Real estate mogul Patrick Carroll, whose Atlanta-based company manages $7.4 billion in assets, had a thing or two to say about Wednesday’s rate hike by the Federal Reserve. And it all boils down to what feels akin to another punch in the gut for his sector.
The Fed’s rate hike, the second quarter-of-a-percentage-point increase in a row as part of a yearlong campaign of hikes, “is like kicking someone when they’re already down,” said the founder and chief executive of CARROLL, which has a portfolio of more than 29,000 residential and commercial properties across eight states.
“The more the Fed continues to push rates, the more the real-estate market is going to feel pain across the board,” he said in an email to MarketWatch after the Fed lifted its main interest-rate target to between 4.75% and 5%, the highest level in more than 15 years.
Though Fed officials signaled just one more rate hike would likely be appropriate this year, investors came away disappointed after Powell told reporters that no rate cuts were currently in the central bank’s base-case outlook. In addition, market sentiment may have been dented by Treasury Secretary Janet Yellen’s separate statement that her agency isn’t looking to expand FDIC deposit insurance.
Stock Market Today: Did Yellen upstage Powell? Stock market slides after Treasury secretary says not looking at expanding deposit insurance
U.S. stocks
DJIA,
SPX,
COMP,
finished lower on Wednesday, with Dow industrials down by 530.49 points as bank shares also dropped. Meanwhile, most Treasury yields plummeted, with the 2-year rate
TMUBMUSD02Y,
falling below 4% to one of the lowest levels of the year.
The Real Estate Select Sector SPDR exchange-traded fund
XLRE,
fell 3.7% Wednesday and is down 5.7% so far in 2023, compared with a 2.5% year-to-date gain for the S&P 500-tracking SPR S&P 500 ETF Trust
SPY,
Recent turmoil in the banking sector is putting a spotlight on commercial real estate, which Powell addressed in his remarks to reporters on Wednesday. The banking woes are casting a cloud over a market, in which trillions of dollars in debt is held by smaller banks.
Read: Bank jitters put spotlight on commercial real estate. 3 charts pinpoint the potential trouble spots.
“The real-estate market is built off transactions and when that stops, not only do real-estate companies get hurt but so do brokers, lenders, etc.,” Carroll said in his email. Every 25-basis-point or 50-basis-point rate increase “lowers valuations such as company PE valuations, real estate valuations and even growth stocks. It is a ripple effect, and I wouldn’t be surprised if we start seeing more layoffs across the industry due to transactions slowing down. This will continue to hurt the single-family housing market, as well.”
Read the full article here