Newtons 3rd Law & Real Estate

But seriously. . .

Every action creates and equal and opposite reaction. This is one of the most basic laws of physics, and if you need a simple visual example then check the gif below. . . .

In an uncommon twist of physical laws, Newtons 3rd also applies equally to real estate financing, almost. For every action effecting interest rates there is a reaction, but too bad for us not always equal to the original action.

In our world of commercial real estate we see this in full effect. Interest rates not only affect loan rates, but possibly buying and sending habits that affect our tenants stores, and retail locations, and even medical when patents decide to not get medical help due to financial hardship, or postpone elective surgery until CC rates drop.

The real kicker is that the basic laws of the FED’s actions aren’t quite so precise as the mathematics used by Newton, and other great minds like Einstein or Hawking. Principles the FED uses are base on traditional financial ideals that were written in the 1800’s, and early 1900’s and have lost much of their meaning due to changes in modern society.

The reality is that the FED’s math is more like a Rube Goldberg machine. if you need to see a perfect example check the info graphic below for a mind bending eyes-wide-shut look into monetary policy at the federal level.

Recall that in December 2015 we got the surprise of the FED raising short-term interest rates slightly from record lows of zero – to a new high of between 0.25% and 0.50% – the slightest of nudges above the absurdity of zero.

Remember that way back in the mid-2000’s, when the Fed raised short term rates at 17 straight meetings hoping to cool the forming real estate bubble –  and mortgage rates barely budged higher and we ultimately ended up in a real estate bubble of epic proportions thanks to the FED’s pointless actions.

This past week there was another unexpected surprise to big chief economist all across the FEB, the average interest rate on a 30-year fixed mortgage went the other way, opposite of the short term interest rates. The FED expected by raising short-term rates it would raise long term rates and cool a potentially forming commercial real estate bubble.

Instead. the banks dipped the 30-year rate to 3.96% percent this week (from 3.97 percent last week) just the slightest of percentages causing home mortgage applications to soar.

The simple fact is our current economic policy is based on principles about as old as Newton, but unfortunately as convoluted and imprecise as Rube Goldberg’s  vision of mechanics. Our current stock market conditions are volatile and becoming more reactionary to even the slightest changes in consumer behavior or technological advances in energy production.

Our advice? Buy and hold. Return to common sense basics. Stop thinking short-term and go for the long-term investments of commercial real estate close to transportation, shorten the last-mile between your tenants and their clients and pick a smart property manager to keep your investment sound for the long ride.