In 2022, we posted a blog titled “How Low Interest Rates Affect the Real Estate Market.” At the time, mortgage interest rates for a 30-year FRM (Fixed Rate Mortgage) began the year at 3.25%, according to Freddiemac.com. Our recent high of 7.79% in October 2023 had homeowners and investors complaining to the heavens. Rates are starting to decrease. Whew. But what does it mean when interest rates are low or high?
We all need to take a big breath and gain some perspective! If we walk back down interest-rate lane, the black-and-white version is that Freddie Mac’s data show an October 9, 1981, 30-year FRM of 18.63%. Not a typo.
All manner of different world events contributed. Still, although interest rates are much lower now, housing affordability (which many housing programs in the United States define as having housing costs less than 30% of income) is at an all-time low. Fewer people can afford houses now with interest rates in the single digits than when they were in the high teens. How does this happen?
How Do High Interest Rates Affect the Real Estate Market?
Mortgage rates are tied to the 10-year Treasury yield, which tends to mirror the federal funds rate but is not at a set differential. The gap between the 10-Year Treasury yield and Mortgage rates can be 1.5 to 2% different, but the gap can be more than that. Lenders can do what they want, within reason, depending on what they can get away with. Keep reading.
All manner of forces make interest rates (and mortgage rates) move: the economy, joblessness, inflation, investors buying mortgage-backed securities, and worldwide events such as pandemics and wars.
In general, higher interest rates cause a slower real estate market. Fewer people can afford the principal and interest for a piece of property. Any kind of property. Real Estate has many subdivisions, pun intended. There’s residential real estate, commercial, undeveloped, mixed-use, and many more categories. Urban. Suburban. Inner City. Coastal. Midwest. Southeast. Each word evokes an almost visceral feeling—a picture in your mind’s eye portraying anything from garbage cans in sketchy alleys in the inner city to breathtaking ocean views to a shopping center to a vineyard in Napa.
The CREM Group, founded in 2015, handles residential and commercial properties, “standard” and probate homes, and trust and conservatorship properties, and yes, everything from inner city to breathtaking coastal properties. Some of our clients are investors. Some seek a home in which to live. Others seek management and even eviction help. The CREM Group real estate brokerage specializes in trust and probate properties in Southern California.
5 Things to Consider Before Investing
The conventional wisdom says that when interest rates are low, it’s an excellent time to buy a home or property. That’s the problem. The conventional wisdom is not always wise. And it overlooks the details. Interest rates are relatively high now because our post-pandemic economy began to heat up. The Feds had to slow inflation. It seems to be working as interest rates (and inflation) are starting to come down. But what does that mean?
As a home buyer or as an investor, it means there’s more to think about. High interest rates can diminish demand for properties and even cause companies to table or defer their growth plans as expanding becomes more expensive. Sometimes, layoffs occur and finding a job becomes more difficult. On the other side, people trying to sell their homes may have to lower the price!
- Mortgage rates
Mortgage rates are “high” at 7% (compared to early 2022), and the U.S. Federal Reserve has indicated they will keep rates at this level through most of 2024. Mortgage interest rates are the “cost” for using (borrowing) money for a set period of time. The higher the interest rate, the more money a borrower pays in the form of interest. With a higher interest rate, the P & I (Principal and Interest) for an owner-occupied residence on a 30-year loan will increase the overall cost of the asset/home. That’s “the bad” news. Read on.
- Is it an “investment” property or a home?
At the CREM Group, we represent buyers and sellers primarily in Los Angeles and Orange Counties. We specialize in probate, trust, and conservatorship homes but represent all kinds of properties, from commercial buildings to undeveloped land. Often, people who are going to live in a house don’t think of themselves as investors, but they are. Unlike investing in the stock market, they just happen to live in their investment,
If you’re looking for a good deal, a probate home often offers a lower price (some are fixer-uppers). But the bad news is, they can take a while to purchase, sometimes up to a year or more. In these times, with interest rates destined to be “high” up to 2025, it may be time to strongly consider paying less for the property rather than trying to save money on the mortgage rate.
- Are Homes REALLY Less Affordable?
Higher mortgage rates may make real property less affordable at first glance, but they may also send home prices down, reversing the effect of the higher rates. Our CREM Group real estate agents have found that low inventory in some areas of Los Angeles and Orange Counties has frustrated buyers searching for the few homes on the market.
Here’s what’s happened. People with homes are holding onto them because they enjoy a 3% rate and pay a smaller mortgage. Or they may see that since demand is down due to higher rates, they may choose to keep their home off the market and wait for when mortgage rates drop again and home prices go up.
Trying to time the perfect moment to sell or buy property can make you crazy! Like the stock market. It doesn’t always happen quickly, so buyers may still have time to snap up property with a good value (price) before the interest rates drop (hopefully). Here’s the thing: Everyone is guessing on the future.
The CREM Group is here to assist our clients in making the best decisions and use our extensive experience in the Los Angeles and Orange County real estate markets to reduce the hazards of wild guessing.
- Spoiler Alert: Check your finances to make sure you can make the payments.
Residential: “High” interest rates are relative, as we’ve seen. As the interest rates rise, your P & I will go up but you can perhaps make it up if the property price is lower. Two things: One—If you’re looking to occupy, then be sure (calculators are here) you can make the payments. Two—Do not forget the cost of home ownership! Repairs, upkeep, property taxes, and utilities can surprise you.
Commercial: We have specialists who can help you if you’re purchasing or renting out a property because your considerations are different. The analysis should consider the rental income for the property. Know the market in the area you’re considering. The CREM Group will look at that for you and advise you. Also, income property investments usually require a larger down payment than the owner-occupied version and shorter repayment terms. These vary by the type of property, supply and demand, and lenders.
Factor in that you have enough cash to make repairs and cover the P & I if a tenant can’t make a rent payment or if you have vacancies. They can be killers. Our professional management services can help with these issues.
Can you really afford the P & I? What about the property taxes? Don’t forget those! Remember, homeownership and investment properties have other unexpected expenses, like when the plumbing breaks or the roof needs repairing. Have a “fudge” factor.
- Make probate and trust home purchases your side hustle.
Trust and probate home purchases take time. So, while interest rates are high, this might be a great time to start your real estate investing “side hustle,” where you can enjoy passive income. Otherwise, high interest rates make high-ticket homes, apartments, and commercial properties a higher hurdle if you want to jump into the world of being the real estate mogul you always wanted to be. But wait!! Passive income means sitting on the beach drinking piña coladas while your bank account grows quietly in the background. Wow! Where do we sign?
Despite the uncertainties created by the coronavirus, the economic climate, and worldwide unrest, the resulting historically low interest rates had their day. Now they’re higher. Living in your “investment” as your primary residence is an excellent idea. The marketplace for real estate is a wily intricate affair. Buyers, sellers, lenders, the Fed, the supply and demand, and surrounding world, national, and local events can change the outlook for real property in a heartbeat.
Don’t be shy. Don’t wait!
Check with reliable, professional real estate brokerages (like The CREM Group) who have resources they trust to help you make the right decisions in real estate today. Chicken Little said the sky was falling when interest rates went up. Prove her wrong.
As always, contact us by email here if you have any questions about real estate, probate real estate, trust real estate, and conservatorship real estate, especially in Los Angeles and Orange Counties in California.
Mark Cianciulli, Esq. [email protected]
Disclaimer: This content is meant purely for educational purposes. It contains only general information about real estate and legal matters. It is NOT legal advice and should not be treated as such. We recommend consulting a legal or tax professional before acting on any material, opinion, or point of view described herein.