How Will Real Estate Handle Rising Interest Rates?How Will Real Estate Handle Rising Interest Rates? https://www.alexander-anderson.com/wp-content/uploads/2018/11/Pic-8.jpg 970 647 Alexander Anderson Real Estate Group Alexander Anderson Real Estate Group https://www.alexander-anderson.com/wp-content/uploads/2018/11/Pic-8.jpg
Rising interest rates are having a ripple effect across the housing market as the Federal Reserve increases borrowing costs.
Analysts expect the Fed to raise rates again in December and possibly a few times in 2019. The effect of the Fed’s rate hikes is seen in mortgage rates, which are about 100 basis points higher compared with a year ago at nearly 4.9 percent for a 30-year fixed rate mortgage.
October housing starts data also fell short of expectations. Homebuilder sentiment is falling amid rising mortgage rates and stronger home prices, according to the most recent monthly survey by the National Association of Home Builders/Wells Fargo Housing Market Index. The survey data show that builder confidence dropped eight points to 60 this month; it was 72 at the beginning of the year.
Experts say some areas of real estate and certain regions may hold up better than others with rising interest rates.
Doug Imber, president, Essex Realty Group in Chicago, says rising rates are the topic of conversation and concern for real estate investors, but the context for why rates are rising matters just as much as the direction.
“Rates go up for different reasons, and the reason that they’re going up now, thankfully, is because we have a very strong economy and the Fed is trying to be mindful of inflation,” he says.
Robert Arnall, executive vice president and chief credit officer of FineMark National Bank & Trust in Fort Myers, Florida, says the Fed’s rate hikes are most pronounced in the short end of the yield curve. The longer end of the yield curve has seen less of a rise – that’s important for real estate investors, since most loans are based on the 10-year U.S. Treasury rate.
Small Rate Hikes May Be Palatable
Even if the Fed raises rates next year, the ripple effect won’t be significant, since rates are still at historic lows, Arnall says. 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,” Arnall says. “That payment is significantly more impactful to the individual.”
Both Imber and Arnall agree interest rates are still very attractive when put into historical context, even though 30-year mortgage rates are at some of the highest levels since the Great Recession.
“Consumers today have gotten used to this low interest-rate environment that we’ve been enjoying for the last 10 years,” Arnall says.
Multifamily and Commercial Areas Will Remain Strong
Imber says the economy’s strength is reflected in outperforming real estate sectors. Industrial real estate distribution centers and office warehouse have been doing well.
“Generally office (space) is having a period of lower vacancy and good rent growth,” he says.
Multifamily units, such as apartment buildings, have had a period of solid growth, and it may continue if mortgage rates continue to rise and home prices remain strong. Those two factors raise the barrier to individual homeownership, and the apartment owner is the beneficiary.
“People stay as renters for an extra year or two while they save up more money for down payments (for homebuying),” Imber says. “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, he says.
Investors who use real estate investment trusts should be able to withstand higher rates, says Mauricio Gruener, founder of GFG Capital in Miami.
He says throughout the previous Fed rate hike cycles, REITs have held up well. 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, says Gruener, who was citing data that compared the FTSE Nareit Equity REITS index with the Russell 3000 index.
“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. He says 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.
Arnall is cautiously optimistic about the outlook for real estate for the next 12 to 18 months if the U.S. economy can hold up.
“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.”
While he doesn’t see anything that will cause a downturn at the moment, he says just the age of the real estate bull market and the unprecedented growth in the economy means this situation can’t last.
“(We’re) on the longest economic expansion in the history of the United States,” he says. “Simple logic says, something’s going to change somewhere soon. The question is: Is it tomorrow or in 2020?”
Source: US News
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