BiggerPockets Real Estate Podcast - BiggerNews: The Fed Is Finally Ready to Cut Rates, but How Low Will They Go? w/WSJ’s Nick Timiraos

Episode Date: September 13, 2024

The next Fed meeting is crucial for real estate investors and the economy. So, what will the Fed do? Are we getting the 0.25% rate cut that many experts predict, or will a 0.50% rate cut come due to further weakening of the economy? The job market is already struggling, and the Fed needs to make a move—fast. The question is: will whatever they do next be enough to stop us from falling into a high-unemployment economy? We’re getting into it in this BiggerNews! We brought in the chief economics correspondent for The Wall Street Journal, Nick Timiraos, to give us the latest update on the Fed, what could happen in September’s Fed meeting, and what’s in store for rate cuts. Nick agrees that this meeting is more crucial than most and that the decisions made could significantly impact the economy and real estate. How many rate cuts will we get this year? How big will the rate cuts be? And who’s deciding these rate-cut decisions in the first place? Nick knows the Fed better than almost anyone and shares exactly what they’re thinking and where they believe rates are headed in today’s episode. In This Episode We Cover: 2024 Fed rate cuts and how big the first one could be at the next Fed meeting  Why rising unemployment is putting even more pressure on the Fed to make a move Whether or not home prices could shoot back up once mortgage rates fall How many rate cuts is the Fed expecting to make in 2024 (more than we thought before!) The “signal” that the Fed is sending with their decision in the next Fed meeting  And So Much More! Links from the Show Invest in Turnkey Properties with REI Nation Join BiggerPockets for FREE Let Us Know What You Thought of the Show! Try Baselane, the One Platform for All Your Property Banking & Finances Thrive in Any Market with “Recession-Proof Real Estate Investing” Find Investor-Friendly Lenders See Dave at BPCON2024 in Cancun! The Fed Is Planning to Cut Rates Soon. Here’s How Investors Should Prepare Learn More from Nick Connect with Dave (00:00) Intro (02:10) The Fed Explained (03:59) September's Crucial Fed Meeting (07:05) Who Decides the Rates? (13:23) 0.25% or 0.50% Rate Cut? (17:27) Risks to Real Estate (23:30) Unemployment is Rising (29:33) Rate Cut Predictions Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-1017 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

We're at a key inflection point with the economy right now as we enter the fall of 2024. Inflation is starting to come down, but unemployment is rising at the same point. And as a result, all eyes are on the Federal Reserve and whether they're going to actually start to cut interest rates. And this topic about what the Fed is going to do is really important for real estate investors. And as such, we have a great guest, Wall Street Journal, Chief Economics Corresponding, respondent Nick Timmerhouse joining us today to help us understand what is going on with the Fed. And I'm excited for this because Nick is honestly one of the best in the business at making sense of the Fed behavior and also at interpreting what it all means for regular people and

for real estate investors like us. Hey, everyone. Happy Friday. Dave here. We've got a great bigger news show for you today. We're going to be previewing next week's Fed meeting, which, begin on Tuesday, September 17th. And at these upcoming meetings, the Fed is widely expected to announce a cut to the federal funds rate. And that is pretty well known. But what's not known

is how much they're going to cut rates or how fast they're going to do it at the next meeting into next year and well into the future. And we don't know what their strategy is to successfully avoid a recession. So today we're going to get into all that with Nick. I'm going to ask him why this particular Fed meeting just feels really important compared to all the other ones that we have during the course of the year. We're going to talk about different policies and some of the politics that go into the different factions within the Fed. And of course, we're going to talk about what this all means for the housing market. I'm super excited about this conversation because real estate is one of the most interest rate sensitive industries. Maybe it is the most

interest rate sensitive industry in the entire economy. And so as investors and people who operate in the space, we really do need to be paying attention to what's going on at the Federal Reserve. But before we jump in, I just want to give a quick overview of what the Fed is and define a couple of terms if you're not familiar with them. So the Fed is basically a short name for the Federal Reserve, and their job is to set monetary policy for the United States. That's basically what interest rates are going to be. And their job as assigned by Congress is not, hey, just, you know, make up interest rates and move them up and down. It's this balancing act between what's known as price stability, which is basically what normal people call inflation, and maximizing employment, what normal people

call the labor market. And so the Fed is basically always trying to tweak their policy to make sure that we don't have a lot of inflation, but at the same time, the economy is growing. And obviously this has implications for the whole country, which is why people like me look at this so much and why I'm encouraging all of you to listen to this episode and what Nick has to say because I think you'll learn a lot about what's coming down the pipe and will help you make decisions about your portfolio well into the future. Last caveat here is that the Fed, while they don't set mortgage rates directly, they actually control something called the federal funds rate, which indirectly is, has implications for the mortgage rates and for the housing market as a whole. So that's why we pay attention to this. Hey, guys, one more disclaimer. This is Dave jumping in after we edited this episode.

We've noticed that the audio from Nick's feed was not very good. We apologize for that. But the content and Nick's opinions and information is so good that we're going to air it anyway. It's not unlistenable by any means, but we apologize if there's a lower audio quality than usual. Okay. Let's bring on Nick. Nick, welcome to the Bigger Pockets podcast. Thank you for being here.

Thanks for having me. Now, you've been on our sister show on the market a couple times. Now we appreciate that. But for those of our audience who don't know you, could you give us a brief bio? Yeah, sure. I've been a reporter at the Wall Street Journal for the last 18 years. I spent about five years covered in housing, housing finance. I've spent the last seven years covered in Federal Reserve, interest rates, and economic

policy. And I know for people like you and frankly, people like me, we look at every single one of the Fed meetings, eight of them every single year. But the one that's coming up in September seems to be of particular importance. Can you explain to us why? Well, this is the meeting where the Fed has come and cut interest rates. And people have been waiting for a long time for the Fed to cut interest rates. So, you know, that makes it a big enough deal. There's an extra bit of drama because it is.

exactly clear how much the Fed is going to cut interest rates. The market is expecting a quarter percentage coin interest rate cut, which is the normal increment. But, you know, some officials sounded like they weren't ready to completely close the door to a larger half point rate cut. So there's maybe a little bit of suspense around that question. Normally, when we go into these types of meetings, we don't really know exactly what the Fed's going to do. They do sometimes signal it. But you said that this upcoming meeting, it sounds essentially like a sure thing that rates will be cut at least a little bit. Why are you so certain about that? Well, there are two reasons.

One is that inflation is back coming down the way it was last year, we're second half in the year. And so the Fed needs to see inflation, you know, moving down to its target. It targets 2% inflation using their, their, their, preferred gauge inflation is still a little bit above 2%, but it's in a much better neighborhood than it was last year before. The second reason is the later market. You know, the labor market looks solid for the first few months of this year. It looks like it's slowed down now. And the question is, you know, is this slowed down to normal or is it going to slow past normal to something weak? If I could give a third reason, I mean, the third reason the Fed is going to

cut the straight to annexating the Fed chair told us in his last last. speech, the time has come to cut interest rates. So he took any kind of suspense out of the will they or will they cut question. But the reason he did that is because the inflation picture and the later market picture has developed along those slides. Yeah, normally going into these types of meetings, analysts are trying to, and journalists like yourself are trying to read the tea leaves and guess and prognosticate about what's going to happen. But they've been pretty candid about the fact that they're going to be cutting interest rates. So I obviously agree that this is almost a certainty here. I'm curious, Nick, if you could just give us some background on how these

decisions are made, because I think a lot of America has gotten familiar with Jerome Powell, the chairman of the Federal Reserve over the last couple years. Maybe not everyone, but he's become, I think, more of a known figure than previous Fed chairs. But is he making these decisions himself, or can you tell us how the Federal Reserve determines what interest rates should be and what direction they're moving them? So, you know, one answer to your question is that he is making a decision. The other answer is that there's a committee of people who have to come up with setting monetary policy in the country. And that's called the Federal Marker Committee or the FOMC. that is the body that meets every six or seven weeks in Washington, D.C.

It's composed of seven governors who are on Fed's board. Those people are there because a president has put them there, and they have a vote at every meeting. Then there are 12 presidents of the Fed banks. All of them come to Washington for the meeting. They all participate in the meeting, but only five of them have a vote in any year. They take turns every year voted. The New York Fed president, sort of the first among equals of the 12 presidents. He has a vote at every meeting.

And then the other four are rotated. And so those are the people who actually vote on policy. But anybody who's ever had to lead a committee of 12 to 19 people, it's hard to get 12 to 19 people to agree on anything. So there's a lot of blocking and tackling that happens in the run up to the meeting. In fact, I mean, if you look at how the Fed, the power of the federal, Fed was sort of operated recently. They tend to know what they're going to do at the meeting, where they're making their decision. So what they're really doing is they're talking for their next rule. There's a debate that happens. You know, what should we do today or tomorrow? It's a two-day

meeting. But then really, where do we think we're going to be in six weeks? And so in one way, the committee's working for the decision. But again, anybody's had to get 19 people to agree on anything. There's sort of a group, you know, a steering committee almost. It's called it Troika. The Fed Troika is the Fed chair, the New York Fed president, who also serves as the vice chair of the FOMC, and then the vice chair of the board, typically those three people, and then a small group of advisors, staff, senior advisors to the chair. They are coming up with the options that will go out to the committee. It's definitely an interesting sort of unique type of organization and organizational structure.

And as you said a few times, Nick, I imagine it's pretty difficult to get these people to agree on anything. But for my understanding, and please correct me if I'm wrong, there's been a lot of consensus about policy over the last couple of years. And this group of people has largely been in agreement that rates should start going up in. 2022 and should have stayed high up into that point. So first of all, is that, is that correct that there's mostly been consensus? Yes. You know, they vote on the policy decision, a statement that they put at the end of the meeting. And if you look at the last time anybody dissented, any of the voting members of the FOMC dissented, the last time that happened was in June of 22. This is now tied for the second longest period in like the last 50 years.

where you haven't had a dissent. But I do think sometimes people look at the fact that every decision, the last 16 decisions have been unanimous. And they say, well, there's group think of the Fed. They never disagree on anything. If you read the transcripts of the meetings, you'll actually see that, you know, there can be a lot of disagreement, even though they all kind of get to the same place. And I think part of that is, you know, when inflation was a raging in phono two years ago, the direction of travel was clear. We've got to get interest rates on. And then when it looked like maybe they had gone high enough, there was some debate last year. There were people who wanted to keep going. And there were people saying, guys, we've done enough.

Let's just cool it for a while. And then, you know, I think over the first half of this year, there was a lot of agreement that things were getting better, but it was too soon to cut. And now you're getting, I think, to some of these places where if you look at cutting cycles, Jay Powell led the Fed to do three interest rate cuts in 2019 when the economy looked like it was slowing down. Inflation wasn't as much of a problem as maybe they thought it was going to be. And there were dissents on all three of those cuts, more than one. And so I think we're now heading into a period where it wouldn't be surprising to see maybe more differences of opinion over how fast you go down the mountain. Yeah, that was going to be my next question is have there been dissents recently? And I guess because heading into the September meeting, we sort of know that there will be cuts. But my question is what happens next. You know, like, as you said, we sort of know what's going to happen here. But I imagine looking into if there are dissents would be an interesting indicator for myself and our audience to look at to try and understand how quickly rates may come down over the next year or so.

Yeah, I think if this is a quarter point cut, it seems like there's broader support for that. There may be one policymaker who is not comfortable with it or who's not comfortable with a larger half-point cut. So that's to be determined. But, you know, the committee does defer to the chair. I think in part because they recognize he's trying to balance the tradeoffs as best he can. And these are close calls sometimes. People who have dissented, I ask them hard to dissent. And they say, yeah.

but it's reserved for those times when you really just have a difference of opinion about what's happening. And you want to make clear that you think this isn't the right way to go. All right, it's time for a short break, but we'll continue our conversation with Nick Timorouse on the other side. For decades, real estate has been a cornerstone of the world's largest portfolios. But it's also historically been sort of complex, time-consuming, and expensive. But imagine if real estate investing was suddenly easy, all the benefits of owning real, tangible assets without the complexity and expense. That's the power of the Fundrise Flagship Fund. Now you can invest in a $1.1 billion portfolio of real estate, starting with as little as $10. The portfolio features

4,700 single-family rental homes spread across the booming sunbelt. They also have 3.3 million square feet of highly sought after industrial facilities, thanks to the e-commerce wave. The flagship fund is one of the largest of its kind. It's well diversified, and it's managed by a team of professionals. And it's now available to you. Visit Fundrise dot com slash BP Market to explore the fund's full portfolio, check out historical returns, and start investing in just minutes. Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise Flagship Fund before investing.

This and other information can be found in the fund's prospectus at fundrise.com slash flagship. This is a paid advertisement. What if I told you you could forget everything you know about investment property loans? Because host financial is rewriting the rulebook, tossing out those pesky DTI restrictions. They focus on your property's income potential. No tax returns or personal. income statements needed. Simple, efficient, and tailored for investors like you.

Imagine a lender that sees the gold mine in your property, not just the numbers on your paycheck. That's the host financial difference. And they're approved in 47 different states, so your next big deal could be just around the corner. Ready to unlock your property's true potential? Visit hostfinancial.com. Don't let old school lending hold you back another day. That's hostfinancial.com. Did you know your house gets bored when you leave? I can't actually prove that, but it probably misses out on the action, the footsteps, the late-night fridge raids. Yeah, when you're gone, your place is basically on unpaid leave. It's sitting there in the dark thinking, I could be contributing right now.

Your side room wants a side hustle. Even your Wi-Fi is like, we could be networking. You're on vacation, spending money like it's a sport while your staircase at home is fully capable of sending your income upwards. Here's the twist. You can go on a trip and actually earn money. Airbnb makes that possible with the co-host network. If you're away for a while or have a secondary property, you can hire a vetted local co-host with real hosting experience to handle it all. A co-host can handle guest communications, it can manage reservations and keep things running smoothly so you don't have to check your phone between beach days. That means less stress and more time enjoying your trip. You can relax, knowing guests are taking care of, and your place is in good hands.

You travel, your house works. Everyone wins. If you're ready to host but could use some help, find a co-host at Airbnb.com slash host. Managing properties can feel like a full-on circus. You're juggling vendors, tracking payments, chasing approvals across multiple properties, and maybe a few HOAs, all while trying to keep tenants happy and owners confident. One delay can throw everything off, and suddenly, your day is all clean-up, no progress. That's why hundreds of property managers rely on bill to streamline their finances. Bill for property management lets you add all your properties,

assign permissions, pay bills, and receive payments quickly and efficiently, without the usual bottlenecks. It syncs with platforms like QuickBooks, Zero, NetSuite, and Sage intact, so your accounting stays aligned. You can automate bulk payments across properties and HOAs. Choose flexible payment methods like same-day ACH, internet. National wires, card or check, and set custom roles in approval policies. There's even a dedicated bill inbox for each property to keep everything organized. Ready to simplify your workflow, book your free demo at bill.com slash bigger pockets, and get a $100 Amazon gift card.

That's bill.com slash bigger pockets. Thanks for sticking with us. Let's get back to Nick. I'm curious about this debate between a quarter point and a half point. How big of a difference would this be? Because, you know, we've gone from near zero to five and a quarter for the federal funds rate, you know, bring it down to five, four point seven, five. Is that, you know, is the difference really going to matter in terms of business investment, financing, or is it really just what kind of signal they're sending to the broader business community investors and Americans in general? I think you're right. I think it is more of the signal. They're ascending, you know. They ran up the mountain. They've hung up at the top for a while. And now the question is, where are you headed? Where is base camp? You're going down.

They don't know how far down they need to go. And, you know, that is, that partly determines how fast you go. If you think 2% is the right interest rate to be at, that's a neutral interest rate. That's where they thought the neutral interest rate was before they started raising rates to 2.2.5. And if you have high confidence that you need to get to neutral quickly and it's that low, then you'd go fast. They don't have that confidence. They think maybe the neutral rate is higher and maybe you should go slower. So it's a question of tactics in the sense also of how do you see the risks right now? How do you see the risks that inflation might get stuck above your target? And how do you see the risks that the labor market might weaken more than you're expecting?

And which one of those do you lean into more? I mean, there are clear asymmetries in the layer market where when the unemployment rate starts to go up a little bit, it tends to go up a lot and it's harder to fix it. You have to cut rates a lot more. So that might be, you know, people who are thinking, hey, let's front load this. Let's take out some bigger insurance against that kind of layer market outcome, which we don't want. That would be an argument for doing 50. I think an argument for doing 25 years, the economy does not look like it's in a recession. and in the past when the Fed was done a 50 basis point cut in 2001, in 2007, or when the pandemic was starting in 2020,

there were clear, urgent reasons to move. I do think there are reasons this time is different. The Fed just raised interest rates a lot more than anybody thought they were going to. After a period in which businesses and households thought interest rates weren't really going to have to go up all that much. And so there are reasons to think maybe you'd want to live a little bit of a little bit. faster here, but if you don't see a reason to light your hair on fire, maybe you don't do the move that's reserved for times where your hair is a little bit more on fire. That makes sense. It's just all a psychological game, too, like what they're trying to signal

to the economy, trying to signal to businesses. So it would be very interesting to see. I want to follow up on that, but first just wanted to clarify a term that you used a minute ago, Nick, which is called a neutral rate. This is a concept in monetary policy. High interest rates are generally called restrictive, which is basically where you're trying to cool down the economy a little bit. Low interest rates, people call accommodative or stimulating. So when you lower interest rates that increases investment and tries to rev up the economy. And then there's this concept of a quote unquote neutral rate, which doesn't really exist unless I'm wrong. And it's a moving target. But it's this idea that there's this magical number

that the Fed can get the federal funds rate to where it's not necessarily trying to jack up the economy. It's also not putting the brakes on the economy. It's sort of if you use a car analogy, there's no gas, there's no brakes. It's just coasting at the same speed. So just wanted to clarify what that is. And ideally, I think the Fed's policy is that they ideally will get to this magical neutral rate and hold there. But that's not usually how it works. They're usually either stepping on the gas or stepping on the brakes a little bit. and tinkering with the economy as they go. So, Nick, I wanted to ask about inflation because, you know, obviously on this podcast, we are mostly real estate investors, aspiring real estate investors. And one of the major drivers of inflation over the last couple years has been real estate,

whether in home prices or rent prices, construction costs have all gone up. It has been a major contributor. And I'm curious if you've heard anything or there's any concerns. that lowering interest rates, which in turn could bring down mortgage rates. And just as a reminder, Fed doesn't control mortgage rates, everyone, but they indirectly influence mortgage rates. And so if mortgage rates come down, is there risk that the real estate side of the economy may start to see outsized inflation again? Yes. I mean, that's a concern you've wrote all your long, particularly from more hawkish commentators or policymakers who were worried about keeping inflation

too high. You know, if you think about sort of the risks of higher inflation, a lot of those have faded this year. The labor market, for example, wages are coming down. The labor market doesn't seem like it's as big a threat of higher inflation. So if we're going to have inflation come back up, you're not seeing it from commodities, you're not seeing it from import prices. So where is it going to come from? The argument you hear probably most right now is, well, if the Fed cuts too much and they stimulate the economy too much, maybe you'll see it, and maybe you'll see it exactly as you laid out in the housing sector. I think if you think back to December when we saw a pretty big move in rates, rates came down

quite a bit because the Fed was signaling they were done raising rates and they were talking about when to start cutting this year. You saw mortgage rates come down and you saw maybe activity pick up in the first quarter. And so there was a lot more angst maybe, especially among these hawkish commentators of policymakers that see, this is why you don't want to overdo it, you're not totally sure you've done the job on inflation and you don't want to have to get back on the horse and chase it. I think now there are more questions about whether the market is really as resilient as maybe it seemed earlier this year.

So I'd look every week at the Mortgage Bakers Association purchase application series. And as we've seen interest rates come down to a low six and a half percent over the last month, I mean, look, I know it's, no, you're looking at August, it's a seasonally slow period. But you haven't seen a lot of lift from the purchase app series. In fact, it's pretty much stuck near the lowest levels that it's been for a very long time. So there are reasons to think that maybe we've just exhausted the pool of buyers who can handle a purchase when interest rates were closer to 7%, you see inventory picking back up. I do wonder if the resale market is going to create more of a competition now for the new

builder market. Builders, they had a pretty good situation with resale inventory being so low for the last year. And so I think there are more questions now about is a 6.5% or a 6% 30-year fixed rate mortgage really going to provide the pickup that you would thought. And I think it'll be an important ingredient in whether the Fed can achieve a soft landing. If the economy is really sold here, you're going to want to see housing construction stabilize and pick back up. That could be an important, you know, pull for the economy here if things are rub us slowing down. I share some of those question marks with you. I think a lot of people in this industry assume, oh, mortgage rates go down, appreciation, housing prices just skyrocket. And that could happen. But there are a lot more questions. To your point, we don't know how much demand will come back. And even if demand increases, you know, the supply question is still a big question mark.

We're seeing more inventory come on. And if inventory comes back to the market in a proportionate way to all the new demand from lower interest rates, that might mean that we have a modest growth or normal growth in the housing market. We just don't know. But I was curious about this because you mentioned earlier, Nick, that the risks that the Fed is sort of balancing is risk to reigniting inflation. versus risk to the labor market.

I just wanted to clarify for everyone to make sure is that a real estate sort of has this special part in recessions and interest rates because it is such a highly leveraged industry. And what that means is basically that, you know, we all know this, but when you go out and buy a property, you usually use debt. And construction companies use debt. Developers use debt to finance a lot of their operations. And so real estate, more than most industries in the United States, are very sensitive to changes in interest rates. Where you think about a manufacturing company, you know, as Nick and I were talking about, the difference between a, you know, a 5.25 federal funds rate and a 4.75, you know, it's going to take a while for that to hit the manufacturing industry.

But that might hit the construction industry the day after it happens. It might take deals that didn't pencil yesterday to deals that do pencalling. today. And so in a lot of ways, real estate is sort of out front and sort of is the first reactor to interest rate changes. And why personally, I think, and it sounds like Nick and a lot of other people have heard this as well, is that if rates come down, it could reignite real estate maybe in a positive way, but also potentially in an inflationary way as well. All right, we have to take a quick break, but stick around because later in the show, Nick's going to tell us what the Fed has already indicated about their path of rates, not just for this next meeting,

but for the next couple of years. So stay tuned. For decades, real estate has been a cornerstone of the world's largest portfolios, but it's also historically been sort of complex, time-consuming, and expensive. But imagine if real estate investing was suddenly easy, all the benefits of owning real, tangible assets without the complexity and expense. That's the power of the Fundrise flagship fund. Now you can invest in a $1.1 billion portfolio of real estate, starting with as little as $10. The portfolio features 4,700, a single-family rental homes spread across the booming sunbelt. They also have 3.3 million square feet of highly sought after industrial facilities, thanks to the e-commerce wave. The flagship fund is one of the largest of its kind. It's well-diversified,

and it's managed by a team of professionals. And it's now available to you. Visit fundrise.com slash BP Market to explore the fund's full portfolio, check out historical returns, and start investing in just minutes. Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the fund's prospectus at funrise.com slash flagship. This is a paid advertisement.

Did you know your house gets bored when you leave? I can't actually prove that, but it probably misses out on the action, the footsteps, the late night fridge raids. Yeah, when you're gone, your place is basically on unpaid leave. It's sitting there in the dark thinking, I could be contributing right now. Your side room wants a side hustle. Even your Wi-Fi is like, we could be networking. You're on vacation, spending money like it's a sport while your staircase at home is fully

capable of sending your income upwards. Here's the twist. You can go on a trip and actually earn money. Airbnb makes that possible with the co-host network. If you're away for a while or have a secondary property, you can hire a vetted, local co-hosts with real hosting experience to handle it all. A co-host can handle guest communications, it can manage reservations, and keep things running smoothly so you don't have to check your phone between beach days. That means less stress and more time enjoying your trip. You can relax,

knowing guests are taken care of and your place is in good hands. You travel, your house works. Everyone wins. If you're ready to host but could use some help, find a co-host at Airbnb.com slash host. New Year, Clean Slate, and maybe a vacancy that needs to get filled fast, that's where a veil comes in. With Avail, rental listings can be published to 24 top rental sites with one click, completely free. That includes places renters are already searching, like Realtor.com, apartments.com, redfin, and more. No copying and pasting. No juggling multiple platforms, just one listing that shows up everywhere. If getting rentals organized and filled fast is on the list this year, start with Avail. Sign up for free at Avail.com.com.

That's AVAIL.co slash bigger pockets. Tax season reminder for all the real estate investors listening. If you own rental properties, short-term rentals, commercial buildings, basically anything that's not your primary residence, you need to know about cost segregation. It's an IRS compliance strategy that lets you accelerate depreciation on your properties, which means you're paying less in taxes this year and keeping more cash in your pocket for your next deal. Cost Segregation Guys is the go-to firm, having done over 12,000 of these studies with $500 million in total depreciation identified.

Head to costsegregationguise.com slash BP to get a free proposal and see your potential tax savings. If you think property management is expensive, try mismanaging a vacancy or an eviction or a maintenance issue that turns into a five-figure problem because no one caught it early. That's expensive. A good property manager isn't overhead. Their protection against small mistakes turning into big losses. And that matters more than ever in this economy. That's why I like Mind. Unlike other property managers, Mind manages your property like an investment.

They obsessively measure the things that matter for your bottom line. Things like occupancy, delinquency, and net promoter score. And they have the results to prove it. Go to mine.co slash show me to see how mine performs and get your first month free, which is much cheaper than learning the hard way. We're back with Nick Timmerhouse from the Wall Street Journal. Let's dive a little bit more into the labor market side of things. So we've seen weaker jobs numbers.

We've also seen a lot of revisions to previous jobs reports downward that are showing some weakness in the labor market. But can you give us some historical context? How would you describe the state of the labor market today? Well, the economy is just very, you know, if you try to compare this, period to past periods. It's very weird. This is a very weird time. You know, it's not a normal business cycle. We went through the pandemic. The pandemic was like a, you know, like a year-long hurricane or blizzard and sort of it froze everything. So waking up from that has just been weird.

I think the question now is, what's normal? Do we get back to normal in the labor market? Do we, and do you stay there, or do you kind of slow, keep slowing past it? You know, you said something about how responsive the economy is going to be to lower interest rates here. And if people, there's a quote, it's attributed to Bob Toll. I don't know if Bob Till actually said this, but there's no mortgage rate that can convince somebody to buy a house if he or she's worried about losing his of her job. And so I think that's where we are right now, is, you know, the economy's just not adding as many jobs as it was six months ago. That's one of the reasons you see the unemployment rate tithing up here. You've also seen a big increase in the number of people that they

to work. And so the unemployment rate can go up because the labor supply is growing faster than the not-go jobs that are being created. And that's what you have right now. The unemployment rate can also go up because people are actually getting pushed out of their jobs. They're being fired. And if you look at permanent job losers, that number has drifted up a little bit, but it hasn't drifted up enough to explain the increase in the unemployment rate to 4.2% in August from 3.4% in April of 2020, that was so low. But it is, you know, it is cooling down. Last week, the Labor Department put out a number, they look at job vacancies, job openings. And if you just compare the number of open jobs to the number of unemployed people at the peak of this cycle in March 22,

when businesses were just in a panic to hire people back, there were two openings for every unemployed person. The number that came out last week for July showed that we were down to 1.1, a little bit below 1.1 job openings for every unemployed person. And that's actually below where it was before the pandemic. When the pandemic hit, we were about 1.2. So you now just see a labor market that is less tight. There are more people looking for work. It's taking people who lose their jobs, who will come into the job market without a job.

It's taking them longer to find a job. You know, maybe we stay here. That wouldn't be for the Fed, if you could just hold this at a 4.2% unemployment rate, that would be fine. The worry is that when you see, when you look at the unemployment rate, it never just stays in a solid and straight line. It's either going down or it's going up. And right now it's going up. And these things, you know, they look at the charts. They look like hockey sticks.

They go up by a little bit and then they go out a lot. And the Fed doesn't want to have a 5%, 5.5% 6%. 6% unemployment rate here. And do you have some historical context for that, Nick? Because that's definitely true. Like, how long after unemployment rates start to go up does it usually peak out? And I know that there's a lot of variables like Fed policy there. But like, what are we looking at here?

Like, what is a quote unquote normal recessionary cycle or cycle of weakness in the labor market it looked like? Well, so some people may have heard of something called the SOMB. It's this economist of the Fed who identified that you use a three-month average of the unemployment rate. So when that goes up by half a percentage point from the low over the previous 12 months, it is always, you know, it is always coincided with a recession. Once you've gone up by 50 basis points on the unemployment, you keep going up quite a bit more. And it just gets to this idea that you, you you think about a tipping point where businesses are, no, they're not sure if they need the workers, they're not sure if they need the workers, and then it's like a beach ball that you've held onto water.

Once you decide, oh, business is just too weak. I do not need these people anymore. I'm going to let them go. The beach ball pops up. And so that's kind of captured by the Sommul. Now, there was a little bit of a market freak out, if you recall, in early August, because after the August payroll number came out, we triggered the Somm bowl. That was the first time that you could say that, the three-month average of the unemployment rate had gone up by half a percent from the previous 12-month low, and we're still after the August numbers that came out in early September, you know, we're still above that threshold now. Now, Claudia Somm, who's the economist who's, you know, popularized to this approach, she said there are reasons to think

that it may not, you know, it may be a little bit of a false positive. And if you look at something like permanent layoffs, you know, permanent layoffs are not what is driving. this increase in the unemployment rate. But I do think it's a sign that the labor market is cooled. And all along the question I think this year has been, it's like you took a glass of hot water and you put it in the freezer. Is it just going to snow, is it going to get to some level and stay there or is it going to keep freezing and you're going to take out ice at some point and do you want to take it out before it's completely frozen? I think, you know, monetary policy is not science. You know, there's no boiling point or freezing point for the economy.

But that sort of captures the principal here. You're testing a trend. Does that trend continue? All right. Well, that's definitely something I'm going to be keeping an eye on. There's a lot of different labor market data out there. But the job openings and unemployment rate are good ones for everyone to track if you want to be following along here. Nick, I know you don't have any background information that we don't know about.

But I think a lot of our audience is probably curious where mortgage rates, where interest rates are going to be in the next. you know, year or so. I won't ask you about mortgage rates, but federal funds, you know, the Fed does release something called the summary of economic projections where they at least give out some ideas of where they think the target rate will be in the near future. Can you just tell us a little bit about what the Fed is saying about the next few years? Yeah, so the summary of economic projections is important. The Fed doesn't get together and agree on this. Everybody's sort of putting down their own forecast. What we in the press write about is sort of where the median is, where the 10th of the 19 participants in the center of. And think back to the conversation

we were having about 25. It's 50. What really matters for monetary policy and for the economy is the path of rates over the next few years. What is the market pricing in right now? Because the economy reacts to that. The economy doesn't necessarily react on the day the Fed cuts interest rates. If markets are anticipating a rate cut, it's when the market, it's when the bond market begins to pricing a lower interest rate, right? Mortgage rates have come down, even though the Fed hasn't made any interest rate cuts yet, because the markets are anticipating what the Fed is going to do. And it's really when the Fed either ratifies or, more importantly, doesn't ratify the market expectation that you could see, say, interest rates go up.

So, you know, the SEC here is going to be very important at the September meeting. The September meeting is a weird meeting because the SEP, the summary of economic projections, is provided in calendar space. So in March, they're putting down how many interest rate cuts or increases they see, where they see interest rates at the end of the year. They're doing the same thing in September, knowing full well, and we know full well. There's only two more meetings after this one. So you're basically writing down where you think interest rates are going to be the meeting

after this one at the December of meeting. They're also writing down where they see interest rates at the end of 20th. 25, 26. It's all conditioned on their forecast. So where are interest that's going to be at the end of next year? You know, if you think inflation's going to come down a lot, we're going to have more interest rate cuts. If you think the economy's going to be quite weak, you're going to have more interest rate cuts. They tend not to project that. They're putting this down, assuming appropriate policy. And so it tends to provide sort of a more optimistic scenario for the economy, as if we really thought there was going to be a recession, you would act now to try to head that off. But nevertheless,

you know, the interest rate projections have shown the Fed cutting interest rates a couple of times this year. In March, it was three cuts. In June, it was one cut. We're back at least to three cuts now, September, November, December. One cut of 25 basis points seems like the minimum that people expect for this year. And then the question is, how many more do you get next year? Do you get down to, you know, three and a half percent, three percent, you know, we'll find out. Well, something I will certainly be watching and we'll make sure to update our audience on regularly about what's going on. Nick, last question here is, we know a lot of what might happen at the next Fed meeting,

but what, as a experienced Fed watcher, are you going to be looking for from the meeting and the subsequent press conferences that come after? No, I think the question really right now is how forward-leading does the Fed plan to be, if they think the economy and the labor market is weakening more than they might have anticipated. So, Jay Powell gave this speech at the Jackson Hole Conference at the end of August. It's a big conference every year that the Kansas City Fed puts on in Wyoming. Powell speaks every year. He knows it's a big stage. So he tries to say something. And this year, he seemed like he was on his front foot. We're trying to stick the soft landing here.

And part of doing that means not getting too far behind. You kind of want to stay ahead of So the question right now is, you know, how do they live that? How do they operationalize that? Does that mean we're cutting by 50 basis points in September? If you're not cutting by 50 basis points, if you're only doing 25, do you think you're going to have to do a little bit more in November and December? Are you going to keep going down at 25 basis points apart until the layer market tells you, you know, you should go faster? So I think the question right now is really around defining how forward-leaning, how preemptive might they try to be here. If inflation is getting worse, they can't do that. They have to still worry about inflation. But if you really think you've

cut off the risks of higher inflation, of, you know, a stuck, sticky last mile, which was the concern, you know, over the last year was that you'd get to two and a half percent and you just stay there. If you think you now have dealt with that worry, can you go faster? Or do you run the risk of letting this soft landing slip through the fingers? All right. Well, I will be following suit, Nick, and looking at some of the same indicators that you just mentioned. Thank you so much for joining us today. We really appreciate you sharing all of your insights and research with us today.

We will make sure to link to Nick's bio and contact information in the show notes below. Nick, thanks again for being here. Thanks so much for having me. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K, copywriting is by Calicoe content, and editing is by Exodus Media.

If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.com. podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. Bigger Pocket's LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.