October 14, 2025
The news in Q3 centered around the Federal Reserve cutting rates. There was an expectation all year that the Fed would begin easing at some point. It was particularly notable amongst many throughout the real estate sector who are counting on lower rates to spur activity.
Here's where we stand: Despite the Fed's September rate cut, mortgage rates have settled above 6.3%. Naturally, this has tempered mortgage applications and made housing affordability more challenging. We're now seeing some of the tightest conditions in 40 years.
But here's what makes this moment noteworthy for investors: While elevated rates have slowed overall market activity, they've also created a more selective environment. Projects that work in this rate climate are being underwritten with conservative assumptions, which means they're built to perform even if conditions stay choppy.
Inflation has been relatively stable throughout 2025, hovering just above the Fed's 2% target. But the labor market told a different story—job growth softened through Q3 and unemployment ticked upward.
That combination prompted the Fed to act. On September 17, they cut the federal funds rate by 25 basis points to 4.00-4.25%—its first cut since December 2024.
A single cut won't reshape markets overnight. But if this is the start of an easing cycle, it could meaningfully shift the cost of capital for real estate projects. In our world, that's the difference between deals that work and deals that don't. The bigger question? What would happen in the broader market once the Fed moved?
That's where things got interesting.
The reason? Regional markets tell different stories. The Southeast and Midwest—North Carolina, Tennessee, Ohio, Georgia—continue showing strength with healthy investor demand and housing activity, even as the national market slows. These are the markets where Groundfloor has deep roots and consistent deal flow, proving that macro headlines don't dictate every outcome.
The Fed doesn't actually control mortgage rates. Mortgage rates follow the 10-year Treasury yield, which is driven by what bond investors believe about future growth and inflation. Right now they're betting on economic strength, pushing yields higher despite the Fed's cut.
This exact pattern played out last autumn when the Fed cut by 50 basis points and Treasury yields climbed anyway.
A single rate cut of 25 basis points is unlikely to have a meaningful impact on the economy and individual investors. However, if this marks the start of an easing cycle—a series of rate cuts—yields could begin to fall, potentially sparking more activity across different sectors of the economy.
Lower interest rates should translate into lower yields on bank products and traditional fixed-income securities, but they also mean the cost of borrowing improves. For real estate specifically, a lower cost of capital makes more deals financially viable and should lead to increased activity across the sector.
But here's what Q3 reminded us: Things don't always unfold as expected. The Fed cut rates, yet Treasury yields climbed. For investors, this kind of unpredictability underscores the importance of diversification. Private real estate debt continues to offer higher yields than traditional fixed income because it’s backed by real project performance—not just Fed policy.
While money market rates compress in an easing cycle, returns on real estate-backed investments reflect the underlying fundamentals of supply, demand, and project performance. If borrowing costs improve as rates fall further, these projects don't just survive—their economics improve. If rates stay elevated, they're already built to perform in this environment. You're not trying to time the Fed's next move. You're participating in transactions that generate returns across multiple rate scenarios, with the added benefit of diversification that's uncorrelated to stocks and bonds.
If you’re looking for diversification, higher yields and exposure to private markets, take a look at how Groundfloor Notes compare to traditional and alternative credit products.