Is the impending interest rate hike a signal for real estate owners to sell?
The general consensus is that once the feds start raising interest rates they will continue to increase for the foreseeable future. While some proclaim that the feds could actually reduce rates, more are of the belief that low interest rates, or at least what we have gotten used to, are at an end. Failing to raise rates at this point would be a sign of economic weakness, and that could be as damaging as raising rates. Most predictions are for interest rates to be up buy more than one percent in a year, and by as much as two percent in two years time. However, we are still at least three percent below the interest level at the time of the crash. So what does this mean for real estate owners?
Higher Rates Can Be A Good Thing
Higher interest rates aren’t necessarily a bad thing. Rates are raised as a sign of confidence in a strong and growing economy. They can be good for economic growth, spurring new lending, and of course better returns on your savings accounts. Some of the fastest real estate price growth has been during higher rate periods too.
The Bad News About The Coming Rate Hike
The bad news is that higher rates can curb spending and affordability. As a result, payments on car loans and credit cards are going to be higher. This alone can impact debt-to-income ratios and those qualifying for mortgage loans. If that wasn’t enough, the high rates charged on mortgage loans will reduce how much homebuyers can borrow. It will mean paying a lot more each month for a house, and over the life of a loan; if they even qualify.
This also means that the numbers will no longer make sense for buyers on income producing investment properties that are priced based on current four percent or less rates. If a rental property is priced to barely break even, it would leave the next buyer in a negative cash flow situation. This may certainly impact the resale price of many properties.
The Sell or Hold Dilemma
This situation may create a dilemma for many real estate owners. Do you keep holding your property, or sell it today at what could be its maximum value?
Historic data suggests property prices should keep on going up, but it would be foolish to completely ignore the math of rising rates. Every individual needs to look at their own situation and timeline. If you planned to sell this property in the next few years anyway, this could be the optimal moment to get the most for it. If you are happy holding onto this property for another 15 or 30 years, don’t let go of the good interest rates you’ve got now.
If you do sell, know what you’ll do with that cash in advance. Will you put in a CD when those rates rise? Will you lend it out to other real estate buyers? Will you buy other properties with more room to grow?
Is it Still a Good Time to Buy Real Estate?
Absolutely! There is still an incredible window of opportunity to acquire income properties and lock in historically low interest rates. Who knows when we’ll see this alignment of prices and rates again?
Even when buy and hold doesn’t make sense any longer, there can always be money made by wholesaling, fixing, flipping, and finding undervalued deals.
Summary
While we are likely to see the U.S. housing market continue to trend upwards, it is smart to keep an eye on the impact of interest rates. Don’t underestimate how high they can go. We have certainly been lucky to experience
