Funding and Alternative Lending Strategies By Jennifer McGuinness-Lubbert To say that the last 18 months have been “quite a ride”, would be an understatement. The Fed raised the Fed Funds rate target at its fastest pace in history. During the first half of 2022, the central bank raised rates three times, ramping up the size of the increase each time, culminating in June’s aggressive 75 basis point hike. Before June, the Fed hadn’t raised its flagship policy rate by 75 basis points in any single meeting since 1994. The Fed continued its aggressive battle against inflation over the course of the year, with three additional 75 basis point increases during the second half of 2022. Then in December, the Fed tacked on one more but this time, slightly less aggressive, with a rate hike of 50 basis points. Were we seeing light at the end of the tunnel? The federal funds rate ended 2022, 425-450 basis points up from ZERO at the start of the calendar year. With most of the financial and economic research world believing that the central bank will leave short-term interest rates in the current 5.25%-5.50% range at the close of its Sept. 19-20, 2023, meeting, the main unknown is how policymakers will reshape their “stale” forecasts from three months ago, as they were shown to be, at times, materially incorrect. Economic data since the Fed’s mid-June meeting, has persistently surprised to the upside, hence, the Fed will need to go “back to the drawing board,” as their outlooks saw declines, rising unemployment and only modest improvements in inflation. Many are predicting that given the (at times) “prettier” picture, that the Fed will not raise the rates further — but speculate that they are not yet ready to indicate that they are “done” from a tightening perspective. Declaring that they have completed their cycle would likely lead to a significant easing of financial conditions. Personally, I predict that we will see one additional 25 basis point increase. By the time you are reading this article, we will know the answer. Easing financial conditions could mean higher stock prices or lower bond yields, which could stimulate spending and borrowing and trigger an increase in inflation, which is what the Fed is trying to avoid. In my humble opinion, this means the majority of Fed policymakers will probably still consider a year-end policy rate of 5.6% to be where we should be, which is one quarter point above where it is now. Although there are still some economists that believe that the Fed will raise rates again toward the end of the year, many other economists also expect Fed policymakers to pass fewer rate cuts next year. Financial markets are currently pricing for rates to fall to 4.4% by the end of 2024 and 3.8% by the end of 2025. The September meeting will be very telling on this front. Generally, all of the economists and researchers expect to see substantial “upgrades” to the initial forecasts they presented, as despite the 525 basis points of interest-rate hikes over the last 18 months, the U.S. economy expanded at about a 2% pace in the first half of this year, and may be growing even faster in the current quarter. There may even be a glimpse from the Fed that they are more optimistic regarding the labor market, for example, as the unemployment rate leapt to 3.8% in August, its highest since before the Fed began raising rates. But people losing jobs was not the driver of this increase — it was the number of people looking for work, which is a symbol of strength more than weakness. Last summer, inflation at its peak was 7% and has been falling rapidly this year to 3.3% in July, only slightly higher than the 3.2% rate the Fed predicted it would see at the end of this year. Where are mortgage rates today? The national average 30-year fixed mortgage rocketed past 7% in mid-August, reaching a 2023 high of 7.23%. As of September 14, the average 30-year fixed mortgage rate stood at 7.18%, according to Freddie Mac. Despite these high mortgage rates and home prices, the market remains as competitive as ever, thanks to the fact that demand levels are still currently surpassing the lack of inventory available and because homeowners who locked in low interest rates are not selling their homes. Many point to these features as evidence of an affordability crisis and blame it for why certain people are not so quick to go out a buy a home. Today’s mortgage spread, which is the difference between the 10-year Treasury bond yield and the 30-year fixed rate mortgage—is approximately 300 basis points. Historically, the spread should be between 150 and 200 basis points. Lawrence Yun, the chief economist of the National Association of Realtors, predicts that spreads will begin to normalize and that mortgage rates will fall to around 6% by the end of 2023. I’m not sure that I agree that we will get to 6% by the end of 2023, but I do believe we will see rates begin to come down next year and begin to stabilize this year. According to recent data, the median new home sales price in the United States that dipped to a 2023 low of $417,200 in April, increased to $436,700 by July. Year-over-year new home sales have also increased, surging by 31.5%, even as existing home sales continue to sag or increase. Finally, single-family construction starts increased 6.7% following a decline in June and applications for building permits rose 0.6% from the previous month. Let’s now assess the opportunity While housing is regional and trends differ by location, the East Coast and Midwest (for example, 4%+ in Chicago and Clevland) are seeing strength in their home prices, while on the West Coast, places like Nevada (-8% in Vegas) are seeing a decline. Right now, overall home prices in 2023 appear to be more than just a seasonal increase. Also, we