2022 has brought about some of the highest rates from the Fed in the past 40 years. Which brings about many questions for real estate investors. Will this push us into a recession? What will this mean for the housing market, mortgage rates, and rental investments?
To start; as rates increase it’s important to bear in mind that investment loan rates will always be higher than a traditional mortgage to begin with. As a general rule of thumb, you can expect investment loan rates to be approximately 0.50% to 0.75% higher than a primary mortgage rate.
In our current market, both home prices AND financing prices are on the rise simultaneously. Which means that people aren’t just being pushed into a less expensive home, some are pushed out of purchasing a home altogether. So, what do they do? They continue renting. Rental markets and the home purchase market are very tightly linked. Therefore, we can determine based on historical data in similar market climates, the coming years will have a large and increasing market of renters. Making having a real estate investment a wise one indeed. The demand for housing will remain high and along with that, high rent prices. This recent Zillow report shows how increased mortgage rates correlate with average rents, moving from $1,600 per month in February 2022 to $2,000 in August 2022.
Source: Zillow Economic Research
So what does this mean for Rental Property Owners or those involved as passive Real Estate Investors?
The bottom line is that when the Federal Reserve interest rates go up, it can actually be a very good thing for real estate investors, particularly multi-family. The first reason is that the market for multifamily apartments will increase as many people will either not qualify or cannot afford a mortgage on a primary residence. The standards for lending go up significantly during this climate of rates increasing. Mortgage lenders who previously pre-qualified home shoppers will have to recalculate, often leaving a lower number of qualified home buyers.
The second thing to consider is that while the housing market boom appears to have stabilized, the prices of homes remain at historic highs. Coupling that with the rising interest rates results in rental costs being favored over a mortgage payment. Therefore indicating that real estate investments will continue to perform well. Individuals and families now postponing house hunting still need a place to live. The market for tenants now looking for a place to rent is bigger and will expectedly climb.
When you piece together what a rising Federal Reserve rate does to the housing market and mortgage rates- it may signal a great opportunity for potential investors to dip their toe into the real estate investment market or for those already in the game to consider expanding their holdings. The foreseeable future holds a new stream of tenants and a strong future for real estate investment. Historically real estate has always been a strong hedge against inflation.
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