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Fed Balance Sheet Talk


Fed's Balance Sheet - Why It Matters




Simply put, the Fed’s Balance Sheet materially impacts the CRE sector by influencing global capital flows, which drive the supply and demand for tangible assets such as real estate. Surprisingly, when you look at history, the flow of funds influences cap rates more than interest rates do. In other words, the amount of currency in circulation chasing real assets has a greater impact on pricing of those assets than the cost of debt. But, that is an article for another time. 


The Feds balance sheet serves as a tool to stimulate or restrict economic growth in the market by increasing or decreasing liquidity and consequently, borrowing. On the asset side of the balance sheet, the Fed holds treasuries, mortgage-backed securities, and assets under a variety of lending facilities like the discount window and repo facility. Fed liabilities include bank reserves on deposit, currency in circulation, and reverse repurchase agreements.



Inflation is the expansion of the money supply. When the Fed wants to increase the amount of currency in circulation, it engages in quantitative easing whereby it purchases treasuries and assets on the market. This act elevates prices and drives yields down. When it wants to decrease liquidity or currency in circulation, it sells treasuries and assets to the market, pushing prices down and yields up.


After the 2008 financial crisis, the Fed, and other central banks around the world, rushed to stabilize the save the financial system by purchasing underwater securities and assets from the market, flushing cash back out and stimulating the economy. By the end of QE round 1 in March of 2010, the Fed had purchased 1.725 trillion worth of financial assets, and they continued to engage in more rounds of QE. 


In 2020, 20% of all US dollars in circulation were printed to stimulate the economy in the wake of the pandemic. The short-term rate, another tool the Fed can use to influence market participation, dropped to virtually 0%. Fast forward to March of 2022 and US inflation peaked at a 41 year high of 8.5%. But how? Fundamental economics. If there are too many dollars chasing a fixed amount of goods and resources, prices go up. When the Fed buys assets and/or issues new debt (creates currency), these dollars eventually make their way into risky assets. The lower the risk-free yields are, the greater the appeal to chase higher returns in risky assets like real estate and stocks. In a nutshell, that explains the inherent tie between the Fed’s balance sheet and asset prices. 


Starting in April this year, the FOMC (Federal Open Market Committee) will be reducing the number of treasuries that will be rolling off the Fed’s balance sheet by roughly 80%. Instead of treasuries rolling off and being absorbed by the private market, who demands higher yields, the Fed will reinvest proceeds back into new security purchases, elevating prices and suppressing longer-term yields more than the market would naturally allow.

As the value of debt continues to come into question by the supply and demand of debt, investors will seek to re-balance their portfolios accordingly to mitigate ongoing volatility. 


Tangible, fixed supply real estate remains a compelling investment option in the face of uncertain economic, inflation concerns, and policy conditions. Specifically, residential real estate, a non-discretionary asset that everyone needs to survive, will continue to command interest. By keeping an eye on the Fed’s balance sheet and forward-looking indicators, we can make better risk-adjusted investment decisions. The more dollars there are chasing inflation hedged assets, the higher valuations should be, regardless of negative leverage.

Tariffs on CRE

By Christian O'Neal • March 20, 2025
Impact of Tariffs on CRE

Why Residential?

By Christian O'Neal • February 13, 2025
The fundamental need for housing is universal—everyone requires a roof over their head. In the United States, however, we are facing a significant shortage of housing. According to the National Multifamily Housing Council, an additional 4.3 million units will be needed by 2035 to meet growing demand. Much of this demand is driven by migration to expanding lower cost cities and away from high tax, high cost metros, a trend accelerated by the widespread adoption of remote work during the pandemic. This trend has reshaped the housing landscape, creating a compelling opportunity for investors. While there are numerous investment strategies available, each with its own set of risks, residential real estate stands out. Over the past three decades, multifamily rentals have consistently delivered the highest risk-adjusted returns in commercial real estate. Why? Because housing is an essential need, regardless of economic conditions. At AEG, we are strategically developing both for-sale and rental housing, allowing us to adapt our approach to changing market dynamics and maximize returns while mitigating risk. Here’s why we are confident in the strength of residential housing as an investment: Land is Finite: Unlike many other asset classes, land cannot be created or expanded. The supply is fixed, and the demand for housing continues to grow. In the foreseeable future, virtual spaces like the metaverse will not replace the fundamental human need for physical shelter. Residential Housing is Non-Discretionary, and It's Supported by Government Liquidity: Housing is the only non-discretionary asset class. If it weren’t, we would see similar government support for other sectors like retail, office, or industrial real estate, but we don't. The federal government provides liquidity to the multifamily housing market because it is a fundamental need. This support drives down the weighted average cost of capital (WACC), making housing assets attractive to investors. This consistent access to capital compresses cap rates, creating a floor on the market (to an extent), fueling long-term growth and demand from investors big and small. Rents Tract with Inflation, and It is Rare to See Negative National Rent Growth: Rents reset every year as cost increases are passed off to tenants via annual lease contract resets. Since the beginning of recorded history, national rents have only gone negative year over year three times: the Spanish flu of 1918, the Great Financial Crisis, and during the Covid-19 pandemic. While yearly gains in rental cashflow streams will not make you wealthy, they are without a doubt very stable cashflows, historically speaking. There is no similar liquidity for for-sale housing, but its non-discretionary nature still gives it a strong investment profile. In growth markets like South Carolina's tertiary cities, the influx of new residents is fueling demand across all price points, further strengthening the residential sector. We believe in our residential investment thesis for both macro and local fundamental reasons. If interest rates remain high, new construction will slow even further. Meanwhile, homes in desirable locations will remain in high demand as many homeowners—especially those with low-rate mortgages—are unlikely to sell. According to the latest third-quarter data from the FHFA, 73.3% of U.S. mortgage borrowers now have an interest rate below 5.0%, a decline of 12.2 percentage points since Q1 2022. This significant shift in mortgage rates creates a unique dynamic: many homeowners are effectively "locked in" to their current homes, preventing them from moving and creating a looser supply in the for-sale market. As a result, home prices are expected to remain elevated in high-demand areas. While values may remain relatively flat in real terms over the next few years, on a nominal basis, they are expected to rise, particularly in growing markets. If interest rates decrease or economic growth drives up rental demand, build-for-rent communities could become more viable. However, they are not yet penciling out as attractive investments because growth has stalled - but, that is about to reverse. Thanks to our strategy and access to land—often without burdening our balance sheet or stretching our resources—we are able to remain nimble and pivot towards the most attractive risk-adjusted yields. As we navigate an uncertain economic environment, several factors support the ongoing strength of the residential housing market: slow housing starts, higher interest rates, and a large percentage of homeowners sitting on mortgages with sub-4% rates. These dynamics, along with strong demand in high-growth areas, reinforce our belief that residential real estate will remain a compelling investment in the years to come. At AEG, our focus is on developing attainable, high-quality housing, from custom spec homes, to mini-farm tracts, to higher density townhome projects. This flexibility allows us to serve a wide range of income levels and tailor our strategy to market conditions. With a commitment to quality finishes and high end products, we appeal to buyers regardless of economic conditions, providing us with a tighter, more predictable cash conversion and days on market cycle, unlike some of our competitors. By seeking out individually parceled deals, we reduce overall risk and remain agile in our decision-making.

CRE Price Discovery

By Christian O'Neal • February 3, 2025
Valuations & Investment Psychology
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