After a three - year absence “quantitative easing” is back and the impact on lowering interest rates could be profound. In this Commercial Real Estate Mastery podcast we’re going to explore the power of government intervention to lower rates as well as how you can use that trend to make money with property.
Episode 11: The Impact Of The Return Of Quantitative Easing Transcript
There is a seismic shift coming in American real estate, and it's coming from interest rates. And we got our first clue as to this event in the recent Federal Reserve meeting. This is Frank Rolfe with the Commercial Real Estate Mastery Podcast. We're going to talk about quantitative easing and more specifically the return of quantitative easing and what that could mean in interest rates this year. So let's first go back and say what is quantitative easing? What it is is basically the US government buying its own securities to lower interest rates. And that was the primary weapon that the Obama administration used to lower interest rates during the Great Recession. 2007, 2008, America entered the last huge recession in recent American history. And it was looking really bleak. Things were bad, unemployment was terrible. This recession was caused by collapse of the commercial mortgage-backed security market, known as CMBS debt. And with it, it took a lot of financial institutions, it ruined liquidity, and things were just looking terrible. So the Obama administration decided the best thing it could do to battle this mess was to lower interest rates. And they dropped the Fed funds rate down a lot.
But the problem is, you can't really impact the long-term mortgage market with just Fed funds rate movement. If you look recently, the Federal Reserve has cut the short-term rate, I think three times. But the long-term 10-year Treasury rate, which is what mortgages are attached to, has hardly moved at all. But what Obama learned was, that if he used quantitative easing in a big way, if he had the government buy back its own securities, that he was able to drop mortgage rates by an entire point in just 90 days. And pretty soon everyone realized the key tool to lowering interest rates was quantitative easing, that that was more important than the Fed dropping the Fed funds rate, which is only short-term borrowing, but to impact long-term, you went out there and you bought up mortgages. And that's how they got interest rates down to the lowest levels of American history. How low did they get them? We all know what mortgage rates were. People were doing mortgages on houses at 2.5%, 3%. People were financing all kinds of commercial real estate at crazy low numbers, just like that. And then what happened was, Jerome Powell started raising the interest rates and he raised them 11 times, 11 consecutive raises.
It's never been done before in American history. It's the fastest interest rate increase and the highest rates in 40 years. And it saddled Americans with an environment where it was very, very hard to buy real estate at these very lofty interest rate numbers. And it created a disconnect between sellers who wanted reasonable pricing and buyers who couldn't afford to give the seller their number because they couldn't convince a bank to go ahead and make a loan at that level, because maybe that was what the loan level would have been prior to Jerome Powell raising the rates. But recently in the Fed fund minute, besides dropping rates a quarter point, which really was not a big news story, a quarter point drop in the Fed funds rate, doesn't translate to much at all in the Treasury. But it was announced that Trump is going to start buying back. He has ordered an executive order, I believe it's Fannie Mae, Freddie Mac to buy back, it's like $200 billion or something of mortgages. And this is really going to set in motion some pretty big results because we haven't had any quantitative easing in the past three years.
That's the same three years where rates have gone up so much. In fact, we were doing quantitative restrictions during that period. But now suddenly we're changing the map, we're changing course, and we're going to begin to do quantitative easing. That is the key tool that has been used in the past to lower rates. Now, Trump has some other executive orders he is trying to do to get rates down. One of the big things he's doing is he's replacing Jerome Powell as head of the Fed coming up in May. And he said that his administration will focus as its one big item in 2026 in getting rates down. Now, he can pick a new head of the Fed, but the key thing he can do if he wants to get rates down, and he knows it from what he saw with the Obama administration is, quantitative easing. And now that he has started, tipped his hand that that is what's on the docket. And he's starting that process, that's where we can start seeing really big declines in interest rates going forward. Now, when you're trying to buy real estate, the best time to buy it is when rates are going down.
And that's simply because cap rates on property and property values tend to follow interest rates. So if you were to buy a property, let's say right now at a 7% cap rate, and then interest rates were to fall a point, that 7% cap rate might equate now in the modern world to a 6% cap rate because it's just following the interest rates down. But you then just created an incredible amount of value in your property. Your property escalated up hugely as the net income was divided by six as opposed to seven. So if you look back at all the best times to own real estate in American history, you will note, if you look at the curves, it's always been the best time to buy was when interest rates were at their peak and you rode them down. The worst time to buy is when they're at the bottom and you ride them up.
Many commercial real estate buyers got caught off guard when the Fed started raising the rates back in Q1 of 2022, because rates had been so low for so long, we're talking over a decade, that people just assumed it would go on forever. But in fact, they were wrong. Everyone was caught completely by surprise. And those who bought properties when the rates were so low have been watching them with great misery go up, which in some cases has made those properties upside down in valuation. The mortgage is bigger than what the property is now worth. But if you look at the situation at the same time when prices have gone up the most, which is as rates decrease, there's that one little moment when we turn the corner, kind of like a roller coaster where it's going up, and then at the very top, you look down on your roller coaster.
In the same manner right now, I think we're looking down on interest rates. I think we're about to start the part of the roller coaster ride that is down on rates. But as those rates go down, it makes the values of the property go up. So what does it all mean? Well, what it means I think for the new year is, figure out a niche that you truly believe in, a niche that really interests you, and start seriously learning about that niche and making offers on those properties. Because if there was an optimal time to buy real estate, that time is probably now.
Now, interest rates run in cycles, just like the roller coaster. Things tend to go down, but then at one point they hit the bottom, and then they tend to go back up again. You want to kind of get off the buying mode when the rates are starting to go up and then get back on again when the rates are going down. So if you truly believe that rates are about to start going down, that they're on the decline, this is the time to take action to start buying properties. 2026 should be a very productive year for commercial real estate because of this positive movement in rates.
None of us know for sure, but we'll start seeing things soon. Powell will be leaving the building in May. That's a sure thing. We'll have a new person who's the head of the Fed. We can keep watching the notes of the Fed and the discussions and actions of the Trump administration as far as ways to foster lowering rates. And if all these combine, as I think they probably will, you'll see significantly lower rates coming up soon. And that means that right now is the trigger if you want to make money in real estate to get active. This is Frank Rolfe with the Commercial Real Estate Mastery Podcast. Hope you enjoyed this. Talk to you again soon.