The U.S. housing market has taken several unexpected turns over the last few years. It is crucial to understand current trends if you are looking to buy or sell an investment property. 

The real estate market is anything but predictable. Even for industry experts and economists, knowing what will happen in the coming months or years is impossible. The question then remains whether you should make a move now or wait.

Mortgage rates in 2023 have doubled year-over-year. Deals are hard to come by and prices are steadily rising, and inventory is lower than usual — all of these are crucial factors in investment decision making. Investors should know what rising mortgage rates could mean for their real estate portfolios.

The uptick in rates may increase housing prices or cause property values to depreciate temporarily. This could have implications for real estate investment portfolios.

2023 Mortgage Rates and the Real Estate Market

The housing market does not look good for Americans looking to buy or sell a home — particularly for first-time homebuyers. According to Bankrate, the most current fixed interest rates are as follows:

• 30-year fixed: 7.55% — up .51% YOY
• 15-year fixed: 6.80% — up +0.21% 
• Jumbo loans: 7.58% — up +1.68%!

Borrowing rates are much higher than last year. A 30-year fixed rate was about 2.65% in January 2021. Meanwhile, rates hovered around 4.5%-4.7% for single-family homes in August 2022.

Naturally, rising interests affect the housing market in numerous ways. Here is a breakdown of the changes.

Demand

2023 mortgage rates have given homebuyers much less purchasing power than in previous years. As fees increase, those locked into a 5% or lower rate are less willing to sell and borrow again at the current costs. 

The uptick in rates may increase housing prices or cause property values to depreciate temporarily. This could have implications for real estate investment portfolios.

Nearly 35% of respondents to a Zillow survey said they planned to keep their home, due to concerns about affording a new one. Some people may be unable to afford a loan, leading to declining home demand. 

Inventory

Fewer homeowners selling their properties means far less inventory for homebuyers to choose from. As mortgage rates increased again in the first week of August, Realtor.com reported a 17% decrease in new listings, with houses listed an additional eight days on average.

Inventory change grew by only 3,271 houses the week of July 28 — the peak this year. Because of this, buyers are seeing astronomical home prices amid low purchasing opportunities. The median cost of a single-family home was $495,100 by the end of the second quarter of 2023. 

Those seeking a smaller starter home face high price tags for less square footage. Single-family homes in the U.S. saw a 1% decrease in square footage from 2012 to 2022. The South and Midwest housing markets have seen the most significant reduction at 3.3% and 2%, respectively. 

Carrying a mortgage may seem unwise when interest rates are high. Nevertheless, sellers know buyers will be hard to come by, especially if they need to sell their homes quickly.

Profitability

Interest rate hikes can affect real estate investment portfolio profitability. For instance, investors must make higher monthly payments, which could eat away at their profits. 

People who rent out their property to short- or long-term renters could see a reduction in bookings, which would be detrimental to gains. Investors can make approximately $1,695 in average monthly rental earnings in suburban communities — about $50 more than in cities. 

However, what if you own a condominium with a high monthly homeowner’s association fee? Depending on your area, your HOA could be $100 to $700 monthly, and even higher in exclusive communities!

Paying off your mortgage and keeping up with HOAs among fluctuating rental bookings may prove difficult. However, failure to pay mandatory fees could also result in foreclosure. This may be a problem for investors operating a beach home rental. When the season ends and tourists go home, you must determine how to keep up with costs without renters’ income.

Should You Invest in Real Estate in 2023?

Savvy investors must invest wisely when mortgage rates are through the roof. Only invest in real estate if it makes sense currently.

You cannot go wrong with investing in real estate — or can you? Generally, most agree real estate is a safe investment opportunity. Your property value will appreciate if you play your cards right by knowing current market trends, therefore making it a valuable asset for your portfolio. 

However, home values often dip during recessions and natural disasters. While some housing markets bounce back after some time, others stall. 

Historically, buyers are usually apt to build their property portfolio when mortgage rates are low. The market lags during an uptick in interest rates. However, despite 2023’s high mortgage rates, investing in a property can still be a good idea.

Carrying a mortgage may seem unwise when interest rates are high. Nevertheless, sellers know buyers will be hard to come by, especially if they need to sell their homes quickly. Fortunately for you, there may be some wiggle room in the price.

Investing in a property for passive cash flow — such as an Airbnb or VRBO — is also to an investor’s advantage. Short-stay rentals may be more profitable than long term and may not strictly cater to summer vacationers. If you live in an area experiencing economic growth, people relocating may want to stay at your investment property while they build or search for a new home.

Barbara Corcoran, renowned real estate investor and Shark Tank extraordinaire, suggests following the creative community when exploring the most up-and-coming location to invest in. Creatives bring renewed energy to neighborhoods, which can significantly appreciate values in the future.

Invest Wisely Amid High 2023 Mortgage Rates

Savvy investors must invest wisely when mortgage rates are through the roof. Only invest in real estate if it makes sense currently. It is best to follow these steps when expanding your portfolio:

• Speak to experts in your local housing market, especially a great local Real Estate agent and your financial adviser.
• Research the housing market near you to determine which area will provide the highest return on investment. 
• Stay ahead of real estate trends, including interest rate fluctuations.
• Understand additional expenses associated with investment properties, such as upfront costs, renovations, HOA fees, and property maintenance upkeep.

Always be aware of market volatility. Economic conditions may alter your property value and cause a loss or a gain, so be on top of all the current trends.  

Real Estate: Keeping Up with 2023 Data

No investor has a crystal ball as to whether real estate is the best option to diversify your investment portfolio into, especially as mortgage rates increase in 2023. Historically, real estate is financially advantageous as a long-term opportunity and investors must research their nearest farm areas to determine the potential for appreciation in any given scenario, including rising 2023 mortgage rates.