The Problems Are the Path: Interest Rates and Future Targets

The FED target for interest rates in two years is 3-3.25%.  There was some upset investors after the last FED meeting that took the Stock Averages down precipitously.  The expectations were there would be a series of interest rates cuts in 2025, that the FED determined would not occur.  Well, what does it matter?  Think about you are traveling  from your home to Lake Tahoe, or from Sacramento to Menlo Park or Menlo Park to Sacramento.  The trip from the Bay Area or visa versa will take 3 hours, give or take 15 minutes.  You can go on via Hwy 5, or 80, or 680, or 580 or some combination of all of them.  But when it comes to arrival you will be there at about the same time.  So why is there the big hullabaloo over how many rate cuts we get in 2025.  You could start out from Sacramento get onto 5 and then there is an accident.  Or you could do the same on 80, another tie up.  Take the cut off onto 680 from 80 and another tie up.  You could stay on 80 all the way to the Bay Bridge and find another jam.   Or, you are lucky and no jams and smooth traveling any you are there in less than 3 hours.  The result is whichever route you take you will arrive at about the same time another driver takes with the different route.  So, why the upset of 2 or 3 cuts in 2025 or one?  It only means that there will be other cuts in 2026 to get to the 3-3.25 rate when we are at the 4.25-4.5% rate now!

One thing I do see is the optimism for the Silicon Valley is high.  Home Prices are rising!  People are returning back to work in offices.  Commercial Properties are picking up.  Job numbers are improving in Silicon Valley.  Sooner or later prices will increase in San Francisco and prices of the communities that once drew work from home works will drop.  It has been 4 years since the Pandemic drove people out of the Bay Area.  I watch home prices in the Sacramento Valley and eastern Sierra Hills communities.  New projects are dominant.  From Elk Grove to El Dorado Hills to Placerville land is cheap and available.  Builders are covering the area.  The problem with the new developments is the cost of utilities and the availability of Doctors.  More people move in the practice is full for the senior medical physician or dentist and new ones are hard to find unless you are willing to drive a distance that becomes longer as more people move.

Sooner or later the return occurs.  We are seeing that now.  the new email to the "work from home" employee is: come to work or you are fired! 

Build and they will come has always been a well observed axiom in real estate.  Except how long will it take for them to come?  Then once you come how long will it take to acclimate and will you stay or return from whence you came?

The great investment opportunity I see is that the Commercial projects are centering around a new level...7% Cap Rates.  The FED say 3-3.25% in two years from the present 4.45%-4.5% Cap Rates will come down.  That makes the properties bought at 7% appreciate solely from the change in Cap Rates.  A Layup in my view for investors in Commercial Properties!

Happy New Year, just some food for thought as I observe the coming of 2025.

As before, call or write for any question you may have and think of me of your "in the know real estate professional".

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