Interest Rate Outlook

Interest Rate Outlook

Real estate investment is heavily tied to and dependent on lending interest rates, so a rate hike could unlock the door to lower property prices.

When rates go up, so do monthly mortgage payments, making it more difficult for you to find properties that will generate positive cash flow until prices correct for the new market.

When rates drop dramatically, more people buy and fewer people rent.

It can also drive up property values, as home buyers often look at the final monthly payment, not the price of the property.

With that in mind, it is crucial to keep an eye on mortgage interest rates when investing in real estate.

Recent Interest Rates

Since 30-year mortgages have the longest recorded history, you’ll want to look at this number to get an idea of what interest rates are doing and to follow trends.

In October 1981, according to Mortgage News Daily data collected on Freddie Mac, interest rates hit an all-time high of 18.45 percent. Since then, they have been on a fairly steady decline with a few peaks along the way.

In 2010, rates on a 30-year fixed mortgage dropped to 4.23 percent with fluctuations up to a little more than 5 percent the following year. After the increase, interest rates dropped again.

Where Interest Rates Are Today

Today, interest rates are almost back down to the incredibly low rates of November 2012.

Rates are holding steady at around 3.5 percent.

What is unusual is the length of time rates have remained low. For the past six years, interest rates have been at or below 5 percent, with typical rates sitting below 4 percent.

Why Have Interest Rates Stayed So Low?

The Global Financial Crisis, also known as the Credit Crunch, hit in 2007, leading to thousands of foreclosures, bankruptcies, and a long recession.

To help combat the effects of the recession, the Federal Reserve Bank responded by lowering interest rates to help spur economic growth.

With the economy in a slow but relatively steady period of recovery, these historically low interest rates may not last for long.

Low Interest Rates and the Real Estate Market

The GFC hit real estate hard. Creative lending tactics led to the issuance of many adjustable rate mortgages with balloon payments.

When homeowners failed to make the payment or refinance the loan, many lost their homes.

While this was tragic for the individual, it opened up a wealth of possibilities for real estate investment. After all, a flood of houses hitting the market depressed property values from the sudden highs seen leading up to the GFC.

Combined with low interest rates, investors had a sudden opportunity to expand their property portfolio at a time when more people needed to find rental accommodations.

At the same time, loan regulations became more strict, making it harder for lenders to find qualified buyers.

Those real estate investors with a higher credit score faced less competition for desirable properties. When fewer borrowers qualify for a mortgage loan, it reduces the number of offers per property.

Enter Government Mortgage Programs

Falling mortgage numbers spurred government action in the form of a variety of homeowner grant and tax relief programs.

First-time home buyer programs were designed to help new buyers get into a home.

Existing homeowners were offered a half dozen different programs designed to help them afford their existing mortgage or refinance to get out from under water.

Foreclosure rates are now at an eight-year low, bringing up the question of an interest rate increase.

Will Interest Rates Go Up?

Interest rates are cyclical.

Rates go down, and then they go up. The only real question is when, not if, the rates will rise.

The Federal Reserve did put through a small increase to the prime rate, but that does not directly impact mortgage rates. These are more closely tied to bond activity.

Also, as long as the Federal Reserve continues to buy up mortgage-backed securities, it is likely that mortgage rates will remain low.

Low Interest = Higher Prices

Even if the mortgage interest rates do start to rise, that may not be a bad thing for you.

If you plan on buying into real estate, a rise in rates usually translates into a drop in prices.

Buyers tend to look at the bottom line, and what they can afford on a monthly basis is limited.If rates go up and prices stay high, properties fail to sell.

Sellers may not move on the price right away, but, eventually, higher interest rates will drive down prices.

Why Higher Interest Could Mean Better Real Estate Returns

When you are buying real estate as an investment, the goal is always to buy at the lowest possible price and sell at the highest.

If high interest rates drive down property values, you could pick up some units at well below the current market value. Then, when the rates fall again, driving prices back up, you are in a prime position to sell at a significant profit.

When to Look for Rate Hikes

Experts predict that interest rates will stay fairly flat until 2019.

Increases will be phased in slowly, so if you watch the market you should see the trend.

When rates get up above 5 percent, it might be time to start looking for discounted properties.

Of course, if the market pushes back against the increase, you might see rates drop right back down.