{"id":5385,"date":"2023-08-08T17:44:00","date_gmt":"2023-08-08T21:44:00","guid":{"rendered":"https:\/\/propertyonion.com\/education\/?p=5385"},"modified":"2023-08-10T19:22:25","modified_gmt":"2023-08-10T23:22:25","slug":"how-interest-rates-really-affect-investing","status":"publish","type":"post","link":"https:\/\/propertyonion.com\/education\/how-interest-rates-really-affect-investing\/","title":{"rendered":"How Interest Rates REALLY Affect Investing"},"content":{"rendered":"\n<p>The current economic climate seriously affects real estate investment opportunities, and one of the greatest factors is high interest rates. What specific impacts do high interest rates have on real estate investing? Should agents, investors, or aspiring homeowners be worried as the Federal Reserve prepares to raise interest rates once again? Let\u2019s take a look.<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p>The number of people who want to borrow and lend money must remain balanced or else interest rates would fluctuate and cause economic turmoil. The Fed\u2019s job is to keep those price fluctuations in check.<\/p><\/blockquote>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 ez-toc-wrap-left counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">In this Article:<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/propertyonion.com\/education\/how-interest-rates-really-affect-investing\/#How_Are_Interest_Rates_Determined\" >How Are Interest Rates Determined?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/propertyonion.com\/education\/how-interest-rates-really-affect-investing\/#Residential_Price_Stabilization\" >Residential Price Stabilization<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/propertyonion.com\/education\/how-interest-rates-really-affect-investing\/#Higher_Capitalization_Rates\" >Higher Capitalization Rates<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/propertyonion.com\/education\/how-interest-rates-really-affect-investing\/#Buy_or_Sell\" >Buy or Sell?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/propertyonion.com\/education\/how-interest-rates-really-affect-investing\/#Market_Improvement_Will_Be_Slow\" >Market Improvement Will Be Slow<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_Are_Interest_Rates_Determined\"><\/span><strong>How Are Interest Rates Determined?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In layman\u2019s terms, interest rates are the price people must pay to borrow money for property loans. As more people request loans for residential and <a href=\"https:\/\/propertyonion.com\/education\/is-the-commercial-real-estate-crisis-going-to-be-worse-than-predicted\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"commercial properties (opens in a new tab)\">commercial properties<\/a>, the Federal Reserve finally approved an interest rate hike in March 2022, which was the first increase since December 2018.<\/p>\n\n\n\n<p>Since then, the Fed has increased interest rates several more times and&nbsp;<a href=\"https:\/\/www.cnbc.com\/2023\/06\/14\/fed-rate-decision-june-2023.html\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">plans on two more spikes<\/a>&nbsp;in 2023. It\u2019s all about the law of supply and demand. If there is a greater demand for real estate investments, the Fed might have to increase interest rates to keep prices stable and prevent the market from collapsing.<\/p>\n\n\n\n<p>Here are the&nbsp;<a href=\"https:\/\/www.bankrate.com\/mortgages\/todays-rates\/mortgage-rates-for-thursday-july-13-2023\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">average national interest rates<\/a>&nbsp;as of July 2023 \u2014 keep in mind that these percentages might not apply to your local housing market:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>30-year fixed rate:&nbsp;<\/strong>7.25%<\/li><li><strong>30-year fixed jumbo rate:&nbsp;<\/strong>7.24%<\/li><li><strong>15-year fixed rate:&nbsp;<\/strong>6.54%<\/li><li><strong>5\/1 ARM rate:&nbsp;<\/strong>6.22%<\/li><\/ul>\n\n\n\n<p>The number of people who want to borrow and lend money must remain balanced or else interest rates would fluctuate and cause economic turmoil. The Fed\u2019s job is to keep those price fluctuations in check. By raising interest rates, it simultaneously improves prices and forces buyers to consider their investments more carefully.<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p>Although buying single-family houses wholesale or flipping them for profit are viable real estate investment options, they might not be the best choice at this time.<\/p><\/blockquote>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Residential_Price_Stabilization\"><\/span><strong>Residential Price Stabilization<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The main impact of high interest rates is the stabilization of housing prices. From 2020 through mid-2022, during<a href=\"https:\/\/propertyonion.com\/education\/how-covid-pushed-housing-prices-to-new-highs\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" the height of the COVID-19 pandemic (opens in a new tab)\"> the height of the COVID-19 pandemic<\/a>, interest rates were low and median home prices&nbsp;<a href=\"https:\/\/www.cnn.com\/2023\/01\/20\/homes\/existing-home-sales-december\/index.html\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">reached all-time highs<\/a>&nbsp;due to low demand. This dynamic has begun to flip, with the Fed periodically raising interest rates to help housing prices return to affordable levels.<\/p>\n\n\n\n<p>Realtor.com\u2019s June Housing Report&nbsp;<a href=\"https:\/\/www.realtor.com\/news\/trends\/homebuyers-have-been-waiting-6-long-years-for-this-moment-but-theres-a-huge-catch\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">showed a 0.9% decrease<\/a>&nbsp;in median home prices. Although the drop is small, it\u2019s the first reported downward movement since 2017. The report also showed a 7% increase in active listings from the previous year. This news is promising because home prices and market activity tend to peak during the summer. If the 0.9% decrease is any indication, investors can expect to see even lower prices later in 2023.<\/p>\n\n\n\n<p>It\u2019s also worth noting that housing developers&nbsp;<a href=\"https:\/\/www.forbes.com\/sites\/jamesnelson\/2023\/07\/08\/the-answer-to-the-housing-crisis-is-more-housing\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">are seeking more housing projects<\/a>&nbsp;and thus bringing more investment opportunities to the table. These projects are primarily apartments and multi-family properties. <a href=\"https:\/\/propertyonion.com\/education\/why-the-rental-market-will-crash-in-2023\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"Renting became more common than homebuying (opens in a new tab)\">Renting became more common than homebuying<\/a> across the U.S. in recent years, and that trend will continue as these projects reach completion.<\/p>\n\n\n\n<p>Although buying single-family houses <a href=\"https:\/\/propertyonion.com\/education\/7-ways-to-find-more-wholesale-deals\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"wholesale (opens in a new tab)\">wholesale<\/a> or flipping them for profit are viable real estate investment options, they might not be the best choice at this time. Investors who are&nbsp;<a href=\"https:\/\/renovated.com\/how-to-score-your-first-residential-multifamily-property\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">interested in multi-family properties<\/a>&nbsp;or apartment buildings can expect to see more activity in the near future as nationwide efforts to address the affordable housing crisis gain momentum.<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p>In other words, it will become more difficult to estimate the long-term profitability of a property in the coming months.<\/p><\/blockquote>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Higher_Capitalization_Rates\"><\/span><strong>Higher Capitalization Rates<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Rising interest rates also lead to higher capitalization rates \u2014 better known as \u201ccap rates\u201d \u2014 which is a huge game changer for real estate investors. The cap rate is essentially the difference between a property\u2019s required rate of return and its expected growth rate. It\u2019s a helpful metric for assessing property values and evaluating risk.<\/p>\n\n\n\n<p>High cap rates generally&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/c\/capitalizationrate.asp#:~:text=Generally%2C%20a%20high%20capitalization%20rate,lower%20returns%20but%20lower%20risk.\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">indicate a higher level of risk<\/a>&nbsp;if you\u2019re attempting to get stable income from your real estate investments. So, although the down payment might be affordable, the property\u2019s cap rate might indicate that the investment is unprofitable in the long run. You also need to account for depreciation or changes in your local market that impact the property value.<\/p>\n\n\n\n<p>In other words, it will become more difficult to estimate the long-term profitability of a property in the coming months. We have already seen an increase of real estate investors using online valuation tools like Zillow and Realtor.com to simplify their calculations. In fact,&nbsp;<a href=\"https:\/\/www.homego.com\/blog\/how-much-is-my-house-worth\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">22% of homeowners use online valuation tools<\/a>&nbsp;to get an accurate estimate of their property values.&nbsp;<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p>The chances of a crash are lower than they were in 2021 and 2022, but this current situation is still unstable and unprecedented in the U.S.<\/p><\/blockquote>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Buy_or_Sell\"><\/span><strong>Buy or Sell?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The real estate industry has been much kinder to sellers than buyers in the last few years. The market is finally starting to shift back toward the buyer\u2019s favor as prices stabilize. However, <a href=\"https:\/\/propertyonion.com\/education\/should-you-invest-before-interest-rates-rise-or-wait-for-a-market-crash\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"investors should hang tight  (opens in a new tab)\">investors should hang tight <\/a>and focus on opportunities for short-term income properties. New apartments and multi-family homes should be your main targets.<\/p>\n\n\n\n<p>Real estate investment trusts (REITs) should also be on your radar. Unlike physical property investments, REITs&nbsp;<a href=\"https:\/\/money.usnews.com\/investing\/slideshows\/best-reits-to-buy\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">allow you to hedge against inflation<\/a>&nbsp;and generate consistent income despite the economy\u2019s fragile state. They can give you a stake in a variety of residential, commercial, and specialty properties.<\/p>\n\n\n\n<p>As a general rule, properties with shorter lease terms are the safest investments <a href=\"https:\/\/propertyonion.com\/education\/should-you-invest-before-interest-rates-rise-or-wait-for-a-market-crash\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"when interest rates are high (opens in a new tab)\">when interest rates are high<\/a>. You don\u2019t want to get caught in a long-term commitment that\u2019s losing money while the economy is still fragile. Focus on investments that will get you strong short-term results and stay patient with the economy\u2019s recovery.<\/p>\n\n\n\n<p>Although property prices are beginning to stabilize, there is still the&nbsp;<a href=\"https:\/\/www.usatoday.com\/story\/money\/2023\/05\/31\/is-housing-market-going-to-crash\/70260153007\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">possibility of a market crash<\/a>&nbsp;for investors to consider. If a crash occurred, prices would plummet, and the market would flood with buyers looking to make a good deal or a quick buck. The Fed would have no choice but to raise interest rates even further to keep supply and demand balanced.<\/p>\n\n\n\n<p>On the other hand, a market crash could also cause investors to lose interest in the market. A decline in demand would lead to the opposite effect \u2014 higher property prices and lower interest rates. The chances of a crash are lower than they were in 2021 and 2022, but this current situation is still unstable and unprecedented in the U.S.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Market_Improvement_Will_Be_Slow\"><\/span><strong>Market Improvement Will Be Slow<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Nobody likes high interest rates, but they are a necessary measure to restore balance and affordability to the world of real estate. Improvements will be slow as prices level out and low to middle-income buyers return to the fold. There should be an increase in investment opportunities in the future, but investors must be patient with the market\u2019s recovery.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The current economic climate seriously affects real estate investment opportunities, and one of the greatest factors is high interest rates. What specific impacts do high interest rates have on real estate investing? Should agents, investors,&hellip;<\/p>\n","protected":false},"author":56,"featured_media":5392,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[425,710,217,502,364,316,377,295,496,436],"class_list":["post-5385","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-investing-articles","tag-apartment","tag-capitalization-rates","tag-covid-19","tag-federal-reserve","tag-inflation","tag-interest-rates","tag-investor","tag-multifamily","tag-real-estate-market","tag-rental-market"],"_links":{"self":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts\/5385","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/users\/56"}],"replies":[{"embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/comments?post=5385"}],"version-history":[{"count":4,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts\/5385\/revisions"}],"predecessor-version":[{"id":5391,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts\/5385\/revisions\/5391"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/media\/5392"}],"wp:attachment":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/media?parent=5385"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/categories?post=5385"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/tags?post=5385"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}