What’s the Outlook on the Real Estate Market Once Interest Rates Increase?
It has been said that the Federal Reserve will raise interest rates a few times in 2019, and this can have a ripple effect across the real estate market as it increases borrowing costs. To date, mortgage rates are already about 100 basis points higher compared with a year ago at nearly 4.9 percent for a 30-year fixed rate mortgage.
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According to the most recent monthly survey by the National Association of Home Builders/Wells Fargo Housing Market Index, homebuilder confidence had already dropped eight points to 60 this month. It was 72 at the beginning of the year. With that said, what would happen to the real estate market once interest rates rise?
Small Rate Hikes May Be Doable
Robert Arnall, Executive Vice President and Chief Credit Officer of FineMark National Bank & Trust in Fort Myers, Florida, says:
“If the rates increase by only a small percentage, the ripple effect won’t be significant because for a buyer purchasing a $200,000 single-family home, the difference in costs between a 4 and 5 percent interest rate on a 30-year fixed-rate mortgage is less than $200 a month – it’s a jump from paying about $950 to $1,100.”
He says a move from 5 to 8 percent would do more damage.
“You go from $1,100 a month to $1,500 a month, that payment is significantly more impactful to the individual.”
Multifamily and Commercial Areas Will Remain Strong
Doug Imber, President of Essex Realty Group in Chicago says:
“Generally office space is having a period of lower vacancy and good rent growth. The economy’s strength is reflected in outperforming real estate sectors and industrial real estate distribution centers and office warehouse have been doing well.”
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“People stay as renters for an extra year or two while they save up more money for down payments for home buying. It’s not just the rates are higher, but if I’m making X amount of dollars in salary, I don’t qualify for cheaper rates, so I have more money to put down.”
“The one caveat to multifamily housing is that supply is starting to increase, which could limit how much landlords can raise rents.”
Mauricio Gruener, Founder of GFG Capital in Miami, says:
“Investors who use real estate investment trusts should be able to withstand higher rates. Throughout the previous Fed rate hike cycles, REITs have held up well.”
Citing data that compared the FTSE Nareit Equity REITS index with the Russell 3000 index, Gruener said that since 1994, REITs have outperformed stocks in every tightening cycle except last year. REITs averaged a return of 16 percent relative to the 10 percent return of stocks during the 23-year time frame between 1994 and 2017.
“The moral of the story here for us is if economic footing is solid and expectations remain tame for both growth and inflation, then real estate should be able to hold up relatively well across different access points,” Gruener says.
Kyle Winkfield, managing partner of OWRS in the District of Columbia says:
“Even if rising rates cause slower growth in the real estate sector, some areas of the U.S. are likely to be less affected compared with others. Areas with strong job growth could do well, as could areas with population growth, such as Florida and North Carolina, which may attract people who are retiring and seeking better weather.”
“Despite interest rates going up and despite economic shakiness, those pockets will thrive,” he says.
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Arnall says that just the age of the real estate bull market and the exceptional growth in the economy means this situation can’t last.
“Most real estate markets today are still off of their peak high achieved in 2005-06,” Arnall says. “Relative to cost of construction, properties are still somewhat attractive.”
“(We’re) on the longest economic expansion in the history of the United States,” he says.
He is cautiously optimistic about the real estate market if the U.S. economy can hold up for the next 12 to 18 months.