The relationship between reserves and economic activity may be more complex than traditionally assumed. While higher reserve balances are often associated with easier financial conditions, emerging research suggests that reserve creation can also affect bank lending through balance-sheet constraints.

At the 2022 ECB Research Conference, researchers presented “The Reserve Supply Channel of Unconventional Monetary Policy,” which examined how large-scale reserve creation influenced bank lending under the post-financial-crisis regulatory framework. The study found that, all else equal, additional reserves would crowd out bank lending because reserves and loans compete for balance-sheet capacity. From 2008 to 2017, each dollar of reserves injected was estimated to crowd out 19 cents of corporate bank credit.

Earlier New York Fed research reached a similar conclusion, noting that large reserve balances may not stimulate credit creation and can, under certain conditions, have contractionary effects on lending. Together, these findings suggest that reserve growth may support financial-market stability while simultaneously constraining some forms of credit expansion.

This raises the possibility that balance-sheet expansion could contribute to lower market volatility even as lending conditions become more restrictive. Such dynamics may help explain periods in which asset markets remain resilient despite signs of economic softness.

Dave:
The Federal Reserve might actually be raising rates in 2027. If you look at prediction markets and what traders believe, they’re now actually saying the Fed will raise rates by September of 2026. What does this mean for real estate? What does it mean for you? Today on On the Market, we’re digging into the latest news, including what’s happening at the Federal Reserve, interesting data about HELOCs and an AI office boom that could help guide your next investment. This is On The Market. Let’s get into it. Hey, everyone. Welcome to On the Market. I’m Dave Meyer, joined by James Dainard and Kathy Fettke. Kathy, James, did you have it on your bingo card this year that the Fed would be raising interest rates in 2026?

Kathy:
Yeah, as soon as we started attacking, I ran. Yeah.

Dave:
Yeah, I guess come March, April, it did seem it got more probable, but man, start of the year, I would’ve lost a lot of money on that bet. Well, let’s get into it. Today on the show, we are going to be talking about the Federal Reserve ad nauseum. We will get into what this means for real estate investors and where things are likely to go. But we also have two other stories to share with you. One about the AI office boom and what an opportunity this might be for certain types of investors and how HELOCs are sort of becoming popular again and how real estate investors should be thinking about using them in their own portfolio. So let’s get to it. Our first headline for today, this comes from Reuters, but it’s probably on the cover of every media outlet in the country right now.
It said traders now see the Fed raising rates by September 2026. So this is specific to the next couple of months. And just to provide some background here, most people, myself included, beginning of the year, were expecting the Fed to probably keep rates somewhat steady this year, but most people were betting on one to two rate cuts because inflation was getting under control in January and February were down in the low 2% job reports were doing well and it just seemed like that would be an okay move to make. As of March and April after the war in Iran started, inflation has gone up dramatically. It was up 4.2% now year over year as of May. That is a significant increase and it’s kind of across the board. If you look at the CPI, the PPI, the PCE, all sorts of different ways to measure inflation, it’s up on all of them.
So the Federal Reserve following their mandate to keep inflation under control just yesterday announced that they’re holding rates steady for now. That was their June meeting, but they’re indicating to the market that don’t expect rate cuts and maybe you can expect a rate hike to try and get inflation even further under control. So that’s the background. Kathy, what do you think of this and what does it mean for real estate?

Kathy:
Well, it is ironic. I think I will say because the president has been wanting lower rates, he kind of caused this to be the opposite and he chose Kevin Warsch, which he probably thought he could control and the opposite is happening there. So some of the interesting things that happened at the Fed meeting is that the language is changing. There was no talk about hitting 2% inflation. Just I think his line was the committee will deliver price stability. So that was a lot more vague.

Dave:
Do you think that’s intentional because they might accept a higher inflation rate in the future?

Kathy:
Yeah. Oh, for sure. So that is probably something the president agrees with is like obviously the president wants lower rates, but with inflation, that’s just not going to happen. And what is especially interesting is that most of the Fed officials voted for probably, I think it was nine of them voted that there would be rate hikes.

Dave:
Just so people know, they didn’t vote, but they indicate- Indicated

Kathy:
On

Dave:
The dot

Kathy:
Plot.

Dave:
On where things are going. So yeah, a lot of people have signaled that they think a rate cut is in the future.

Kathy:
Thank you for that correction. Yeah, signaled it.

Dave:
No, no, just want to clarify. Yeah.

Kathy:
No, that’s right. But Warsch didn’t put a dot on the dot plot. He’s not projecting. And so there’s speculation that he’s just not going to be speculating because there’s so much unknown of where the next vote’s going to be. So it’s very interesting that Trump’s pick is maybe not the puppet that some people were thinking it would be.

Dave:
I’m not that surprised. Kevin Warsch has been a Federal Reserve governor. I think he understands how this works. I also think he knows if he came in and cut rates right away in this inflationary environment, we would undermine the credibility of the Federal Reserve and that could backfire. I think if they cut rates yesterday, we would’ve seen bond yields go crazy. We would see mortgage rates go even higher yesterday because people would be fearful of inflation and that the Federal Reserve wouldn’t be taking their responsibility to control inflation seriously and that they were just going to cut rates to try and stimulate the economy, inflation be damned. So I actually think this was a better move for mortgage rates than cutting rates in the meantime, but it is interesting. Even if inflation gets under control and they cut once, we’re not getting significantly lower federal funds rate for a while.

Kathy:
If there was only a camera in the White House that we could see the reaction right now-

Dave:
Would you be watching it real

Kathy:
Time?

James:
Yeah. Well, and I think he even talked about that. He knew that about 30 days ago that this was going to go sideways economically when Trump was talking about it because he said, he’s like, “Yeah, it’s going to get a little hairy for a second.” But like Dave said, the fact that he came in, I mean the announcement yesterday is, yeah, it makes sense, right? Inflation’s going up. The problem that we all had before was we knew inflation was going up. We were being told it’s transitory and then now we’re in the mess that we’re in now. And so we got to make sure that we stay on top of that. And as much as I wanted rates to be cut and us to get interest rates down, I mean, as an investor, that’s what we want, right? Little bit cheaper money, loosenes up the market.
The long-term benefits, we have to keep this inflation under control. They’re making the right calls, but what I’m wondering is with this Iran deal, if it goes through and stays, what does that do to inflation and how much will that drop? Because I saw oil dropped even, I mean, would it close 5% lower this way? A

Dave:
Lot. It was like 80 bucks a barrel yesterday. I mean, it was up at 110, but it’s been hovering around hundreds, so it’s probably down 20% this week.

James:
Yeah. And so as we see energy fall, if the strate opens up, what is that going to do to these inflation numbers? Because I mean, a lot of what we’re seeing on the spike in pricing, at least from a consumer standpoint, I can tell you one thing right now, shipping is a nightmare. Getting your product on time because they’re trying to load up their transits and getting appliances and things delivered to you nationwide, everything gets lost and delayed, but also it is going up on price. I mean, people are charging more because fuel costs more and if energy goes down, it might knock inflation down quite a bit in the next month.

Kathy:
Possibly, but you have this other side of the equation that the economy’s kind of booming. And I’ll be talking about that in a bit and that can create inflation as well.

Dave:
My guess is that we will see a peak to inflation in the next month or two on a year over year basis, probably. Let’s just presume peace deal gets signed and it stays. We don’t know, but let’s just presume that happens. It’s kind of like the analogy of when a snake eats something and it kind of works its way through the snake over time and you can see that bulge. I think that’s what will happen with inflation. Will it get worse? Probably not because the thing that was driving inflation up will be cured, but it still has to work its way through the system. It doesn’t just snap back. Prices are probably not going down. We’ve seen this in COVID, companies, service providers not lowering their prices again. So we’re going to be stuck for at least next year in the data seeing higher inflation.
I also think there are certain, we can get into this, but food costs are likely to stay high because fertilizer costs and inputs to food prices, that matters for a whole year. The whole crop season, we’re going to see higher food costs. And these things, supply chains don’t just snap back together. All the analyses I’ve read say that oil prices will probably stay high for the rest of the year and it’ll probably be three, six months before supply chains are really back to their optimized self. So probably not getting worse, but I do think we’re going to see inflation stay in the threes for the foreseeable future. Whether the Fed is comfortable with that or not is a new question I think we will be thinking about. But as long as the labor market stays as good as it is, I don’t know if they need to cut rates.
I will also say this though, part of me thinks this is a bluff, the raising rates thing is because the thing the Fed has done a lot over the last couple of years is like tell the markets ahead of time so that they don’t freak out. And I don’t know if they necessarily actually think they’re going to raise rates, but I do think they kind of want to send a signal to the market like, “Hey, we’re going to be really serious about inflation and we will raise rates if we have to. ” If I was betting today, I’d say rates stay flat for the rest of the year.

Kathy:
Yeah, that’s what the article I read was saying is basically with this new Fed share, there wasn’t as much forecasted. In fact, he didn’t forecast at all. So that part of the Fed’s job, which has been very specific language at every FOMC meeting that signals markets to do stuff before it happens and that may be changing and it makes sense because every day’s a new day and you don’t know what’s going to happen tomorrow. It’s very hard to forecast.

Dave:
Totally.

Kathy:
So it’s more data driven potentially.

Dave:
Yeah. I mean, that’s what Warsch also said publicly, he doesn’t think the Fed should be saying as much publicly. So we’ll see.

James:
You know what though, but he’s not wrong about that. They come out and they say things like even when things are trending the right way, they’re like, but it’s like they’re this constant rain cloud. It’s like, dude, pop a Xanax and get a little happier when you’re delivering the message. It is your delivery in the message, right? You can say the same thing, but say it two different ways. And I will say Powell’s a rain cloud, period. The delivery was never good. And a lot of the things that he was saying was good. It’s just how he was saying it, not the way it should be going. And then you get the media hyping everything up, but I don’t know. I think this inflation’s going to slow down a little bit quicker. I mean, oil dropped dramatically and that is the key driver when you look into these inflations.
I know we got good job reports. Those things are going on, but I think that was pretty strong even going in to this inflationary period. And so I’m hoping that this deal works out and we see a little bit of just relief across the board, not just for interest rates, but just in general getting people to work, like every time I hear the labor report, I’m like, it’s the complete opposite on what we’re dealing with every time.

Dave:
In Seattle, it definitely is.

James:
It’s polar opposite. I can tell you there’s a lot of people looking for work right now, especially in the construction industry. Builders are laying off people. There’s well qualified bodies coming to the market to work and they are not getting job offers. I have not had this many subcontractors, project managers, superintendents reach out to me for work. This reminds me of almost like 2009 days where it’s like, “You got work, you got work?” We are getting harassed right now.

Dave:
Not a great sign for Seattle, but I think the labor market data is super weird I personally think we’ve seen a lot of increase in the partial employment data. The unemployment number doesn’t tell the whole thing. A lot more people are partially employed or underemployed, they call it, where they’re working fewer hours or less than their full capacity, whatever it is. And so we’re seeing that increase. But James, I mean, I think there’s a good chance you’re right. If inflation gets under control and the labor situation that I feel like everyone is feeling but is not reflected in the data starts to show up in the data, then we could maybe see rate cuts, but I don’t know. Let’s talk though, instead of guessing, let’s talk about what people should be doing about this right now. Kathy, do you have any advice for real estate investors about how to handle this?

Kathy:
Well, I found it, as we discussed, very interesting that 2% inflation target was not mentioned and every word that comes out of worse’s mouth is intended. That’s how it always has been. The Fed share signals signals to the markets what’s going on. So that signal is perhaps this 2% target that just came out of thin air. I mean, who came up with that and why may be not as important. So we’ll see. But if that’s true and let’s say it’s 3% or between two and 3%, who knows? What we do know is that real estate is one of the best hedges against inflation. Inflation is kind of good for us investors if you own the hard asset. That has historically been the case. Houses, buildings, they’re all made of things that inflate. We’re seeing it now. I mean, James just said it. It’s hard to get the materials that you need to get things built.
And when you have a property that already has those things, inherently the value of it goes up. All you have to do is go to Fred, type in Fred, which is the St. Louis Fed and type in home prices over the past decades. And you’ll see it just consistently goes up. It’s not even necessarily that the value of the property’s going up, it’s that inflation has gone up and housing is affected by that. Rents tend to go up over time as well. So if you want to hedge against inflation, it is real estate, hands down, hands down. And with my story, I’m going to talk about even why that’s even more important today.

Dave:
Great advice. James, any advice for people on how to handle this or outlast this confusing situation?

James:
You know what? It’s randomly the last two weeks I’ve been geeking out on bills and credit card, just everything. I don’t know what it is. I went into hyper, we got to cut the stupid bills. And so I know personally right now, just because costs and everything are going up, household costs, inflation, it’s harder to make money right now. The margins are just a little bit different. And so I went into between personal business, we audited all of our weird expenses and I’m like, all right, let’s just start cutting fat because that’s what you should do. Create more margin, create more profit, create more room in your daily life by going through. And everyone should do a subscription audit on everything they do.

Dave:
Oh no, it’s too depressing.

James:
Oh my God, do not wait more than 90 days for everyone listening because this stuff adds up into real money and it turns into years of time, especially with businesses. And the other thing is one thing I have learned over 20 years is when it gets this confusing, like you think this is going to happen, this is going off. Nothing seems to be making sense. It is the best time to buy because that analysis paralysis is a real thing and people just lock up. And when people lock up, there is a lot of really good opportunities out there. So as confusing as scary as sometimes real estate may be or investing may be, that is when you want to look the hardest. Now update your buy box. You don’t go buy the next average deal. It has to hit different requirements, but there is some really good opportunities and not because we’re in some free fall and the market’s crashing, it’s because everyone is frozen.
And when people are frozen, you get to pick what you want. And so just double down, keep your eyes open, don’t go rush to buy, but there is buys out there. I mean, I have more flips going on than I probably had in the last couple years with this show, everything coming out. Doesn’t feel great right now. We’re going to sell a lot of things. Not great. I am also buying $3.5 million in flips next week. Wow.

Kathy:
You’re so brave.

James:
The math works, right? It’s like, all right, just punch holes in it. And if you just punch enough holes in it and it still floats, buy it. Yeah.

Kathy:
I don’t know. I saw your Instagram. There’s more than holes in those properties you’re buying

James:
The better.

Dave:
Well, it’s great advice. I think basically the fact that we’re have this inflation, the Fed’s not doing anything I think means this market that we’ve been in is here to stay and it’s going to be the same kind of thing James was just talking about. Opportunities to buy cheap. And as Kathy said, this is a good long-term inflation hedge. So if you can find good deals, low competition environment is a good place to try and buy, but you got to be disciplined to find the really good deals because there’s a lot of trash out there as well right now. Kathy, what story did you bring today?

Kathy:
My article is from The Wall Street Journal and the title is The AI Office Boom Feels like 2000 all over again. Now if you were around then, and I know some of you were just little toddlers, but back in 2000 there was the. Com boom and then bust. And I am from San Francisco. It was good for me because we were buying real estate then, but there was a big bust because so much money went into. Com boom that it was oversold and there was a massive housing recession in, I think it was 2001, but right afterwards. Now shortly after, there was another boom in housing in San Francisco. But according to this article, it’s not as bad as it sounds this time around. So the office boom is happening because of AI, but companies and landlords have gotten wiser. They learned. Some of us actually learn from the mistakes that we’ve made in the past.
So this time when they’re leasing, they are looking at the fundamentals of the company. Who would’ve thought? Instead of just leasing to a startup that borrowed all this money and has shown no income for years, they’re leasing to AI companies that do have income. These are companies that can handle the leases. So there isn’t as much concern that all this office leasing is going to result in a bust. Well, interestingly enough, New York City is seeing the greatest boom from this San Francisco, of course, but the third city was Austin Austin is just absolutely booming in office leases. This has 34% increase in Austin jobs that use office space compared with 2019. This is a big deal. I got to tell you, if I had the guts that James has, I would be buying all over Austin.

James:
I know.

Kathy:
Even if it doesn’t make 100% sense today, I know Tarle Yarborough said that it’s like, I can’t make these things cashflow. I just think Austin’s on the verge of booming again.

Dave:
Will you buy office or residential?

Kathy:
Residential. Residential to keep up. All these jobs are coming in. People are having to go back to the office and there are more and more corporate headquarters moving to Austin. The fundamentals are there. It’s just it was oversupplied. Too many builders came in, but that I think it’s going to be absorbed. And if I had the guts to be negative cashflow for a bit, I think people are going to see massive equity growth in these cities. I have a niece who is a realtor in San Francisco. People are doing crazy stuff, hundreds of thousands of dollars over asking price again because of the AI boom there.

Dave:
Yeah. San Francisco’s going nuts.

Kathy:
It’s going

Dave:
Nuts. I think it’s up like 11% year over year. It’s crazy.

Kathy:
Yeah.

James:
You know what? And Seattle typically falls San Francisco. Yeah. That’s what I’m putting some eggs in a basket and I’m buying here. I’m like, you know what? We seem to chase about six to nine months behind.

Kathy:
And that’s so wise, James, because about six to eight months ago, I had someone on my show that was from San Francisco saying that, and I am from San Francisco, I don’t live there now, but he was saying there’s properties you can get here that are 2009 prices. I mean, 2009, remember that was like cheap. So just a year ago, you could buy so cheap in San Francisco and those days are gone. And I remember thinking, “Gosh, if I had the guts, I would buy some negative cashflow properties in San Francisco and make a few hundred grand just in a year.” I think that’s the opportunity happening in Austin right now and possibly Seattle, like you said, James.

James:
I was talking about Austin last time we were on, because when you’re looking at rebounding markets and rents were down, values were down and there’s that rubber band effect and I was like, “This is a market that is going to pop and I think we should do it. Dave, you want to go buy something in Austin?

Kathy:
I’ll do it with you.

James:
You want to do it?

Dave:
Yeah.

James:
Let’s do it.

Dave:
I don’t know. It’s not enough for me. The idea that we’re going to get some more AI jobs is not enough for me to buy a not cash flowing deal in a city. I don’t know. I do think it’s interesting following the economy and jobs and where these are going does make a lot of sense to me. And if you’re in one of those markets and understand one of those markets, you might want to do something like James and Kathy are recommending, but not for me right now. We got to take one more quick break, but we’ll be back with On the Market right after this. Welcome back to On The Market. I’m here with James and Kathy sharing our most important headlines of the week. So far, Kathy talked about an AI office boom. We talked about the Fed. James, bring us home. What do you

James:
Got? So the article is from Housing Wire and it talks about how the lock and effect is real and how there was over $47 billion in equity pulled in 2026, which is a 2% year over year in the highest first quarter since 2021. Wow. So this is something I’ve been paying attention to a lot, credit card debt, unsecured debt, consumer spending. It can lead to bad consequences and major issues in the near future or in the future. And I don’t know why I’m becoming the old man that tucks their money under a mattress where I’m like, this is all going to go really bad here. And so when I read this article, I was like, wow, there is some definitely financial pressure. And I remember in 2006, five, six, and seven, you started to see things and I didn’t pay attention to them. It was like, Hey, let’s go get a deal done.
That’s all I was paying attention to. And there was starting to be this financial pressure and cracking going on. And I feel like that is going on in the debt space right now and it is going to pop and shock the market.

Dave:
Except I love it. You’re like, I’m hiding my money. I’m going to go buy a speculative house in a new city.

Kathy:
I mean, I read this article differently that people like me don’t really want to get out of your low rate. So the way you tap your equity instead of selling the property is to a HELOC. I’m in the middle of one right now and I’m going to spend it all, going to gamble it with James. But it doesn’t necessarily say these people are stressed financially. It’s just they want to

James:
Access their

Kathy:
Equity. I feel like the stress is for people who don’t have equity, who don’t own homes, they don’t have that to tap into. But I mean, it’s not super specific what people are doing. Perhaps they’re buying another home and learning how to be a landlord for the first time or taking that money and improving the property because they don’t want to move. Why move when you have that low interest rate? So I don’t know that it’s necessarily a sign of distress. When you look at overall debt, the real debt issues are student loan debt, car loan debt that we’re seeing delinquencies really rise on those, but mortgage delinquencies still historically low.

Dave:
Well, I agree with both of you. Mortgage delinquencies are really low. So I do think there’s stress in the market, but it’s not homeowners where the stress is. I don’t know if this is necessarily a sign of stress. I agree with you though, James. I think if you look at the big picture of the American consumer, it’s concerning. I’ve done shows on that recently, just the savings rate plummeting, consumer confidence, plummeting, the delinquencies on consumer debt going up. It’s just a classic economic cycle. This is just what happens. For better or worse, our economy runs on debt and at a certain point, people stop paying their debt on time. It causes a recession. A lot of that debt gets wiped out, bankruptcies happen, and you start over. And we just haven’t had that in 18 years, which is unusual. But the fact that it’s happening now is not very surprising to me.
But at the same time, Kathy, I actually think people are probably using equity from HELOCs. I think a lot of people are just renovating their homes instead of buying new ones because they’re locked in. And so they’re accepting that, “Hey, maybe we can’t move up. We can’t move down because mortgage rates are what they are. Let’s tap some of our equity and just change our current home.” There’s a lot of evidence that people are just reinvesting it back into their home. So I don’t think this is necessarily signs of struble in housing, but I do think there’s distress in the market.

Kathy:
Yeah.

James:
No, I think it’s just important to look at the other complimentary points too. Like foreclosures, yeah, they’re low, but they’re still up 26% year over year. And I know it’s a small number and that’s always that shocking headline that people are like, “Oh, this is happening.” It’s like, “Well, no, relax here.” But there has been a steady trend of that going up. And so it’s just that steady trend of distress with finances. FHA loans are up 21% on delinquencies and you also have early stage delinquencies started to actually fall. So I’m just trying to track all these things because it’s … And also as an investor, these are important for us to look at because where do you want to spend your marketing dollars and time? And a lot of people chase foreclosures, they chase the stress. And I see that with those articles like, “I’m going to go get foreclosures.” It’s like, well, there’s not that many, you’re still wasting a bunch of money, but where is the opportunity that you can go to to find discounted properties?
And what I am seeing though with the amount of expenses that are going up, insurance, household costs, people are pulling out money. The equity padding is not … As they pull out HELOCs, the equity positions are going down and they’re going to make it less tradable. And if the market stalls out, there could be huge opportunities in some of these secondary debts. One of the most profitable things we did, and it was for a short window in 2008, was buy discounted notes.

Dave:
Did you trade them or just hold onto them?

James:
No, honestly, we would buy them right before they went to auction and then they would go to auction and get bid up and then we’d get paid more money. And all you did was get the surplus from your note balance. I mean, we did three of those and it’s not because we were brilliant. We had this great idea. It was just like, “Oh, we want to go buy this building.” And so we bought the secondary debt and we’re like, “We’ll just go to the auction and buy it. ” And so we bought it for pennies on the dollar because these banks were just, they were selling it for two cents on the dollar. It was crazy. And then we went to the auction to go buy it and we’re bidding ourselves up and like, “All right, we don’t want this property anymore.” And then we were like, “Oh man, we just made…” There was a note and this is pure luck, not talent.
We bought this thing for 25 grand. Two days later it sold up and we got $150,000. And I was like, “What just happened? I didn’t even know what an actually…” I’m like, “Wait, we just made money?” So there’s just other opportunities and that’s definitely what I’m tracking right now. And there’s way too much debt. People are still loose with their finances and it’s going to cause cracking.

Kathy:
There’s definitely more opportunity. And I think one thing people should be

James:
Aware

Kathy:
Of is that if there is more distress with FHA loans, which makes sense, you only have to put 3% down on FHA loan and you could have a pretty low credit score. Great way to get in, very difficult if you don’t actually qualify or if your job is on the line or whatever. But FHA loans are assumable and a lot of people don’t realize that. So if you do research people who are struggling with their FHA loan, you might be able to assume it at that low rate.

Dave:
If you want to move in. Those are owner occupied. But I mean, if you want to do that, but it’s great.
But yeah, I think your general point is right though, if there is distress, you don’t hope that for anyone, but it does create opportunity and you can find ways to help someone out of a situation and build your portfolio at the same time. It just takes guts. You got to be like James, you got to be willing to just buy spec houses in cities he’s never been to. It’s not gambling. I’m just joking. When you do find distress, you can find just better numbers. You have to just kind of trust that the market will rebound and if you buy stuff that you know you can hold onto during a downturn, if it exists, I personally think we will see recession at some point just because it’s been so long since we had a real one, it’s just kind of inevitable that cycles have to recover.
And so if you can hold onto it through that and get a better price, those are the deals that over the long run are usually the best performers that you get out there. So definitely something everyone should be keeping an eye out for. Well, Kathy, James, thanks for being here. This was a lot of fun. Let us know how your spec house in Austin goes. All right. Well, thank you all so much for listening to this episode of On The Market. I’m Dave Meyer on behalf of James Dainard and Kathy Fettke. We’ll see you all next time.