September 2022

Principal's Corner

Rates Rise and Rents Rise 

As recently as Q1 22, the Fed funds rate was close to zero. Since then, the Fed has raised short-term interest rates five times so far this year for a total of 300 basis points. And they do not seem to be anywhere close to done as Chairman Powell has committed to beating inflation back down to the 2% level. As the central bank raises interest rates to cool down the economy, this has also spiked home loan mortgage rates near 7%, further putting home ownership out of reach for many first-time homebuyers.

As a result, these potential buyers will now continue to rent, stoking further demand in an already hot rental market. Nationally, rents on new leases rose 14.1% during the first half of this year, according to Apartment List, a rental listing service. In 2021, rents rose an astounding 17.5%. The imbalance of rental demand and rental supply has been in play for quite some time as we have talked about in the past. Developers were expected to complete over 350,000 new units in 2022, according to the Joint Venture for Housing Studies at Harvard. With short-term borrowing costs increasing substantially, the ability for developers to finance new apartment construction will be impacted. This is in addition to supply chain disruptions and labor shortages which have plagued the industry.

Ironically, a Fed-sparked increase in rental demand makes it more difficult to tame inflation since rent costs typically make up about 30% of the Consumer Price Index. According to the August CPI report, shelter prices — which include rent, lodging away from home, and household insurance — rose 0.7 percent in August from the month before, the biggest monthly jump since 1991. The rent index by itself was up 6.7 percent from a year ago. Although a large number of new apartment units have been started since the pandemic began, it is hard to estimate how long it will take for that impending supply to impact the increasing demand.

Most economists predict that rents will continue to rise over the next several years, albeit at a lower, more sustainable pace in the 3-5% range. If the Fed is successful in slowing down the economy, this will invariably affect employment and wage growth. If they raise rates too high and too quickly and over-correct (which is the likely scenario) then we will see a prolonged recession where people will be forced to double up with roommates or move back home with family members putting downward pressure on rents. But this transition will take time to play out. In the interim, you will most likely continue to see rents increasing. 

Edward M. Aloe
Founder and CEO
Follow Us on Twitter!
Latest Headlines...

The housing market correction will be deep, and ugly

If rates do climb into the 7s, the current origination forecast of $2.2 trillion in 2023 will look awfully rosy

“Builders are having a hard time finding lots, workers and materials,” Powell said. “For the longer term, what we need is supply and demand to get better aligned, so house prices go up at a more reasonable pace and people can afford houses. Probably, the housing market needs to go to a correction to get to that place.”

So far, the tightening monetary policy led the 30-year fixed mortgage rate to 6.29% this week, up 27 basis points from the previous week, the Freddie Mac’s Primary Mortgage Market Survey (PMMS) showed on Thursday. A year ago at this time, rates averaged 2.86%.

“The housing market continues to face headwinds as mortgage rates increase again this week, following the 10-year Treasury yield’s jump to its highest level since 2011,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “Impacted by higher rates, house prices are softening, and home sales have decreased. However, the number of homes for sale remains well below normal levels.” 

View Article Here 

Fed hikes rates by 75 bps to rein in still-hot inflation

The decision, expected by most of Fed observers, will cool the housing sector further

According to the Federal Open Market Committee (FOMC) statement, although recent indicators point to modest growth in spending and production, job gains have been robust in recent months and the unemployment rate has remained low.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the FOMC said in the Wednesday statement. “Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity.”

The committee anticipates that ongoing increases in the target range will be appropriate, meaning another 125 basis points in hikes still to come in 2022, with a federal funds rate topping out well above 4%. The FOMC’s Summary of Economic Projections now shows a funds rate midpoint of 4.375% at end-2022 and 4.625% at end-2023.

View Article Here

Higher Interest Rates Shock Developers

Inflation already has increased the cost of construction. Now higher interest rates are causing additional pain.

Building apartments just became a lot more difficult. The interest rates developers pay for construction loans have risen sharply in the past several months, and they are set to increase even higher. At the same time, fewer lenders are making loans. Interest rates are just one part of the rising cost of development, but they are still a major problem for developers. Many are scrambling to protect themselves from rising rates or make up for the cost in some other part of their construction budgets.

It helps that apartment rents continue on a growth trajectory. Most multifamily developments create new, luxury apartments designed to appeal to renters by choice who can afford them. But even growing rents may not be enough to make up for rising costs.

“If I am a developer and I have a team that runs financials, I am having them rerun them,” says Dave Borsos, vice president of capital markets for the National Multifamily Housing Council (NMHC). “What can we hedge? What can we change? What can we modify to get the return that we thought we were going to get?”

View Article Here

On the lighter side....
About CALCAP Advisors


California Capital Real Estate Advisors, Inc., and its affiliate entities (CALCAP Asset Management, CALCAP Properties, CALCAP Lending, CALCAP Senior Healthcare, and CALCAP Strategic Opportunities, collectively known as “CALCAP”), is a California-based investment company founded and 2008 and headquartered in Pasadena, California. The Company sponsors alternative real estate investment opportunities focused on demographically driven housing. CALCAP has been able to consistently provide both individual and institutional investors with outstanding returns over the last 14 years. The Company uses a highly selective and disciplined investment approach, focused on delivering superior risk-adjusted returns. CALCAP currently has over $500mm in Assets Under Management. To learn more visit

Social Mission

CALCAP CARES is a 501(c)(3) private foundation organized to encourage employees to find a way to give back to the neighborhoods where we invest. CALCAP has created "GiveTime4Autism" as its initial program which gives employees the opportunity to donate unused vacation and sick days for a very worthy cause.

The Sanborn House
65 N. Catalina Avenue   
Pasadena, CA 91106

12626 High Bluff Drive, Suite 360
San Diego, CA 92130 

740 N. 52nd Street
Phoenix, AZ 85008 

1309 State Street, Suite A
Santa Barbara, CA 93101

92 Argonaut, Suite 205
Aliso Viejo, CA 92656

Edward M. Aloe, Founder & CEO
(626) 229-9057

Patrick A. Wakeman, Principal
(858) 764-4890

Drew Buccino, Principal and COO
(602) 419-3381

Greg Blix,Dir. of Investor Relations
(805) 896-8500

Tim Landwehr
Executive VP, CALCAP Lending, LLC
Mark A. Mozilo, Principal
(626) 229-9056
View our website:
Stay Connected:
Facebook  Linkedin  Twitter