February 2025: Chasing the Soft Landing — Rates, Recession Fears, and Real Estate Reality

Since the end of ZIRP, real estate has been living in its own world, seemingly separate from the rest of the economy. Over the past three years, I've routinely said that we're in a real estate recession, even though the rest of the economy has allegedly avoided one (see rant below).

Ever since this time, the real estate world has been wishing for the golden path of economic outcomes: beathing inflation, avoiding a recession, and lowering interest rates. AKA, the soft landing. Will we thread the needle? More on that below.

RANT: I know it's not officially called one, but the US experienced a recession in Q1 and Q2 of 2022. We had two consecutive quarters of negative growth, which was the definition of a recession that everybody used until we all heard about the National Bureau of Economic Research. If I had to summarize the conversations at the time, it would be "it's only a recession if it's from the NBER region, otherwise it's just a sparkling economic contraction".

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MARKET INSIGHTS

I'm going to break this into three sections, discussing the components of a soft landing that I listed above. I know they're all interconnected and play off each other, so they can't be fully separated. And obviously, the economy is really complicated, so I'm sure I'll miss a few things.

Interest Rates

It's been a crazy six months for interest rates. Back in September, the 10-year bottomed out at 3.597%. At the time, I remember seeing agency loans being bought down below 5%. So many deals looked so appealing! And then...rates ran back up, hitting 4.817% in mid-January. Now, just six weeks later, we've seen rates drop down to 4.159%. In short, it's a roller coaster.

I have to imagine that a lot of the talk of trade wars is resulting in a flight to safety, putting at least some of the downward pressure on treasuries. I also think we're going to continue to see bad jobs numbers due to federal employee layoffs, so I don't see that helping either.

Inflation

Inflation has been stubborn. It looked like it was on the cusp of defeat when in September when it had fallen to 2.4%. But it's been climbing ever since, reaching 3.0% in January.

I've seen people likening this to the twin inflation spikes of the 1970s. However, one of the downsides of modern economics predictions is that our sample sizes for things like recessions and persistent inflation are (thankfully) relatively small.

I also think it's worth noting that the 2% inflation number is completely arbitrary! Is there really a difference between having 2% inflation versus 3% inflation. I'm inclined to say "no", except that the goal has been pegged at 2% for so long that to stop now would be considered giving up / losing, which might cause a cascade of problems (but I'm just speculating).

Recession

Maybe it's just me, but I feel like there's a growing negativity on the economy. I'd like to avoid monocausal explanations, but the treat of a worldwide trade war doesn't seem to be helping the vibes. Much like treasuries, the S&P is down over the last few weeks. And while it does seem to be an outlier (and also subject to volatility), the Atlanta Fed is predicting a 1.5% contraction in Q1 GDP.

This goes without saying, but my fingers are crossed that we don't enter into a recession.

Verdict

It's a mixed bag. We're obviously happy to interest rates falling, as borrowing in the 5's is a lot better than borrowing in the 6's. But we do want to see inflation fall back into the 2's. Rates are indeed staying higher for longer, but it remains to see how long "long" is.

But as I joked with somebody recently, look on the bright side. We're as closer to rates coming back down than we've been since the Fed started raising them in 2022. The bad news is that we still don't know when that will be, how low they'll go, and what will happen in the middle.

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OTHER THOUGHTS

I ended the last issue with my bold interest rate prediction (at least 100 bps of cuts in 2025). Following that, I put out a poll on LinkedIn. Results are as follows:

• 17% think rates will go up
• 67% think rates will go down 0 to 50 bps
• 14% think rates will go down 50 to 100 bps
• 2% think rates will go down by more than 100 bps

Just for a fun comparison, this is what the market is forecasting for the December 10th Fed meeting.  

• 0% think rates will go up
• 34.1% think rates will go down 0 to 50 bps
• 55% think rates will go down 50 to 100 bps
• 10.8% think rates will go down by more than 100 bps

Summary: LinkedIn is considerably less optimistic than the market.

As always, thanks for your support.

Thank you,

Will Matheson