Talk about the Federal Reserve pulling back on its buyback of U.S. Treasury notes is roiling the market and driving up interest rates. Federal officials qualify that unsettling conversation with assurances rates will stabilize, but the truth is, they’re not likely to. In fact, they’re likely to continue rising.
That means the smart thing to do is lock in long-term, low-interest rates.
The fiscal uncertainty is threatening the steady growth of the market with mixed messages about the role of the federal government in fiscal policy. The strange thing is, federal officials are justifying a pullback in stimulus on the basis of an improving economy.
The rub is that very pullback could prompt a reversal of economic fortune, stalling the U.S. economy just when it’s set to accelerate. At the same time, because the pullback effectively raises interest rates, lenders are eager to lend. After all, they can make more money now.
The availability of money, particularly for hotel acquisitions and refinancing, is increasing; construction loans are still hard to get, but overall, money’s flowing again.
As usual, timing is critical, and the time to secure financing for acquisitions and refinances is now – more than ever – because you can’t tell how interest rates might fluctuate from day to day. Interest rates, no matter the term, won’t likely go much lower. They may stabilize for brief periods, but it looks like the trend is upward. So lock in your loan now to keep the cost of your money low.
There’s historical support for that approach.
The 60 year average interest rate for 10 year Treasury notes is 6.5 percent and it’s currently around 2.5 percent, still substantially below the long-term average. Which strongly suggests that rates will go up.
In the last 20 years, that average 10-year Treasury rate been 4.6 percent and in the last 10, it was 3.6 percent.. All this means that long-term fixed rates are likely to be under the long-term average, and hoteliers should expect historically lower interest rates for the foreseeable future. At the same time, it’s unlikely they’ll average the 3.6 percent of the first decade of the millennium.
While money is getting more expensive, because the economy continues to improve, – though modestly – lenders are more optimistic and consequently willing to do business with entrepreneurs who present them with a sound fiscal and operational plan.
In this context of uncertainty, capital becomes more available. It’s sort of a Catch 22: as interest rates rise, there’s usually more capital for hotel owners.
People grappling with these issues who want help cutting through the fiscal underbrush should consider turning to a hospitality consultant familiar with all aspects of the economy. You don’t want to be in a canoe while your oars remain on shore.
You have to figure in interest rates are going to rise when you’re doing your analysis before refinancing and build that model ahead of time. In more stable times, owners assumed interest rates would remain low. That’s going to change from here on.
So, as usual, it’s all about preparation and awareness. Follow the news of the market, lock in a long-term, fixed-interest rate loan now and know that, as the economy improves, interest rates will rise. However, a rising tide lifts all boats.
By Jeff McKee