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Will higher interest rates result in lower real estate prices?

Interest rates have been a concern for potential homeowners, investors, and lenders for quite some time, but will higher interest rates result in lower real estate prices?

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Interest rates have been a concern for potential homeowners, investors, and lenders for quite some time. Most homeowners focus on changing mortgage rates because they have a direct influence on real estate prices. However, this isn’t the only reason they are a growing concern. Interest rates also affect the availability of capital, as well as, the demand for investment. Interest rates can greatly influence the supply and demand for property and therefore property prices as well.

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According to Investopedia, “Interest rates also affect returns on substitute investments, and prices change to stay in line with the inherent risk in real estate investments. These changes in required rates of return for real estate also vary during destabilization periods in the credit markets. As investors forsee increased variability in future rates or increase in risk, risk premiums widen, putting increased downward pressure on property prices.”

Booms and dips

When interest rates affect capital, it is likely that renting becomes more attractive. If you know you will not be able to afford the home you want, long term, due to interest rates and other economic factors, chances are you will turn to renting instead. This, in turn, drives the rental market to seek higher prices, as the demand increases, but will this hold true over time? Some industry experts have weighed in with their thoughts as to whether or not higher interest rates will result in lower real estate prices and higher rents in real dollar values:

John Souerby, a real estate broker in San Francisco, stated, “Higher interest rates typically create real estate booms, which include higher property values and higher rents. Right now, private investment (banks, insurance companies, institutional investors) in real estate is low because interest rates are low. Investors have moved their dollars out of the mortgage market to where they can get a higher return (they call it ‘flight to quality’). So, what happens when rates increase? Private investors move their money back to mortgages. The influx of mortgage money typically allows more people to buy, which leads to more competition for listed properties, which leads to higher prices.”

Christopher Telles, CRE professional, stated, “Historically, real estate rents rise with increases in interest rates. I’m not an economist so my views can be taken as conjecture, but as a student of interest rates and macro economics it is my opinion we will not see substantial increases in interest rates for the foreseeable future. China’s banking system, which is also being manipulated by their government, is in such a shambled mess that the US regulators, the FED, will likely have no other alternative but to continue to keep interest rates near their current levels as a lever to keep the trade imbalance in check and GDP levels stable.”

What does the future hold?

We’re likely to see the onset of a recession over the course of the next 24 months which will exacerbate the FEDs need to either extend further QE or at a minimum keep interest rates low to protect the strength of the US dollar.

My take is we are living in a new normal where interest rates remain low and as a result a cap is placed on GDP growth. Organic GDP growth is needed by industry to fuel business growth. Without growing businesses there is likely no way for real estate value to continue to rise.

QE placed money into circulation which allowed real estate value to bounce off their Great Recession bottom, but now that markets have fully recovered we’re beginning to see market prices remain flat or begin their decent. The east coast is seeing downward price movement. The historical pattern in a down cycle begins in the east and moves west.”

Ray Ciampaglia, a New Jersey Realtor with a Wall Street background stated, “The short answer is ‘yes.’ If the cost of money increases then the amount one can spend is on the item being purchased with borrowed funds is reduced. Therefore, buyers can afford less. This makes renting more attractive and in higher demand, increasing prices in rental markets. There are exceptions to this, but they come with a very rare set of economic circumstances.”

Chris Nicholson, economist, stated, “All other things (including inflation) being equal, yes. Although the net impact of rents is less clear than the net impact on asset values (valuations would go down for sure, but the rents go up with interest but down with valuation (which goes down when real rates go up), so more complicated).

From all angles

Some of the things that might NOT be equal and, therefore, could move prices in the other direction: local and regional occupancy rates, expectations about future real estate prices (terminal value), expectations about inflation, and expectations about risks and returns in other asset classes.”

Now that some other industry insiders have weighed in with their opinions, how do you feel about higher interest rates? Do you think it will influence rental prices?

#InterestRates

Jennifer Walpole is a Senior Staff Writer at The American Genius and holds a Master's degree in English from the University of Oklahoma. She is a science fiction fanatic and enjoys writing way more than she should. She dreams of being a screenwriter and seeing her work on the big screen in Hollywood one day.

Homeownership

The phrase ‘starter home’ is overrated and overused

(HOMEOWNERSHIP) You see the term in the MLS for fixer uppers, you hear it when Realtors are working with first time buyers. But the term “starter home” shouldn’t be in anyone’s vocabulary. Here’s why.

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Just words

Collins English Dictionary defines a starter home as a “small, new house which is cheap enough for people who are buying their first home to afford.” You won’t find the phrase too often outside of the real estate industry.

There isn’t much about the etymology of the phrase, but most likely, it’s a marketing ploy to get people to buy into the idea of purchasing another home in a few years.

Grind your gears

Mark Greutman, husband to Lauren Greutman, believes that the term “starter home” should bother people. The phrase implies that you will upgrade later.

Your starter home isn’t good enough for the rest of your life. And not to get into how well Americans have it, what about people who will never be able to afford anything more? Is it an insult to them?

Do you really need two living rooms?

Older generations bought one home and lived in it until they could no longer be independent. In today’s world, we buy a starter home, then upgrade to have more space, to live farther away from our neighbors, to have rooms that are only used once or twice a year, and to make sure you have a 2 or 3 car garage to hold your vehicles and more stuff, some of which isn’t taken out very often.

But consider this: You could pay off your starter home in 15 to 20 years, if you budget right.

You could be out from under a mortgage and have money to travel, send the kids to college, or even retire early. When you think about what led to the financial crisis in 2008, isn’t it better to have a smaller house where you can make the payments than worry about losing your house?

Be content where you are

Realtors are motivated to make sure that they have customers. If people buy one home with the intent to stay, will the market dry up? Probably not, because people move and a new generation will be ready to purchase homes for their own family.

Let’s think about that phrase, “starter home.” It fuels consumerism and discontentment. Don’t call cheaper houses starter homes, but just a home.

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Homeownership

The remodeling projects with best ROI that actually increase home value

(HOMEOWNERSHIP) Knowing which remodeling projects to tackle when a home is being put on the market can save a lot of wasted effort and money.

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If you’re looking to help your clients to identify which projects to tackle before putting their home on the market, look no further: the National Association of Realtors surveyed thousands of real estate agents, industry professionals, and consumers on interior and exterior house remodeling projects, and these are the best projects for upping a home’s value before listing it on the market, ranked on the most value and cost recovery a homeowner can get.

  • Refinishing hardwood floors. Start from the bottom to earn top dollar. Refinishing floors transform a home from worn-out and aging to vibrant and inviting, and only costs about $2500 according to the National Association of the Remodeling Industry (NARI). The project also increases a home’s value by that same amount, meaning a homeowner can recover 100 percent of the costs. Pretty sweet deal.
  • Upgrading insulation. Because it’s what’s inside that counts. This project costs about $2100 based on NARI Remodeler’s estimate and increases a home’s value by $2000 according to Realtors surveyed. That’s a 95% cost recovery.
  • Adding new wood floors. If you don’t have wood floors to refinish, add them in! This costs about $5,500 according to NARI Remodelers, and the increased sales value is $5000. A homeowner can recover 91% of costs from a new wood floor addition.
  • Replacing HVAC system. A new HVAC system adds energy efficiency and refreshes the entire home, and NARI Remodelers estimate doing so costs $7000. The increased value for sellers is $5000 according to NAR REALTORS, meaning an easy breezy 71% cost recovery for homeowners.
  • Converting a basement into a living area. Not only is this cost and space-efficient, it’s also undeniably trendy. A basement makeover costs about $36,000 according to NARI Remodelers estimate and increases value for sellers by $25,000 according to Realtors surveyed. That comes out to a cost recovery of 69%.

Which projects are the most costly?

In case you’re curious, these are some of the most expensive remodeling projects:

  • New master suite. More like master $uite – this costs about $112,500 with a cost recovery of 53%. 
  • Converting an attic into a living area. Cute idea, but also a $65,000 one with a 61% cost recovery. One might say the price is through the roof.
  • Complete kitchen renovation. This project costs an estimated $60,000 with a 67% cost recovery. Even more if you want to throw in a brick oven, and you probably do.
  • New bathroom. With an estimated cost of $50,000 and a 52% cost recovery, make sure you aren’t flushing money down the drain with your bathroom addition!

These trends change over the years, so make sure your knowledge is up to date locally since we all know local trends trump national. Hopefully today you’ve garnered some ammo to help clients better understand how to improve their home’s value!

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Homeownership

How to inform clients about well-known homebuyer scams

(HOMEOWNERSHIP) Real estate scams continue to victimize people, but Realtors are in a position to better protect homebuyers. Here are some tips.

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Despite warning after warning and news story after news story, homebuyers keep getting their money stolen in real estate wire transfer schemes. Some blame the mortgage and real estate industries for not doing enough to educate and protect their clients. Others say the people committing these crimes are getting more and more sophisticated. No matter who’s to blame, there’s no arguing that this crime is on the rise.

What exactly do these real estate scams look like? These criminals usually hack into a business’s emails, often a title company, and get all the pertinent information they need. They then steal and copy that company’s letterhead, and the email addresses, signature blocks and any other relevant information they will need to fool the homebuyer. The homebuyer then gets an email that appears to be from the title company, asking them to wire money, often tens or sometimes hundreds of thousands of dollars.

So, you’re probably wondering right now: What can I do? You want to know how to warn and protect your clients and keep your reputation intact (and avoid costly lawsuits). The following safeguarding tips can help keep cash out of cyberthieves’ hands:

1. Pick up the phone. If you’re closing on a home and receive an email with instructions on how to transfer money to your closing company or lender, take a few minutes to call your agent or broker to make sure it’s legit. Yes, this might be a bit annoying, but not as annoying as losing thousands of dollars in an email scam.

2. Be aware. These scammers usually send emails that look like the real thing. If you’re a homebuyer, look for weirdly timed emails (sent in the middle of the night) or spelling and punctuation errors. Is there a sense of urgency to the email?

3. Educate your clients. If you’re a real estate professional, make sure your clients know about this scheme. Not everyone is aware they could be a target (which is why it keeps happening). Set up a specific passcode for each client.

4. Consider using ClosingLock and asking your title company to use this technology for all of their transactions… What’s ClosingLock (previous name was BuyerDocs), you ask? This tech startup provides secure document delivery for closing companies and homebuyers. The company says it has protected more than $5 billion in wire transfers and works with big and small businesses across the country.

Scams will never be eradicated, but it is part of your job to know the current scams and how to protect transactions against shady folks.

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