Doing the math on this one is pretty simple. When interest rates rise, your monthly payments will be higher whenever you're securing new financing…all other things being equal. So while many people have been happy with what has seemed like a better overall real estate market lately, what impact will rising interest rates now have on our overall market conditions?
In the housing market, for example, back in May of this year home buyers could get a $450,000 loan for 30 years at 3.4 percent interest, and have monthly payments in the neighborhood of around $2,000. But as interest rates began rising, home buyers became more likely to experience rates in the 4.75 percent to 4.85 percent range, causing them to now only be able to finance a loan of about $380,000, while keeping the same $2,000 monthly payment.
When interest rates remain lower, the resulting lower monthly loan payments can increase the amount of money people will be willing to pay for a property. This can also increase the amount of money someone will pay for an investment property when they correlate it to their desired cash-on-cash return from the property. The cash-on-cash return equals the net income minus all of the loan payments, with the result then being divided by the down payment. So when interest rates remain lower the cash-on-cash return remains higher.
The good news is that owners who have buildings and available space to rent to businesses may see an increase in the demand for their rental properties. When the companies that were previously interested in buying a building for themselves see what has now happened to overall affordability as a direct result of these higher interest rates, they may decide to rent instead.
So we're now right in the middle of what may be an adjustment period, and within the coming months we'll see how all of this may affect the real estate market. Since it took so long for interest rates to reverse their trend and finally begin rising, they'll probably not be falling again in the near future.
The likelier trend will be for them to remain within the same range for a while, or continue to rise. With this in mind, it will be wise for borrowers to lock in their interest rates for financing as soon as they can, to ensure that they won't get caught paying higher rates.
In the midst of all of this, people in general are feeling better about the economy. Let's hope that people continue feeling more positive about the economy, making it easier for everyone to do business.
Mike Merrill can be reached at [email protected]
In the housing market, for example, back in May of this year home buyers could get a $450,000 loan for 30 years at 3.4 percent interest, and have monthly payments in the neighborhood of around $2,000. But as interest rates began rising, home buyers became more likely to experience rates in the 4.75 percent to 4.85 percent range, causing them to now only be able to finance a loan of about $380,000, while keeping the same $2,000 monthly payment.
When interest rates remain lower, the resulting lower monthly loan payments can increase the amount of money people will be willing to pay for a property. This can also increase the amount of money someone will pay for an investment property when they correlate it to their desired cash-on-cash return from the property. The cash-on-cash return equals the net income minus all of the loan payments, with the result then being divided by the down payment. So when interest rates remain lower the cash-on-cash return remains higher.
The good news is that owners who have buildings and available space to rent to businesses may see an increase in the demand for their rental properties. When the companies that were previously interested in buying a building for themselves see what has now happened to overall affordability as a direct result of these higher interest rates, they may decide to rent instead.
So we're now right in the middle of what may be an adjustment period, and within the coming months we'll see how all of this may affect the real estate market. Since it took so long for interest rates to reverse their trend and finally begin rising, they'll probably not be falling again in the near future.
The likelier trend will be for them to remain within the same range for a while, or continue to rise. With this in mind, it will be wise for borrowers to lock in their interest rates for financing as soon as they can, to ensure that they won't get caught paying higher rates.
In the midst of all of this, people in general are feeling better about the economy. Let's hope that people continue feeling more positive about the economy, making it easier for everyone to do business.
Mike Merrill can be reached at [email protected]