The Azucena Take: A Hawkish Federal Reserve and the Investment Real Estate Market
It happened, the Federal Reserve has taken a hawkish approach to fighting inflation. During their June 16th meeting, they announced that they will raise interest rates by 75 BPS (greater than they had originally announced). This brings the benchmark overnight rate to 1.5%.
Right away, the stock markets took a minor hit but regained the losses by the end of the week. However, there are questions about how the investment real estate market is going to be impacted.
The immediate impact is that lenders have been expecting this so the bump was already written into their quoted rates. It's expected that lenders will pass on the hike to buyers who are currently under contract. Most buyers are expected to absorb it while others may have to reduce their leverage to offset the hike. Some buyers will take this as an opportunity to retrade the transaction price. Will negotiating for a better price work? It depends on the property type and the location market.
How Will it Affect Investors
Credit lenders and life insurance companies will be expected to bake in the new interest rate hikes in their quoted rates. Banks are expected to be more lenient with their rates when it comes to working with long-term clients. Regardless of how investors feel about the rising interest rates, momentum for the real estate market is still hot.
This is more true regarding multifamily properties as the number of households who would qualify for a single-family home loan dropped. On June 9th, 26% of households could qualify for a new loan. By June 16th, it dropped to 24%. This is expected to drop the national apartment vacancy rate even further from the current 2.4%.
Not all investment properties are going to benefit from the rate hikes. The immediate impact will be thinning of the buyer pool. Meanwhile, those who could continue to invest are going to be more selective. Those who are highly dependent on financing are going to have less maneuvering room.
Others will not gain anything but will also not be hurt by the hikes. Most notably, investors who are already in a 1031 exchange. Investors with deep capital in reserve will also not be too affected by the rate hikes.
What Does it Mean for Investors?
The big takeaway for investors is that you will need to reexamine your finances before growing your portfolio. The rate hikes need to be considered but also that some assets will bring in revenue that will offset everything. Do consider that even though interest rates are going up, they are still at an all-time low compared to what they were only five years ago.
The Azucena Take provides an inside look into the investment real estate market using the research done and data collected by Marcus & Millichap