After an extended period of historically low interest rates, the Federal Reserve Bank has started raising rates and has indicated that rates will continue to rise roughly every six weeks for the remainder of 2022. The rising rates will have an effect on the real estate market and may make home ownership a bit more challenging for the typical American, but the effect on the real estate investment market is a bit more complex.
Inflation and Interest Rates
After years of a booming economy and historically low interest rates, the market was due for some sort of healthy correction. When coupled with two years of pandemic related shutdowns and government stimulus, we are now facing severe inflation due to excess money in the system and too few products on the store shelves.
Raising interest rates is the only real tool the Federal Reserve Bank has at its disposal to fight inflation, and they have already hiked rates and indicated they will continue to do so roughly every six weeks for at least the remainder of 2022.
How This Affects Multi Unit Brownstone Investments
The rising rates will have the effect of pushing property values down, while simultaneously raising monthly mortgage payments due to the excess interest payments. Cash rich investors will have an opportunity to pick up multi unit brownstone properties at a discount, just as rents are rising as well.
The next six months, at least, will be an especially bad time for new home construction, whether it is single family homes or multi unit apartments. In addition to the higher interest rates, some commodity and building material prices are exceptionally high due to the pandemic related shutdowns during 2020 and into 2021.
While some prices have indeed come back down from their peaks, notably lumber, prices are still above the norm, and if there were to be a building boom, prices would skyrocket almost overnight. So while predicting the future is hard, we can reasonably say that new construction will be limited at least throughout 2022, if not longer.
Rising Rents in 2022 and Beyond
The shortage of new construction and high new monthly mortgage payments due to higher rates will result in increased rents. Many people hoping to become first time home buyers may have to put off buying and rent for another year or two until the economy stabilizes, or consider co-ownership. Investors can expect to see, at the very least, moderate rent growth on their investment for the foreseeable future.
Looking Forward
We should note that while rates have risen and will certainly rise more throughout the year, rates have been extremely low for several years, even before the pandemic, and rates are only on their way up to the historic average. There is no reason to believe that rates will rise to what would be considered high by past standards.
The next year is likely to be a golden opportunity for real estate investors, especially those who are not over leveraged and are sitting on cash reserves, to pick up multi unit investment properties at a discounted price and have an easy time getting them filled with qualified tenants with increasing rents.
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Authored by: Stanley Montfort
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