If you're on the fence about mortgage rates, home prices, or you're a real estate investor worried that cap rates keep climbing, read this one to the end — because the conclusion I've reached runs against most of what you're hearing in the market right now.
On June 17, 2026, Kevin Warsh chaired his first FOMC meeting as Fed Chair. The Committee held the federal funds rate at 3.50%–3.75%, but the tone was unmistakably hawkish. Most people's first reaction is: if the Fed is this hawkish, won't mortgage rates and cap rates just keep rising? My read is the opposite — a hawkish Fed under new leadership is precisely what could bring mortgage rates down, let cap rates peak and roll over, and give home prices a lift. In this piece I'll walk through the full logic: why the Fed turned hawkish, how that flows through to long-bond yields and mortgage rates, and where cap rates are headed next.
Why the Fed turned hawkish
Kevin Warsh was sworn in as Fed Chair on May 22, 2026, and the June meeting was his first as chair. The statement sent three signals.
First, the Committee judged the economy to still be expanding at a solid pace, with job growth roughly matching labor force growth — no urgent need to cut.
Second, inflation remains above the 2% target, partly due to energy supply shocks. The statement included a notably firm line: "The Committee will deliver price stability" — a clear signal that the Fed intends to keep inflation in check.
Third, the latest Summary of Economic Projections (SEP) showed a meaningfully hawkish shift:
| Meeting | Median FOMC projection for year-end 2026 | What it signals |
|---|---|---|
| March 2026 SEP | 3.4% | Room for a cut later this year |
| June 2026 SEP | 3.8% | A hike is now on the table |
The core reason behind this shift is that the Fed needs to rebuild the market's confidence in its ability to control inflation. There's a well-known concept in economics — self-fulfilling expectations: if businesses, consumers, and bond investors all believe inflation will keep rising, it tends to. By turning hawkish now, the Fed is effectively telling the market: we have the resolve to bring inflation down, so don't price in premature easing.
The second reason is that the U.S. economy isn't weak enough to require immediate rescue. The labor market is cooling but not collapsing, consumer spending is diverging by segment rather than broadly contracting, and investment tied to AI, data centers, reshored manufacturing, and energy/infrastructure is still propping up growth. Inflation hasn't fully returned to target, and the economy isn't weak enough to force an immediate cut — which gives the Fed room to stay hawkish.
The third reason is a Warsh-era shift away from "spoon-feeding" the market. Over the past decade-plus, markets got used to the Fed stepping in every time there was a hint of pressure — expecting a cut whenever growth softened, expecting reassurance whenever stocks fell. Warsh has said explicitly he intends to reduce forward guidance — not signaling his next move in advance, and instead letting the market read the data itself. That shift adds short-term volatility, but it doesn't mean the Fed will keep hiking indefinitely. What it really means is the Fed doesn't want to commit to rate cuts prematurely.
Why a hawkish Fed can actually pull mortgage rates down
This is the most counterintuitive — and most important — link in the chain.
The Fed directly controls the overnight lending rate: the federal funds rate, a short-term rate. But the mortgage rate you actually borrow at tracks long-term yields, specifically the 10-year Treasury. The relationship between the Fed's short-end policy rate and long-bond yields isn't tight — what really drives the 10-year Treasury yield is the market's expectations for inflation and GDP growth, not the Fed's policy rate itself.
The chain works like this: a hawkish Fed convinces the market it can control inflation → economic activity cools, consumption is restrained, GDP growth softens → expectations for future growth and inflation get marked down → the 10-year Treasury yield falls → mortgage rates follow it down.
Mortgage rate data is best tracked through Freddie Mac's weekly Primary Mortgage Market Survey (PMMS), the most authoritative benchmark for the 30-year fixed mortgage rate in the U.S., published weekly since 1971. A commonly cited industry rule of thumb: every 100-basis-point drop in the mortgage rate boosts buyer purchasing power by roughly 10% — a real shot in the arm for a housing market that's currently under pressure.
Where cap rates are headed: five driving factors
For commercial real estate investors, what matters more than the mortgage rate is the cap rate. A cap rate isn't simply "the 10-year Treasury yield plus a fixed risk premium" — it's driven by at least five factors together:
| Factor | What it captures |
|---|---|
| Risk-free rate | The 10-year Treasury and similar benchmarks — the cap rate's baseline |
| Financing cost | Whether buyers can get financing, at what rate, at what LTV, and how strict DSCR requirements are |
| Rent and NOI growth expectations | Investors will accept a lower cap rate if they believe rents will grow and vacancy will fall |
| Supply cycle | If high rates push new development out of the market, supply shrinks 2-3 years out, giving rents and asset values more support |
| Market risk appetite | Capital markets don't stay frozen forever — once lending reopens and buyers return, cap rates start to compress |
My call on multifamily cap rates over the next two years: quality assets peak first, then compress gradually. Three reasons.
First, high rates have already killed off a large share of new development. Many projects can't get financing, don't pencil out, or never break ground. Projects that don't start today mean no units delivered in two to three years. By the time demand recovers in 2027-2028, new supply will actually be lower — less supply means more support for rents, NOI, and valuations.
Second, capital markets will reopen. Transaction volume has been low for the past two years because sellers won't sell at high cap rates, buyers won't buy at low cap rates, and lenders have stayed cautious — the market froze. But it won't stay frozen forever: once long rates stabilize, lending rates stabilize, and banks and institutions start lending again, buyers will come back, and quality assets will be the first to see cap rate compression.
Third, apartments remain one of the most demand-backed asset classes in the U.S. The country's housing shortage is a long-term structural issue, not a short-term story — young people need to rent, new immigrants need to rent, people priced out of ownership need to rent, and workers who relocate for jobs need to rent. As long as housing supply stays structurally short, apartment demand isn't going away.
For private real estate investors, the real opportunity going forward isn't betting on a sudden rate collapse — it's picking projects that still carry a margin of safety in a high-rate environment: low land basis, controllable construction costs, conservative rent assumptions, exit cap rate assumptions that aren't too aggressive, genuine demand at the location, and a capital structure that can't be blown up by short-term rate swings.
Case study: why I've focused on modular development
This is also why I've put so much of my time over the past two years into modular development — its biggest advantage is speed. A traditional multifamily project typically takes 4 years to develop; modular development takes about 1.
What does that timing gap mean in practice? During the low-rate years of 2021-2022, a wave of multifamily projects filed permits at once, then hit the market together in 2025-2026 — running straight into brutal competition and a high-rate environment, and many of them lost money badly. Since 2023, multifamily permit filings in the U.S. have dropped sharply. Because the traditional build cycle takes 4 years, very few apartment buildings will actually complete in 2027-2028.
Take Lynnwood, WA — a transit-hub suburb near Seattle — as an example (data from our own team's project pipeline and permit filings):
| Period | New apartment units |
|---|---|
| Past 2 years | 1,538 units |
| Next 1 year | 0 units |
| Next 2 years | 375 units |
New supply over the next two years is down roughly 75% from the past two years. That's exactly where modular construction's speed advantage shows up: if I file permits on our Lynnwood project starting now, it can be built and leased within a year — and next year, Lynnwood will have zero other new apartment buildings coming online, sidestepping the competition entirely.
But when I underwrite these deals, I insist on stress-testing with assumptions more conservative than today's market: cap rate up another 100 basis points, rents down another 10%, vacancy up another 5 points — can the project still turn a profit under that scenario? If the answer is yes, and the annualized return still holds around 15% even in that downside case, that's a project I'm willing to do. The developers who actually make money aren't the ones with the highest leverage or the biggest scale — they're the ones who can deliver the housing the market genuinely needs at the lowest cost and the fastest speed.
Common misconceptions
Misconception 1: A hawkish Fed means mortgage rates will keep rising. Mortgage rates track long-bond yields, not the federal funds rate — a hawkish stance that suppresses inflation expectations can actually pull long yields (and mortgage rates) down.
Misconception 2: Cap rates only track Treasury yields. Financing cost, rent growth expectations, the supply cycle, and market risk appetite are equally important variables — ignoring the supply cycle in particular is a common way to misread the 2027-2028 market.
Misconception 3: You shouldn't develop in a high-rate environment. The real question isn't "should you develop," it's "can the deal still carry a margin of safety under conservative assumptions" — modular development's speed advantage lets you capture the supply vacuum window that high rates are creating.
Bottom line
A hawkish Fed looks like bad news in the short run, but the underlying logic points somewhere else: inflation expectations get anchored, the economy cools moderately, long-bond yields come under downward pressure, and mortgage rates gain room to fall. At the same time, high rates are cutting into new supply for the next two to three years, laying the groundwork for quality-asset cap rates to peak and roll over. For buyers, that likely means gradually improving affordability. For investors, the real opportunity is using conservative assumptions to identify projects that can survive the cycle — not betting on a sudden rate collapse.
If you're a real estate investor interested in U.S. multifamily development, modular construction, or private real estate investment, reach out to our team — happy to talk through it.
