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Why Rising Interest Rates Usually Mean Higher Rent Prices

The inflation rate has been at its highest since the 1980s. The Covid-19 pandemic has left the economy in a tough state, which only seems to worsen so far. The real estate industry grapples with the rising cost of debt. Loan rates with 3% quotations are now in the high 4%. The impact of rising financial expenses and interest rates is trickling down to investment strategies, rent pricing, and more inflation.

Real estate investors find themselves in “uncharted territories” as higher capital costs push the surge on “cap rates.” The resulting effect is that both real estate buyers and sellers must adjust to price expectations.

Rising Interest Rates and the Real Estate Market

Tighter credit standards, declining surplus for unsold homes, and interest rates for homes have risen drastically in 2022. Landlords and homebuyers need to understand how rising interest rates work because they impact the buying and selling processes in real estate.

Key Points to Note:

  • Rising interest rates reduce demand for home purchases as home buying becomes more expensive.
  • Interest rates go up when the government is trying to stabilize the economy, resulting in higher mortgage costs.
  • Reduced demand in real estate affects landlords and sellers, forcing them to cap their market prices.
  • However, the rising mortgage rates do not negatively impact housing prices and property value when the economy grows steadily as wages and salaries correspond in equal measure.

How Higher Interest Rates Impact Home Buyers and Home Investors

In the real estate market, rising interest rates make selling and buying a home difficult, while lower interest rates encourage easier buying and selling.

Taking a loan to purchase or refinance a property at a fixed rate is still a smart move. However, instead of focusing on high interests, consider other factors such as:

  • Local Market
    Real estate is primarily locally oriented. Pay closer attention to your market specifics before refinancing or purchasing property; evaluate the property’s capitalization rate, which also increases when interest rates rise.
  • Demand, supply, and demographic repositioning
    An investor needs to consider that the housing inventory for affordable housing is lower because its demand outpaces supply. More people will likely move from suburbs to cities when the economy opens. Workforce housing is, therefore, in more demand than supply.
  • Current financing structure and financing trends
    Interest rate hikes impact short-term loans more than long-term financing. Evaluate the 10- year treasury yield, which determines mortgage rates, and assess how the Fed might manage rates.

“The Fed tries to balance inflation progressively by raising rates throughout the year and pulling excess liquidity out of the economy.”

Ginger Chambless, JP Morgan Chase

Rising Interest Rates for Homeowners and Sellers

Rising rates affect homeowners as well. For instance, if Hawley wants to sell a house for $500,000, she may list her home at that price. However, due to inflation and rising interest rates, the market price could only come up to $ 400,000.

Hawley can still make a profit on the sale, but a 1% increase in rates diminishes the market price and value of her home by about $100 000. Landlords can still profit despite the volatile markets, depending on how they operate in the real estate market.

Rising Interest Rate, Property Value, and Market Price

Hypothetical scenarios demonstrate that market housing prices and property value directly correlate with loan rates, but the state of the economy matters. When the economy grows with earnings, rising interest rates do not significantly affect housing prices and market value. Interest rate hikes coupled with job and wage growth cannot paralyze the housing market. So, you should always look at the bigger picture and make sure to assess the economy before taking further steps. 

buying a house

How Do the Rising Interest Rates Affect Real Estate Investing?

If loan/mortgage rates rise, it could be a positive factor for real estate investing. The rental property market increases as fewer people qualify for loans and decide to wait on their own property. Simultaneously, rising interest rates cause a reduction in prices, making it better for an investor to purchase during the rising interest time.

As the high-interest rate escalates, real estate transactions dwindle as lending standards tighten. More people resort to renting until they can afford mortgage loans. A 1% margin increase in interest rate can yield good profits in a stable housing market for an investor in rental properties.

Rising Interest Rate: Buy or Sell?

Purchasing a home at rising interest rates is not a wrong financial decision. The historical perspective still points to current lending rates as relatively lower (below 5%). Today’s mortgage with a 30-year fixed rate is still cheaper than previous years’ lending rates.

Research and data show that today’s 30- year fixed mortgage is lower than the 5% experienced in 2009 and during the Great Recession in 2006. Average lending rates were at 6.5% then, and in the 90s, rates were at 7.9%, whereas in the late 80s, the average rates were at 10.2%.

Are Rising Interest Rates Positive for Mortgage Companies?

Yes, rising rates favor lending companies. The higher the interest, the more the lender earns. Conversely, when interest rates are too high, causing a shortage in mortgage demand, the lending companies also receive a loss of business.

When rates hike, mortgages become more expensive. It becomes more costly for home buyers to purchase a home. When houses become expensive, demand decreases. The resulting slump in the housing market forces sellers to reduce house prices to attract buyers.

Bottom Line

Interest rates capped at historic lows resonate well for buyers. Today’s real estate market portrays some of the lowest debt a home buyer can attain in the market. Strategically, investing as a landlord can help you maximize your property value and retirement income and minimize your investment fees and taxes. 

Need some help as a landlord? EZlandlordforms supports landlords during the buying or leasing processes. You can access personal services at a low cost and benefit from state-specific lawyer-written rental agreements.

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