Investing in the real estate market has never been this uncertain. It could be that prices could receive a slightly unprecedented upshot, or they will peak at a price people could still readily afford. However, what appears evident is that the real estate industry will potentially receive a slight disruption in supply and demand.
Curious to know why? Well, it is due to a government-imposed increase in interest rates. This is a result of an upward inflation curve, resulting in a seemingly unbearable hike in the prices of housing, food, gas, and all other related expenses. Despite experiencing an increase in hourly wages and pay raises, the covid-19 induced inflation is overpowering all enjoyable benefits.
As a result, following a period of deliberation, the Federal Open Market Committee moved to curb inflation by increasing interest rates. Technically, the Fed raised the Federal funds rate, an interest rate in which depository and financial institutions (banks) lend additional reserves to each other, making it costly to borrow.
Previously, the funds’ rate has been at zero since the pandemic struck. To address the inflation, the committee imposed a puny 0.25 rate increase. However, has been stated earlier, this looks to have reverberating effects in all other industries, especially the real estate industry.
How the Federal Rates Will Affect the Real Estate Industry This year.
First, and most importantly, understand that the decision to invest should not be solitarily linked to an increase in Fed rates. Over the years, home prices have seen a meteoric rise – due to the 10-yield Treasury yield – with investors still investing in the market despite the apparent increase in prices. This is because people still buy or rent homes for essential necessities that arise with marriage or childbearing.
It is hard to accurately predict how the Fed’s directives will affect the housing effect. In the short run, however, an increased interest rate will prove challenging for both sellers and buyers such that the former expectedly face the burden of paying higher monthly rates while the latter will face lesser demand for homes.
A Projected Increase in Mortgage Rates
Logically, an increase in interest rates will deter buyers from taking risks or debts to finance huge expenses like mortgages. After all, the mortgage rates track the fed funds rates.
An increase in Fed rates automatically means mortgage rates will also increase. As such, experts foresee an expected rise in prices but will not match what has been previously witnessed.
This will, in turn, cause a possibly significant drop in sales activity. As noted by Lawrence Yun, a chief economist at the National Association of Realtors, prices will see a slight increase, and sales will see a decrease in volume as a reprieve; it noted that “people can take their time as ‘intense multiple-offer day are over.”
Even though prices might increase, it is not expected to be equivalent to the enormous figures they hit in the previous years.
Giving his insights, Doug Duncan, a chief economist at Fannie Mae, says there’s no expectation that prices will fall, but that price appreciation will slow. In hindsight, what could prove a respite could now be better to invest in, considering earlier years’ unbelievable peak and an expected decrease in demand.
Why You Should Buy House in the Present Interest Rates.
Despite the Fed’s directives due to the soaring inflation, now could be the best time to splurge the cash into that real estate investment you’ve been previously eyeing.
A survey conducted by the Fannie Mae Home Purchase Sentiment Index found that 52 respondents indicated buying a house now as the best time to make such an investment, and here is why:
Firstly, rates are moving at an alarmingly exponential rate such that the current average 30-year fixed rate is now greater than 5%. It will be best to invest in the current market rate as the future rate might be much higher than what is currently obtained. However, there is a caveat. The impulse to quickly expect high returns should be tempered at this point.
This is because liquidity will be affected by the current wave of inflation, which could reduce the cash value of your investment returns. Nevertheless, as rental income grows into the inflationary hit of the economy, your investment returns will inevitably grow, especially in light of a likely increase in Fed rates by an additional 3-4%.
Another reason is that the current real estate is already distorted. It is now a buyers’ market, a condition where there are more sellers than buyers. This means that there is a significantly low demand to buy a house. Instead, people are only realistically stuck with renting for now.
However, this is a piece of good news for real estate investors. A high mortgage rate results in a higher monthly rent, driving investment returns increasingly higher.
