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.
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:
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:
“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 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.
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.
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.
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%.
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.
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.
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