In recent times, the financial landscape has seen a significant shift, with interest rates experiencing a notable rise. This has created a ripple effect across various sectors, including the real estate industry. This article explores the impact of these increased interest rates on real estate investors and the wider housing market.

The Current Interest Rate Scenario

The present-day financial environment is characterized by a substantial increase in interest rates. The 30-year mortgage rates have peaked to levels unseen in several years, contributing to the heightened cost barriers for potential homebuyers and dampening the overall housing market activity.

Key Takeaways:

- 30-year mortgage rates have hit multi-decade highs
- Housing market inventory is at an all-time low
- Existing home sales are predicted to have the worst year since 1993

The Housing Market: A Stagnant Phase

As mortgage rates hover around all-time highs and home prices bounce back from a minor dip, the housing market is experiencing a period of relative stagnation. High borrowing costs, coupled with a limited inventory, are discouraging prospective homebuyers and homeowners looking to sell.

The Federal Reserve’s Response

The resurgence of inflation has prompted the Federal Reserve (Fed) to raise short-term interest rates, aiming to decelerate the broader economy and curtail inflation. This action resulted in a swift rise in mortgage rates, exacerbating the financial burden on homebuyers.

The Bond Market’s Influence

Today’s mortgage rates mirror the higher yields in the bond market. However, the premium spread between 10-year U.S. Treasury notes and mortgage rates has expanded, rendering mortgage rates less appealing. This spread is nearly double compared to two years ago.

Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management, states, "At some point, rates are likely to decline and the spread between Treasury rates and mortgage rates should narrow, making mortgages more affordable."

The Upswing in Home Values

Home prices, much like any product or service, are largely influenced by supply and demand. Prior to 2022, supply was lagging, causing home prices to soar, especially in certain suburban areas. Despite a seven-month decline between the end of 2022 and the start of 2023, home values have fully rebounded.

Mortgage Applications and Home Sales Trend

Mortgage applications for home purchases recovered from October lows, when they dropped to their lowest levels since 1995. Despite this recovery, applications are still lagging, standing 20% lower than the same time the previous year. Concurrently, existing home sales have seen a decline in seven of the last eight months.

New Home Sales and Homebuilder Sentiment

New-home sales are experiencing a slowdown following previous months of increased activity. This slowdown, coupled with the rising costs of construction, has led to a decrease in homebuilder sentiment.

The Affordability Issue

The combination of higher mortgage rates and home prices poses a major affordability issue for those looking to enter the housing market. The median monthly mortgage payment in November 2023 was $2,616, down slightly from an all-time high of $2,740 in mid-October. This scenario creates a significant barrier for new homebuyers.

The Real Estate Investment Market

For those considering diversifying their portfolio by investing in real estate, a real estate investment trust (REIT) is a common vehicle. However, rising interest rates pose a challenge for REITs, causing them to underperform other parts of the equity market.

Tom Hainlin, national investment strategist at U.S. Bank Wealth Management, states, "Real estate as an asset class was one of the first to be repriced lower in reaction to higher interest rates."

The Impact on Economic Growth

The Fed’s policy has placed housing and other real estate markets at the forefront of efforts to slow the economy’s pace and lower inflation. The housing market can significantly influence the broader economy and capital markets.

Conclusion

The rising interest rates have undeniably impacted the real estate market and investors alike. As a real estate investor, it’s critical to stay updated on the current market trends and adapt your investment strategy accordingly.