Interest rates have been at historic lows for the last couple of years, but rate Federal Interest Rate increases have started and more are coming. The Federal Reserve increased the rate by a quarter of a point in March and says that a half-point increase is coming in May. It’s anticipated that there will be several more increases throughout the year in an effort to control inflation. In March, the annual inflation rate was up to 8.4%, the highest it’s been since 1982.
Rising interest rates impact all aspects of financial life, but the key question for real estate investors is what rising interest rates will mean for housing and rental markets. There’s lots of uncertainty, but there are a few things we can expect to see in the months ahead.
Housing Markets Likely to Remain Strong But Normalize Some
When interest rates go up, mortgage rates go up, and buying a home becomes more expensive. As a result, in a “normal” market, rising interest rates have an almost immediate impact on home prices and put downward pressure on them.
But, the current market is not a normal one. Despite rising interest rates, home prices are continuing to rise. This is in large part because high demand and limited supply continue to put upward pressure on home prices.
Millennials entering the market, strong labor markets, a build-up of pandemic savings, increased investor activity, and increased demand for second homes have all contributed to keeping demand high. At the same time, supply is limited. The construction industry has been unable to keep up with rising demand, a key factor in keeping prices high.
As interest rates continue to climb in the coming months, everyone is watching closely to see how much rising interest rates impact the housing market with such high demand and limited supply. There’s no way to predict exactly what will happen, but it seems most likely that housing prices will continue to climb at above-average rates – which is currently around 7.5% year-over-year growth – for the next few months and then return to more normal year-over-year growth – around 2-5% – in the fall or winter.
Rental Markets Should Continue to Grow
Increased interest rates make buying a home less affordable and reduce home buyers’ purchase power. The result is that rising interest rates are generally good for rental markets, as some potential buyers decide to rent rather than purchase a home.
It’s worth noting that this is a trend that we’ve seen in normal markets when interest rates are rising and prices are falling. In our current market, where prices continue to rise despite rising interest rates, it’s likely to only further increase the number of people that choose to rent.
High demand for rental properties and low vacancy should continue to drive rental prices up. Additionally, as some Landlords have increased carrying costs due to rising interest rates, they will likely raise rent to cover those costs. The result should be strong rental markets with increasing rent prices.
Takeaways for Investors
While we know that Federal Interest Rate increases will continue to rise, there continues to be lots of uncertainty in all markets. The invasion of Ukraine, ongoing supply chain issues, and ongoing pandemic concerns, coupled with shifting interest rates, create lots of volatility.
While it’s impossible to predict exactly what will happen, real estate investors should keep a few things in mind:
- Even amidst this volatility, the housing market continues to be a good bet for long-term growth. Shorter-term investments involve more risk and might not be the wisest choice right now, but long-term, buy-and-rent investment strategies continue to be a good option for investors.
- Real estate is a good investment during periods of high inflation. Property appreciation tends to keep pace with inflation and inflation pushes all prices up, including rental prices.
- Rental properties historically do well in periods of rising interest rates, as increased demand and higher rental prices generate more income.
The encouraging news for investors is that real estate continues to be a good long-term bet. And, the even better news is that once you find an investment property, ezLandlordForms has all the tools you need to make it EZ to be a Landlord. When you’re ready, we’ve got the Tenant Screening Services and state-specific Leases to ensure you get the most out of your investment.