Historical Data of Recessions and Interest Rate Increases

Historical data shows a rise in interest rates of more than 2.5 percentage points above the previous cycle-average level typically triggers a recession. It takes around three years from the first Fed hike to enter a recession, according to 70 years of data on rate increasing cycles crunched by Deutsche Bank.

The near zero rates of the past five years mean that once short-term rates rise above 2.5% to 2.75%, a mild recession is likely to occur. If interest rates were to rise above a 2.5%-to-2.75% range in 2023, particularly if inflation expectations begin to fall, then there would be a pronounced impact on the economy. The Fed doesn't believe that interest rates need to rise above that 2.5% to 2.75% level, but many economists do.

Interest rates usually fall in a recession as loan demand declines and investors seek safety. 

The Pulse of the Market

As expected inventory increased again last week. Sellers are putting their property on the market hoping to take advantage of the last bits of the hot market that we experienced over the last couple years. We’re starting to see an increase in the number of price reductions and deals coming back on the market as buyers get cold feet or can’t qualify at the higher interest rates.

WHAT TO EXPECT:
We should see the current seller’s market move a little bit toward a buyer’s market as we move through the rest of 2022. This will hopefully give more balance to the market. Inventory should continue to increase which should contribute to the balance of the market. There will still be a strong demand for So Cal multifamily as it remains a solid investment. We should also see some of the inexperienced syndicators leave the market as profit margins get squeezed.