Eric Freedman, the Chief Investment Officer for US Bank, presented a framework to understand real estate investment in the context of fluctuating interest rates. Freedman articulated that the primary driver of property prices is interest rates, which have risen at an unprecedented pace, likened to a steep ‘double Black Diamond’ ski slope. Despite this rapid increase, he anticipates a rebound effect, projecting that a recession will be avoided, with the crux of the issue resting on where interest rates will stabilize. 

In his analysis, Freedman pointed out that, to date, consumers in the United States have not felt the full impact of rising interest rates, unlike their counterparts in the UK and Continental Europe. Nevertheless, the rise has affected auto loans and mortgage rates, indicating a shift from a tightening cycle to one of easing, though this cycle is expected to be prolonged. He referenced a Wall Street Journal report suggesting the Federal Reserve is reluctant to cut rates despite GDP growth exceeding their target, hinting at the possibility of interest rates settling between 2.5-3%. 

Freedman also addressed the latest Consumer Price Index (CPI) readings, which have been critiqued for their seasonality and notes the cuts in multifamily rents in San Diego and contrasting office space trends in cities like Raleigh, Austin, and Houston. The discussion then shifted to wage growth, emphasizing the difficulty in finding affordable homes and the inflation of entry-level wages, which has not translated into consumer savings and fuels continued spending. 

Further, Freedman elaborated on the ‘clean room’ state of the US economy, highlighting strong and balanced growth, especially in sectors like tourism that are catching up. He stresses the importance of being mentally flexible about future economic conditions because he does not believe rates will drop back down to 1.5%.  

The talk also covered money supply trends, particularly the pronounced increase during COVID-19 and the expected normalization which will add “clutter” to the clean room of the economy. The consumer spending landscape shows both positive trends (green) and slowing trends (red), but ultimately is trending red with the use of credit and interest costs being significant factors.  

In the Q&A, Freedman predicted that the Fed Funds rate will settle around 2.75% a little higher than the Fed has predicted, or another 1.5%+ for the 10-year treasury, with the front end of the curve remaining elevated for another year and a half. Expect the back end to be a gradual decline. He discussed the possible impact of this year’s election, particularly immigration policies, and if we switch from isolationist policies to protectionist measures on the economy, including oil prices and homebuilding activities. He concludes by addressing questions about credit card debt, emphasizing the importance of financial planning and the risks associated with longevity, and advising a balanced approach to the ‘YOLO’ (You Only Live Once) mentality.