Jamie Woodwell offers his hot take on what an inverted yield curve means for real estate investors.
Jamie Woodwell is Vice President in the Research and Economics group at the Mortgage Bankers Association (MBA), where he oversees MBA’s research and related activities covering the commercial and multifamily real estate markets.
Jamie and his work are regularly cited in the media, on Capitol Hill and in regulatory settings. He is a regular speaker at industry and corporate events; has appeared on CNBC, Bloomberg and in other popular and trade press; and testified before the Congressional Oversight Panel for TARP. Jamie initiated many of MBA’s research activities, and created MBA’s Peer Business Roundtables and the CREF Careers program.
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Jamie Woodwell – Despite the headlines, a lot of the basic economic data that’s been coming out in news has continued to be pretty favorable.
Adam Hooper – Hey listeners, welcome to the Real Crowd podcast. We’ve had a number of you reach out trying to make sense of what’s going on with this yield curve inversion and the state of the lending market. We decided to have Jamie Woodwell, Vice President of Research and Economics at the Mortgage Bankers Association come back on the show, and give us his hot take. We talked a little bit about what’s going on with the yield curve. They tease their Q2 results in the first half of 2019 results for the lending environment, talked about general economy and what that means for us as commercial real estate investors. So, hope you enjoy this short episode. As always, we love your comments, reviews. Send us a note to email@example.com. With that, let’s get to it. Well Jamie, thanks for joining us again today. We’re excited to get your take on a very hot topic right now which is this yield curve inversion, and what that might mean for commercial real estate investors. Thanks again for joining us today.
Jamie Woodwell – Thanks so much for having me. It’s certainly a hot topic, and a really interesting one too.
Adam Hooper – Before we get into that. Maybe… It’s been… Earlier this year, we spoke, and had you on another episode. Why don’t you give us just kind of a quick update, what’s been going on in the economy, what’s been going on in the markets, kind of set the stage, and then we’ll get into the topic du jour.
Jamie Woodwell – Sounds good. It’s sort of interesting. Despite the headlines, a lot of the basic economic data that’s been coming out in news has continued to be pretty favorable, that the economy has continued to grow, unemployment remains low, the jobs market is strong, the consumer continues to consume. A lot of the basics of the US economy have really been sort of plugging along. The news about the yield curve inversion fits in with some of the “what’s over the horizon” questions that are starting to come up. We have started to see, domestically, some weakness in manufacturing. But again, that’s in the face of continued consumer consumption. But more of the economic numbers that have been coming in that maybe have people scratching their heads, or… Not quite so certain about the future. A lot of that’s been more overseas. If you look at some of the numbers coming out of Europe, and particularly around manufacturing in, say, Germany, or even in Asia. The global economy is looking like it’s slowing down at a non-insignificant clip.
Adam Hooper – When you start to see some of these early indicators… You mentioned unemployment’s still relatively low, jobs are pretty strong, maybe manufacturing’s taking a little bit of a dip there. When you see some of these indicators, are there different factors that you’re looking at? Are there different metrics that you start to track, or is it pretty much following those kind of core markers, and just looking at them, maybe, for some of those early signs?
Jamie Woodwell – Great question. It’s sort of a question of if one is focused on a particular sector, then the are absolutely individual signs that one can look at for that sector. Looking at commercial real estate, if you’re focused on retail, then that consumer spending is, without a doubt, the number one thing to keep an eye on. But in terms of the economy as a whole, I sometimes think of it as a bit of a school of fish, and you sort of… You see a school of fish, and they tend to be going in the same direction. But then you look closely, and you might have some going the direct opposite way of the bulk of the school there. That’s what we’re seeing right now, is that there are some signs that maybe that whole school could start to turn at some point, and investors and anyone else watching the economy are trying to figure out if some of those early fish turns are a sign of the school turning, or just of some individual fish turning around.
Adam Hooper – And are there any bigger fish to turn? Or are they all about equally weighted fish?
Jamie Woodwell – That, again, depends on where one’s focus is. And for us in the US, the consumer is the big fish. We’ll keep working this analogy, though it might get painful here in a minute. The consumer is such an important part of the US economy, and actually, the global economy, that keeping an eye on the sentiment of the consumer and whether they are frankly starting to follow the headlines and hunker down a little bit is super important. There, one might look at some of the consumer sentiment surveys for Michigan and elsewhere, which show a bit of a pullback in consumer sentiment, but still relatively strong. Again, that would be probably number one. Working down a bit, I think, you do see some of the spillover from the created discussions and concerns, and what’s going on internationally when you do look at some of that manufacturing pullback. They all can be sort of linked together, but right now, I’d say the consumer is the big fish we’re talking about.
Adam Hooper – When you look at these numbers, is it more… Are you looking at it as an absolute or static number, or you’re looking more at the trend? Does it vary again by a factor that you’re looking at?
Jamie Woodwell – It can depend on what question one is asking. A lot of the conversation right now is around the trend, and the turning of the trend. Even when we talk about just the GDP numbers, we’re talking less about decline in GDP. Although, people are using the recession, the R word, out there. It’s more about a slow down, and the fact that if we have a slow down in growth, that can have an impact. And mind you, we’ve had an incredible run of growth for a long time, and strong growth. But expectations are that with the sort of fading of the impact of the tax cuts from a year ago, and some other factors, that we are going to be seeing slower GDP growth. That starts to be… Maybe not a drag, but not so much of a push on lots of other elements of the economy.
Adam Hooper – Okay. One of the ones, again, kind of the main topic for today is this yield curve inversion. Most of our listeners have probably heard some to do about it. Why don’t you paint, just, a very high-level picture? What does that mean, just from a technical perspective? And then we can talk a little bit about what it’s meant historically, and maybe what we’re looking at this time.
Jamie Woodwell – Sure. The concept of the yield curve is one of those things that sort of enters the popular lexicon, despite the fact that it probably has direct relevance to very few people.
Adam Hooper – Right.
Jamie Woodwell – The concept is that, in general, if you think about interest rates, if one is borrowing shorter term, that tends to have a lower rate than if one is borrowing longer term. If you think about going out and getting a short-term adjustable rate mortgage, that rate would tend to be lower than if you go out and take out a long-term fixed rate mortgage. Part of the reason of that is that uncertainty in the longer term, about what might happen. Normally, one expects the yield curve… If you draw rates from left to right from shorter to longer, you expect that curve to slope up and to the right, as rates would increase over the longer term. The inverted yield curve is when you see… At certain parts of that curve, you actually see shorter term rates higher than longer term rates. We’re at a point right now, where the two year and the 10 year, which are sort of ones that a lot of people have focused on for this inversion. The two year and the 10 year are sort of dancing with each other, and right now, from one hour to the next, or one day to the next, the two year might be just a smidge above the 10 year, or vice versa.
Adam Hooper – What that indicates, then, is that the… From the lender’s perspective, from the banking’s perspective, the short term is more risk than the long term. There’s more uncertainty in the short term than there is in the long term.
Jamie Woodwell – It can mean a whole lot of things, and that’s one of the elements that has economists debating right now how much import to place on the inversion of the yield curve. Lots of debates about what it’s showing, why it’s showing, the degree to which it’s sort of correlated with upcoming recession, or maybe causal of upcoming recession, and just, sort of, how those relationships exist. It’s something where we’ve seen it. We’ve seen the inversions happen, and then anywhere from a short period to a long period later, we have a recession. That makes people focus on it. But there’s still a lot of questions about why, what the transmission mechanism would be, all that sort of a thing.
Adam Hooper – And so, that seems to be… Again, a lot of the coverage about this is that, again, ringing the alarm of, “Oh my gosh, yield curve inversion, therefore, a recession.” It seems like, historically, there’s been a pretty… Again, whether that’s correlated or causally related is to be determined. But seems like it’s been a pretty strong pattern, historically, right?
Jamie Woodwell – Yes, it’s exactly right. So, we’ve seldom seen an inversion without… Again, at some period, it could be two years, being followed by a recession. And I think it fits in with… I’m sure, on your program and others, the question for a couple of years now has been, what inning are we in of the expansion, or the real estate cycle, or whatnot? So, having an inversion sort of fits in with that question that people have been asking of, “Boy, this has been going on for a long time. How much longer can it go?”
Adam Hooper – And so, to me, as an interested real estate investor, if I hear I can get longer term lower rate, that feels better, doesn’t it?
Jamie Woodwell – I think it can. It might depend a little bit on what you’re planning to do with that loan. If you’re looking at a transitional property, or a shorter-term hold period, then you’d be focused more on that shorter end of the curve, and you might say, “Why have my rates gone up?” But if you’re looking at a longer-term hold, and you’re seeing a 10 year treasury at a one six, and certainly, if you’re considering, “Should I get adjustable rate or fixed rate?” There’s a lot of incentive, it seems, today to try and lock in that fixed rate while it’s down at this low level.
Adam Hooper – Does this have anything to do with the… When the fed cut rates back in… Maybe it was July? Does that have any relation to this, or is that separate?
Jamie Woodwell – When you look at what the fed is doing with the cutting rates, part of what they’re cutting of the rates were a “insurance” cutting of the rates. Thinking that maybe cutting rates didn’t have a whole lot of cost to it at that point, but might to the degree there’s concern about where the economy is, might help give another little booster shot to the economy. We saw that, which would fit in with the story that maybe the inversion of the yield curve is a bit of a psychological read on where people are in terms of coming growth, and maybe some concerns about it. I think, also, the flip side of that is, to the degree the fed has some control over the short end of the curve. If they lower rates on the short end, that can maybe exert some pressure on that end of the curve, and…
Adam Hooper – Pull it more back in line.
Jamie Woodwell – Steepen it up a little bit.
Adam Hooper – MBA put out an article, and we’ll have a link here in the show notes. In there, you commented that banks around the world are lowering rates more quickly than we are in the U.S., and therefore, the dollar is gaining relative strength. What does that mean for our industry and the real estate investment space? How does that global dynamic play out here nationally?
Jamie Woodwell – Right. It’s really interesting when you start getting into all the different interplays internationally with the rate differences, with the… Dollar versus other currencies, lots of different dynamics at play. I think, at the end of the day, the number one driver for commercial real estate in the U.S. is that commercial real estate remains a pretty liquid dollar denominated asset, and therefore, is sought after for that stability by an awful lot of investors. You think about what the alternatives are for a dollar, and if particularly in Germany, Japan, one can invest in a government security but have to pay to do that, versus what a yield even though a cap rate would be viewed. It’s pretty low today, in historical terms, in the U.S.. If you compare that to some of the other options out there for investors to put their money, it’s not looking so low anymore.
Adam Hooper – Well, and let’s pick that apart, right? You said, again, Japan, Germany, the two you mentioned there, we’re facing a negative bond environment, right?
Jamie Woodwell – Yes.
Adam Hooper – You have to pay to buy those bonds, essentially, your negative interest rate on those.
Jamie Woodwell – Yeah, exactly right. That’s one of the things that, as you mentioned, is helping buoy the dollar, is if you’re an international investor, and that’s your option, then you look at the United States, where there’s actually still a positive yield on either treasuries, or other investments. That looks pretty good. You do have to then think through what are the implications on the currency exchange there. And right now, the dollar is pretty strong, relative to other currencies, so on the initial investment, that might look like a bit of a headwind for a foreign investor. That being said, the income they’d be getting back is in dollars as well, and investments. It has a little bit to do with one’s expectations for the dollar versus other currencies going forward, and where that might head, as well.
Adam Hooper – How have you seen lenders in the commercial real estate space react to everything that’s been going on lately? Whether it’s the volatility in the public equity markets, whether it’s… This yield curve issue that we’re talking about, the fed cutting rates. Has the lending world reacted to that yet? Has some of this been priced in, or… What does that environment look like right now?
Jamie Woodwell – It’s perfect timing. This morning, actually, we came out with our numbers on the second quarter, and borrowing and lending in Q2, and those showed that for the first half of the year, borrowing and lending on commercial real estate in the U.S. is up 11 percent compared to last year, and last year was a record year, with about 574 billion of commercial multi-family mortgage origination. The borrowing lending market remains robust. Life companies in the GSEs. Fannie Mae and Freddie Mac, they’re running at record paces through the first half of the year in terms of lending activity. If you look at property types, multi-family and industrial are also both running at record paces this year in terms of lending for those property types. Those markets remain very active. When we see the volatility, as we saw recently with the 10 year cropping, there’s a bit of a period of absorption of that, both on the borrowing side and the lending side, folks trying to figure out what that means, and what the new levels are. We’ve been working through that a bit, and rediscovering what the market will bear on both of those. Now, I do think you’re also seeing a lot of borrowers coming in and saying, “This is a great time to lock something in. So, let me try and do so.”
Adam Hooper – For listeners out there that, again, you’re being bombarded with news, whether it’s good or bad, or- Conflicting at times, any strategies for interested commercial real estate investors on how to cut through to some of the data underneath, or how to interpret some of these things with various sized grains of salt?
Jamie Woodwell – To me, there are so many particulars about different property types, about different capital sources, about different strategies in the market, value-add versus more of a core, and there are a ton of really smart, really informed people out there that know the business, can help investors or others work through different options, and to your point, what to pay attention to, and what not to. This is a time where expertise is really valued. That would probably be number one, would be to make sure that you’re connected to… To the professionals in the space, who are focused on particular areas, and know them inside out. The other is that there is just a ton of great information out there. We track the markets, and try and make that available to MBA, and members, and others. If you go to mba.org/crefresearch, you can take a look at some of our reports, and we’re just one of many out there that are tracking the market. So, I’d say it’s a great time to be informed, and there are tons of great ways to be informed.
Adam Hooper – Perfect. Well, you mentioned the website there, and we’ll put links here in the show notes. Any other way that listeners can keep up to date with what’s going on in your world, or the latest coming out of the MBA?
Jamie Woodwell – Absolutely. Two things. One, just go to mba.org, and it’s got a list of our events, our education, our research, all of that. And then, we started something a little while ago, a blog that lets us put out information that might not make it into one of our reports, or that strikes us as interesting. And that, if you go to mba.org/crefintel, C-R-E-F-I-N-T-E-L, you can take a look at that, and always happy to have folks reach out to me directly, too.
Adam Hooper – Perfect. Well, that wraps up our hot take with Jamie Woodwell, at the Mortgage Bankers Association. We hope you appreciate this more short-form podcast. Let us know if you like it. When we have interesting articles come out, or hot topics, we can do these quick episodes, and if it’s something that you like to hear, let us know. Send us a note to firstname.lastname@example.org. Go ahead and like, and review, and rate us on iTunes, Google Play, SoundCloud, wherever you hear the podcast. Thanks for listening, and with that, we’ll catch you on the next one.