After going below 5% last week, current mortgage rates are up again this week. It seems we’re in for a roller coaster ride for the next few weeks.
For most of the ongoing pandemic, we enjoyed historically low mortgage rates that went below 3%. The year 2021 ended with 3.11% for a 30-year fixed loan.
Experts and analysts expect things will not stay that way for 2022 as the economy continues to recover. According to almost every forecast, we will hit 5% by the end of the year. However, things didn’t go exactly as anticipated, and the predictions came to pass a lot earlier. We saw mortgage rates go above the 5.00-mark in April 2022 and reached 6.00% briefly, according to Bankrate.
A week ago, mortgage rates dropped to less than 5% to the relief of investors and homebuyers everywhere. It is the first time since April that mortgage rates went below 5%. The fall in mortgage rates, however, was a short-lived relief, with current mortgage rates already up by at least 0.12% this week.
The question now is, what do the current mortgage rates mean to real estate investors?
How the Market Has Reacted in the Last Month
Given the wild roller coaster ride mortgage rates are in currently, investors were quite relieved to see them go down, albeit at a slow pace, within the past month. The lower rates, coupled with a slowdown in housing sales, were somehow taken as an indicator of a cooler market.
Despite the market cooling, experts agree that we are not facing a housing market crash anytime soon. It just so happened that the demand for housing is now lower compared to the previous months. The decrease in demand is somehow caused by increasing property prices and mortgage rates.
The Federal Reserve’s fight against inflation and the increase in housing inventory also helped bring the current 2022 US housing market to where it is now.
The Fed increased interest rates by 75 bps in its July meeting. The move marked the fourth rate hike this year and, in all likelihood, wouldn’t be the last. This hike has had a ripple effect on the economy and has directly affected the housing market.
As interest rates go up, the cost of borrowing money gets more expensive. It affects consumer behavior by limiting spending, consequently slowing the economy. In this case, purchasing a home becomes more expensive because of the increase in mortgage rates.
The Experts’ Take
The Federal Reserve does not directly set interest rates on a borrower’s mortgage, but its actions indirectly affect the housing market.
The cumulative effect of the wild swings in current mortgage rates is causing a red-hot real estate market to cool down. According to Greg McBride, Bankrate’s chief financial analyst, it also caused the economy to start slowing down but was practically ineffective against rising inflation.
Freddie Mac’s chief economist Sam Khater comments, “Mortgage rates remained volatile due to the tug of war between inflationary pressures and a clear slowdown in economic growth.” He goes on to say that the up and down are expected to continue.
“The high uncertainty surrounding inflation and other factors will likely cause rates to remain variable, especially as the Federal Reserve attempts to navigate the current economic environment,” added Khater.
Despite the current unpredictability of mortgage rates, consumers continue to spend. In fact, they’ve amassed a total of a record-$16.2 trillion in household debt, according to the Fed.
George Ratiu, Realtor.com’s manager of economic research, said that the question for consumers now is “whether companies will overreact to the recession concerns and start trimming payrolls.” Ratiu believes that “a sharp pullback in hiring could have a direct impact on people’s ability to keep spending, especially with today’s high inflation.”
Affordability will remain the main challenge for real estate investors and home buyers alike.
What This Means for Real Estate Investors
As the current mortgage rates remain unpredictable, the main challenge investors face at this time is housing affordability. The increasing costs of purchasing a home can already be felt across the board. Sales for both newly-constructed homes and existing ones have already fallen in the past few months.
Real estate investors are also faced with the reality that inflation has also taken a huge chunk of their income. With their purchasing power not as strong as it used to be, even with the market cooling and prices going down, it is still expensive to buy an investment property.
Look at it this way. A year ago, a home buyer could put down 20% for a $390,000 rental property investment on a 30-year fixed-rate mortgage at a 2.77% interest rate, paying a monthly mortgage of $1,277 only.
Today, a property with the same price at even a 4.99% interest rate will already cost you $1,673 in monthly mortgage payments. That’s a difference of almost $400 in just a year.
With the increase in interest rates, homebuyers can expect higher monthly mortgage payments.
Is Now a Good Time to Buy or Sell?
The upside is that this increase in borrowing costs had home sales dropping and inventory improving. The price cuts are something that real estate investors are taking advantage of now, especially those with more than enough to go around buying investment properties.
With the affordability ceiling set by the spike in borrowing costs, demand for housing has gone down. It has led to more available housing for investors to select from. And as demand goes down, many sellers are more likely to be willing to negotiate.
Buying Property at This Time
If you can afford to buy investment properties at this time without compromising your other priorities, now would be a good time to hunt for houses. Of course, you will need to look for an income property that will generate positive cash flow.
You can use Mashvisor’s Property Search tool as it gives you access to a real estate heatmap that lets you get a good overview of a market. The heatmap tool gives investors a good idea of how neighborhoods are performing in terms of the following:
- Traditional Rental Income
- Airbnb Rental Income
- Airbnb Cash on Cash Return
- Traditional Cash on Cash Return
- Listing Price
- Airbnb Occupancy Rate
Schedule a demo today to learn more about how Mashvisor can help you find profitable investment properties.
Selling Property at This Time
On the flip side, as a seller, you may want to rethink selling at this time since the market is cooling down. You may not get the ideal price for your property unless you’re willing to go below fair market value. It will depend on how badly you need to make a sale at this time.
The best thing to do is to keep monitoring your market and how the overall real estate market is going. More than the current mortgage rate movement, you need to take into account the law of supply and demand as a seller. Demand is lower; inventory is higher. Logically, it follows that prices will also go down.
Carefully weigh your options and perform due diligence, whether you intend to buy or sell at this time. As rewarding an endeavor as real estate investing is, it is never without risks. Make sure you do your homework and the math checks out before making any final decision. It will also help if you consult with other investors and real estate professionals to make wiser decisions.
Wrapping It Up
The current mortgage rates’ wild ride today is expected to continue over the next few months. You should keep track of the market’s movement before making any decision. While timing is essential, due diligence increases your chances of success.
The good thing is that Mashvisor can help you make informed decisions by giving you access to a massive database of accurate data and investment tools.
To access Mashvisor’s real estate investment tools, sign up for a 7-day free trial today, followed by 15% off for life.