Persistent low housing inventory, high home prices and increasingly worrying employment data mean that despite Possibility of Fed rate cut in Septemberhousing in the United States is still too expensive.
When the Fed announces a rate cut, mortgage rates do not automatically fall. The Fed’s interest rate cuts determine the federal funds rate. Traditionally, rates in other sectors, such as mortgages and auto loans, have followed their lead and adjusted accordingly, but mortgages in particular have tended to track the 10-year Treasury note. Below, you’ll see the “spread” between the average 30-year mortgage rate and the market yield on the 10-year Treasury bill over the past decade.
To bring buyers back into the market, Experts agree Interest rates need to fall below 6%. In early August, interest rates fell to a low of 6%, but have since risen back to 6.5%. Sellers may need more losses to get back into the market, as the lock-in effect in the market is as severe as it was last year.
“If you look at the jobs report and this trend continues for another month or two, the answer is yes: the economy is going to be in recession,” said Melissa Cohn, regional vice president at William Raveis Mortgage. house line. “Is the Fed going to make an emergency rate cut? I don’t know. I think we’re going to have a few more days of extreme volatility. We’re going to be on a roller coaster. But we’re not off the cliff yet.
Mortgage interest rates hit 5.25%, a tipping point
although Wall Street Volatility and speculation of emergency interest rate cuts, with interest rates likely to be gradually loweredwhich It will still take time to have the desired effect on the real estate market.
Economists at Moody’s Analytics said: “Even if the first rate cut of this rate hike cycle is likely to occur in September, the federal funds rate will still be in restrictive territory, and further rate cuts will be needed to help the housing market return to a more balanced equilibrium.” Nick Vera wrote.
The data guru was more specific about his views on the housing market’s tipping point:
“A 25 to 50 basis point reduction in 30-year fixed mortgage rates is not enough to reverse the situation, causing rents to become more expensive again…Roughly speaking, 30-year fixed mortgage rates need to fall below 5.25 on a home based on $416,900 digit price (average Q2 2024), the percentage of this happening.
Housing supply increases
Fed starts raising interest rates to curb inflation Exceed Two years ago, mortgage rates soared to 8.03% in October 2023, knocking the door on the viability of using a mortgage to purchase real estate. Sellers stay put because even if they do manage to find a buyer, they can’t trade a lower interest rate for a higher interest rate on a new home. The problem was further exacerbated by a lack of inventory, which also caused home prices to soar, only to eventually fall, driven by rampant inflation.
“For about 15 years, the cost of renting exceeded the cost of housing, but now it’s the other way around,” Villa wrote.
The good news is that housing supply is increasing. A six-month supply is considered a balanced market. according to Nar dataIn January 2022, there will be only 1.6 months of supply, meaning that at the current sales pace, it will only take 1.6 months to exhaust the supply of homes. By June 2024, supply jumped to 4.1 months from 3.1 months in June 2023.
However, the influencing factor is rising house prices. “While lower mortgage rates are one possibility to unlock more supply, the bottom line is that the country has a structural housing deficit and needs to continue building more housing,” Vera wrote.
Villa highlighted supply and demand reasons for rising prices: “Years of underbuilding since the global financial crisis have resulted in an estimated shortage of at least 1.9 million homes.”
unaffordable whirlpool
As a result people Unable Buying a house before interest rates rise in 2022 will require you to choose between higher house prices or higher rents. plus additional charges e.g. skyrocketing insurance and energy costs, potential buyers find themselves trapped in an unaffordability spiral.
the latest one Zillo Index shows that a typical household with an average annual household income of $83,000, purchasing a moderately priced home with a 10% down payment, can expect to spend more than 40% their income About housing costs. This is far more than the 30% recommended by financial experts. This proportion increases in more expensive areas of the country.
What changing markets mean for investors
So what does the unaffordability crisis and gradual interest rate cuts mean for investors? For those of you who currently own a rental home, this means you likely won’t see your tenants vacating your building to purchase a home anytime soon. Save on down payment and then Finding a home and qualifying for an affordable mortgage should take a while.
However, at some point in 2025, if interest rates Do Once the threshold is crossed and more inventory becomes available, you may see tenants looking to buy. To offset this, look for long-term lease agreements with quality tenants in exchange for modest rent increases. In addition, when appropriate, consider Refinance or Leverage your property equity Make upgrades to retain and attract tenants.
Enter the game
If you’re looking to buy an investment property and are wondering whether you should wait for further interest rate cuts after September, my advice is to buy now – you can always refinance. The last thing you want is to get lost in the shuffle when the competition heats up.
even if you don’t have enough down payment Once you’ve saved enough money, look for creative ways to get your first home. These may include:
- Buy with a partner who also contributes the down payment.
- Find seller financing.
- consider a hard money loan and develop refinancing strategies when equity is higher and Interest rates are lower.
- Liquidate assets (401(k)s, HELOCs, cars, etc.).
- Consider moving into the home first to qualify for the FHA 3.5% down payment. this This can be done on a two- to four-unit property so the tenant can help offset the mortgage. Once you move out, you can rent the entire place and repeat the process.
Think long term
In the long run, refinancing is relatively cheap compared to the price increases that may occur if interest rates fall a good Reasons to buy and hold. tax benefits depreciation And equity appreciation always makes real estate a good Invest for the long term, even if cash flow In the short term it is not that high You’ll love it. Investing in the right sector (which is appreciating) at the right price is another smart move.
Get creative and create your numbers Work
The fascinating thing about real estate is that there are so many way of becoming Creatively increase cash flow to offset interest rates and allow investors to take action to stay ahead of the market. These can include:
- Parking charges
- Install a commercial paid washer and dryer
- Rent by room
- construction loan (from a community bank) or an FHA 203(K) loan that can be converted to a conventional mortgage, allowing you to buy a discounted fixer-upper without refinancing
- Low down payment owner-occupied financing
- Short-term home rentals that do not violate owner-occupied financing rules
- Advertising billboard advertising for your commercial real estate.
final thoughts
Whether you are a multifamily or single-family investor, most of your buying competition will Conduct cash flow analysis To ensure that the numbers before the quote are valid. Your advantage will be exist Buy now before others pull the trigger and wait for interest rates to drop significantly.
Investing is a game of risk and reward. you will have to Consider the risks of buying earlier, making the deal work in the medium term, and refinancing to take advantage of equity appreciation and cash flow.
Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
