR cut at the back end of 2023. The idea that there might be a rate cut is misplaced. The reality? Said Zelman: “Being more pragmatic, we just might be slogging along for a while.”