What The Interest Rate Means For the California Residential Rehab Housing Market

After months of speculation, tea leaf reading, oracle consulting, and guru poking, the Federal Reserve held their two-day meeting to decide what to do about historically low interest rates, and in the end, nothing changed. The Fed, under Chairwoman Janet Yellen, announced yesterday that they will not be raising the interest rates for the time being, citing global economic turmoil, though hinted that rates could be raised as early as March, or even December.

When people talk about the Fed, they tend to do so in a very abstract way, which is fitting given how removed it seems from daily life, even under a relative populist like Yellen. But what the Fed does, especially with interest rates, has a direct impact on nearly every sector of the economy, especially in the residential rehab and fix-and-flip markets. Understanding the impact that the Fed could have on your business will be crucial in making plans for your hard-money loan from Socotra.

What Are The Interest Rates?

“Federal interest rates” is a term that gets thrown around a lot, usually without explanation. Most people probably don’t know what the rates actually refer to. They are, simply, the interest rates the Federal Reserve sets for institutions like banks and credit unions who lend money to each other overnight. That is it. It sounds extremely esoteric and unimportant- who cares what banks do at night?

Of course, this doesn’t happen in a vacuum. When the banks have their rates raised, they in turn raise it on everything else, which affects mortgages, car loans, business loans, and everything else people turn to banks for. That can slow down lending, which means that whatever project the lending was needed for slows down, or even stops. From there, the auxiliary services around those projects slow down.

So why on earth would they ever raise interest rates? There are a few reasons. One is that rates are right now historically low. The Fed moved them as close to zero as possible following the market crash of 2007 and 2008. They did this to stimulate the economy and spur growth. It worked, too, as the housing market rebounded, and prices rose, getting people out from underwater. The housing market led the way for the rest of the recovery.

Now, though, people are worried that there is a bubble, and that markets which are overvalued will crash to earth unless the economy slows down a bit.  There is also the fear that low interest rates will eventually lead to runaway inflation, though that old economic standard has been tempered by the reality of the last seven years of low rates and zero inflation (which some think is a bad thing as well, actually).

The Fed didn’t act this time around for a few reasons. The biggest one is that the Chinese slowdown is having an impact on the global economy, and so Yellen and Co. think it is too soon and we are still in a fragile state. Other, probably deeper factors, are that so far the problems with low rates haven’t manifested, which is making some people question their theories. Additionally, the housing market, which just this year finally recovered all the valuation it had lost in the crash, has slowed down a bit, and the Fed might not want to artificially slow it down further.

What The Interest Rate Can Mean For You

If you are a California real estate professional who is looking for a fix-and-flip project, or residential rehab work, now is the time to act. The Fed is meeting again in December, when they could choose to raise rates depending on what happens between now and then. They will meet again in March. Rates will be raised at some point, likely in December, possibly in March. It would be surprising if it doesn’t happen at one of those times, but it is coming. Rates will not stay this low forever.

That means that if you need to get a loan from a bank, you have to do it now, while they are low. You don’t want to be sitting around in December with your only Christmas present being higher rates that can possibly preclude you from getting a loan on a rehab project.

Once you have your property, and have equity on it, you don’t have to worry about the banks. You can use that equity to get a hard-money loan from Socotra Capital, California’s leading lender. Any repair projects and rehab that need to get done can be financed this way, without having to worry about what bankers in Washington are thinking. Unlike banks, Socotra doesn’t just judge you by credit history- we know that you had to put a lot down to buy the property. We work with you based on your abilities and your plan.
So while the Fed deliberates, you can act. Rates rise and fall, and scholars parse Jesuitically through any minor statement by the Chairwoman, but some things never change: the skills you have to do the job right, and Socotra’s excitement at helping you do it.

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