The Federal Reserve (Fed) recently announced another increase in the federal funds rate, and if you’re in the real estate game, this is news you need to keep an eye on. The federal funds rate is the interest rate that banks charge each other for overnight loans, and it influences many other interest rates in the economy, including the ones on your mortgage. Here’s what the recent Fed decision could mean for your real estate investments.
First, a little context. The Fed’s Open Market Committee (FOMC) raised the target range for the federal funds rate from 5-1/4 to 5-1/2 percent. This move is aimed at keeping inflation – which is the rate at which the general level of prices for goods and services is rising – in check. The goal is to stabilize the economy by curbing high inflation rates, which have been more than double the Fed’s target rate of 2 percent.
So, how does this affect real estate investors like you?
1. Higher Mortgage Rates: The increase in the federal funds rate typically leads to higher interest rates for all types of loans, including mortgages. This means that if you’re thinking about getting a loan for a new investment property, you might face higher monthly payments. This could make some deals less profitable or even unfeasible, particularly if rental income won’t cover the increased costs. Side note: Most investor loans (DSCR type) these days are influenced by the 5 year treasury, whereas homeowner mortgages typically correlate to the 10 year treasury.
2. Slower Home Sales: Higher interest rates can cool down the housing market, as potential buyers might hold off on purchasing a home because of the higher cost of borrowing. This could slow down home sales, which might put downward pressure on home prices. If you’re planning to sell a property, it might take longer to find a buyer, or you might not get the price you’re hoping for. You should really make sure you are always looking at the latest data.
3. Renting Becomes More Attractive: If home loans become more expensive, fewer people will be able to afford to buy homes. This could increase the demand for rental properties, potentially leading to higher rents. If you own rental properties, this could be good news for you. Watch out for the new property tax valuations and increases in insurance costs. This is really hurting some of the DSCR based loan amounts.
4. Opportunities to Buy: If higher interest rates lead to a slowdown in the housing market and lower prices, it could present buying opportunities for cash buyers or investors with access to low-cost funding. As always, the key is to thoroughly analyze any potential deal to ensure it makes sense given your investment objectives and risk tolerance. I can tell you, the investors I talk to are keeping more houses than they are selling.
It’s important to remember that the real estate market doesn’t respond to changes in interest rates overnight. Also, local market conditions can often have a bigger impact on your investments than national economic trends. So while it’s essential to understand the potential impacts of the Fed’s decisions, don’t let them overshadow the basics of good real estate investing: buying right, knowing your market, and managing your properties effectively. As always, smart real estate investing is about more than just following the news, it’s about understanding how the news affects your personal investment strategy.