It’s no secret that interest rates have risen. In an effort to curb inflation, the Federal reserve decided to raise interest rates for the first time since 2018. As everyone knows all too well, low interest rates coupled with low available housing inventory caused the real estate market to explode and rise at record speed. The median price of a Las Vegas home has been $450,000 for quite some time now – and rising. This is creating affordability issues and reports have indicated that it is unsustainable. Granted, even with a median price of a home at $450,000, a low interest rate, as has been the case, is still allowing homebuyers to afford these rising prices. How will rising interest rates affect the rental market though?
For the time being, no shift is expected. The rental market has been strong in recent years, with rents rising at record speed. The recent increase by the Fed should have minimal impact, as the increase was relatively minor at 0.25%. Currently, interest rates on the market for home buyers are hovering between 3.5% – 4.0%. Though that is higher that in previous months, interest rates remain close to record lows.
How could the rental market be affected by further increases? If rates continue to go up, eventually affordability will be an issue, and many homebuyers will simply be outpriced. That includes investors who rely on leveraging and obtaining mortgages. When that happens, a shift in real estate prices may occur to counter rising interest rates. Yes, real estate prices may begin to plateau or even see decreases. At that point, some sellers may decide to hold off on placing their properties up for sale, especially if real estate prices take a significant downturn. They may wait for a recovery period. In the meantime, they may consider putting those properties on the rental market. As a result, the rental market, which has a limited amount of inventory available at this time, may suddenly have more than enough and some. As a result, rental prices may soften, or plateau, as well.
Of course, minor changes to interest rates will most likely keep the real estate and rental market status quo. However, at today’s prices, even a small increase can add a significant amount to a monthly mortgage payment. For example, on a $450,000 property, with 10% down, the loan balance would be $405,000. At 3.25%, the monthly principal and interest would be $1763. At 3.5% the payment would be $1819, at 4% the payment would be $1934.
While it is difficult to predict what happens in the future, its no secret that rising interest rates can affect the rental market.