The T-Note and the 60-year rate cycle

Recently, I’ve been privileged to read the Realty Almanac put out by Realty Publications and First Tuesdays. Who is First Tuesdays and why the cryptic name? They are a California real estate trend resource providing news and data analysis since 1979. First Tuesdays is a holdover term referencing the foreclosure dates and times in Texas. You can read about First Tuesdays here.

The Realty Almanac is a data driven analysis of the California real estate market. While the nearly 400 pages of forecasting had on occasion put me to sleep, I ultimately dug through it all. I discovered a surprising trove of invaluable information specific to investors like myself who focus on cash flow and the spread between cap rates and interest rates. This report should be extremely helpful in making decisions about buying and selling in today’s Bay Area real estate market.

Let’s go back to 1980’s, the dawn of a great musical decade and a peak in the average 10-year Treasure Note (T-Note). Rates topped 18% while the Fed tried to tame inflation. That unmistakable 1980’s rate peak was preceded by a low in 1949 when the yield bottomed at 2.5%. This rate crevasse began the 60 year interest rate cycle (also known as the Kondratieff wave) and etched the term it into our economic vocabulary. Incidentally, the Russian scientist who coined this phenomena was executed for being a capitalist! I’m sure Trump would have pardoned him.

Most recently T-Note bottomed in earnest in 2012 at 1.5%, marking the approximate end of the 60 year cycle and the beginning of the next 30 years of increases. But don’t be scared, Halloween is over. It should be noted that during last 30 year 1/2 cycle of rising rates, from 1949-1980, investors experiences an increase in value of their assets, robust job growth and housing construction booms. I’ve always been taught that real estate appreciates at 3x inflation. So why are apartment building investors in the East Bay so afraid of rising interest rates?

It is likely that we will look back on mid-2017 as the beginning of a slow march of increasing interest rates, and  yes possibly continuing for 30 years. The rise will inevitably suppress apartment building values while at the same time a robust job market, low inventory and new millennials entering the housing market may provide mini run-ups.

One of the great things about owning income producing real instate is that it fights inflation. So in a sense we benefit in times of rising and falling interest rates, as long as we adjust our expectations and shift strategies. Real estate is comparatively forgiving, and provided a long enough time horizon, almost always appreciates. Although the quick flips and momentum investing of the past 5-8 years might be gone for now, the long term outlook for multi-family properties is the Bay Area is exceedingly bright. Don’t let the rate increase scare you out of your next great long term investment opportunity, owning income producing property in the Bay Area.

About BayApartmentBroker

Nick Myerhoff is a Bay Area apartment market specialist and property manager. He owns and operates his own multi-family portfolio and assists clients and prospects with their purchases and exchanges of commercial real estate in the San Francisco Bay Area.
This entry was posted in Investing in Multi-Family, Market Conditions and tagged , , , . Bookmark the permalink.

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