Impact of Rising Interest Rates in the Real Estate Market

[JordanK]

I was going to DM some of the more experienced forum members directly but decided that the answers provided would be of good use to everybody here in the community.

My question is.. as a 24 year old involved in Real Estate. For the entirety of my life and many other investors of similar age to me (up to mid 30's). We have never experienced market conditions with high interest rates or high inflation.

I'm reading a lot from influencers, biggerpockets and from podcasts. The general theme is people saying that a housing crash similar to 08' is almost impossible due to the market conditions (low inventory and less stupid credit pumping the market). Also, in my own life a lot of friends and business colleagues share the same sentiment. The 08' crash was a traumatic event for many and I can see why everyone is looking at the indicators from that event to base their present and future decisions. I can't help but feel that it could be interest rates that bring our current bull run to at least a halt if not a minor decline.

I'm curious to hear any first hand accounts, stories or interesting points from people who have lived through those times. A lot of the current info out there, especially online around this topic is speculation and opinions from younger people like myself who haven't lived through it.

@SteveO @Antifragile @biophase @WJK

 

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[SteveO]

There are so many variables. Some data can prove to be accurate but the big things that change momentum are rarely predictable by majorities.

Consumer sentiment drives much of this. Buyers come and go for many reasons. Let's face it, buyers drive most of the market.

Availability of money also plays a large role.

 

[JordanK]

Yes, I think the consumer sentiment side of things is also very interesting. Usually if times turn bad and people can't afford to pay their mortgages they drop out into the rental market.

As things stand here in Ireland most mortgage payments are much more affordable than rent prices. We also have a lot of people still living at home in their 20's and 30's. A lot of those people do want to move out now but can't with the level of prices. Many others are commuting super long distances into their jobs in the city to avoid paying the high rents. One of my old friends from school takes the bus two hours to work in the morning and two hours back in the evening. Usually, you'd consider that kind of crazy but the financial difference is immense. You also have those in their late 20's and early 30's who are delaying starting a family as they can't secure appropriate houses/apartments.

Any major dip in prices would trigger those people to re-enter the market boosting demand.

Not sure how things compare stateside.

 

[biophase]

The general theme is people saying that a housing crash similar to 08' is almost impossible due to the market conditions (low inventory and less stupid credit pumping the market). Also, in my own life a lot of friends and business colleagues share the same sentiment. The 08' crash was a traumatic event for many and I can see why everyone is looking at the indicators from that event to base their present and future decisions. I can't help but feel that it could be interest rates that bring our current bull run to at least a halt if not a minor decline.

I'm curious to hear any first hand accounts, stories or interesting points from people who have lived through those times. A lot of the current info out there, especially online around this topic is speculation and opinions from younger people like myself who haven't lived through it.

@SteveO @Antifragile @biophase @WJK

Here is my opinion.

Back in 2008, anyone could get a loan. I was able to buy 5 properties with stated income loans and I didn't have a job at the time. Most people buying were buying using loans and with intentions to flip. So in that scenario, the buyers knew they couldn't afford the home long term, so when it crashed, it all crashed.

Also, there wasn't any inflationary pressure at the time. When the houses were going up, nobody was complaining about food or goods prices. And nobody was complaining about the low minimum wage. The houses were going up by themselves.

There are so many reasons that this time it's different.

Today, as housing prices are going up, the cost of goods are also going up and also the hourly wages. So to me, this isn't the housing market going crazy into a bubble. It's the prices of homes going up along with everything else. It's everything going up at the same rate.

Getting a loan today is not easy. Banks are making sure you can pay you mortgage! They are asking for a ton of paperwork and requiring a decent down payment. People buying these homes can actually afford them at the time of closing.

Regarding loans, back then many people were on ARMs and when they reset their monthly payments skyrocketed. Right now the 30 year fixed vs ARMs are so close that I'm assuming most people are getting 30 fixed loans. So we aren't going to see a huge amount of foreclosures in 3 or 5 years when the loan rates reset.

Also, most buyers are buying cash. All the stories you here are people getting outbid by cash offers. Those houses don't have mortgages or payments so if the market stagnates, the owners aren't fire selling these properties. They will rent them out or just hold or maybe selling at a slightly lower than market price. They won't be going into foreclosure.

With the pandemic and the popularity of work from home and slack, the house location does not matter as much. Homes that were only vacation homes or retirement homes can now be primary homes. The nice home in the suburb is worth the same as one closer to downtown. You can't look at a home and say it's not worth XXX dollars anymore.

The farmhouse that was worth $100k and 200 miles from Chicago can now be a primary home to a downtown worker than makes $200k a year. He might love that home and pay $300k for it!

With the popularity of Airbnb, the investment rental numbers are totally different now. A home can be profitable at 2x or 3x the cost compared to a 12-month rental. This will keep prices up until something is done to regulate short term rentals. Investors go for where the returns are and the returns are still very good now.

I don't see a housing crash happening. There may be a slow down in prices, but they aren't going to come plummeting down. In my opinion, in order to see a huge drop in prices there must be a cascade of events that causes many homes to go into foreclosure. I don't know what that would be at the moment.

 

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[Antifragile]

I was going to DM some of the more experienced forum members directly but decided that the answers provided would be of good use to everybody here in the community.

My question is.. as a 24 year old involved in Real Estate. For the entirety of my life and many other investors of similar age to me (up to mid 30's). We have never experienced market conditions with high interest rates or high inflation.

I'm reading a lot from influencers, biggerpockets and from podcasts. The general theme is people saying that a housing crash similar to 08' is almost impossible due to the market conditions (low inventory and less stupid credit pumping the market). Also, in my own life a lot of friends and business colleagues share the same sentiment. The 08' crash was a traumatic event for many and I can see why everyone is looking at the indicators from that event to base their present and future decisions. I can't help but feel that it could be interest rates that bring our current bull run to at least a halt if not a minor decline.

I'm curious to hear any first hand accounts, stories or interesting points from people who have lived through those times. A lot of the current info out there, especially online around this topic is speculation and opinions from younger people like myself who haven't lived through it.

@SteveO @Antifragile @biophase @WJK

Thanks for the tag @JordanK and a great question.

In short, my answer is this: The current situation is clear as mud.

The real estate market is greatly affected by high inflation and high interest rates.

• When prices are constantly rising, people tend to invest in real estate as a way to protect their money. This drives up the prices of homes and commercial property, making it difficult for average people to afford a home.
• High interest rates also have an effect on the market. When it costs more to borrow money, people are less likely to invest in a property. This can lead to a slowdown in the real estate market, or even a crash.

2008 was a different scenario than today. But black swan events are called that for a reason, they are unexpected until they happen. Then, looking back they make perfect sense. Back then borrowing was easy (especially in the USA).

What do I think about the future?

I borrow liberally from smarter people. My favourite barometer comes from Howard Marks and his book "Mastering the Market Cycle":


I am also a big fan of Ray Dalio and recently finished his latest book: "Principles for Dealing with the Changing World Order".

Based on that and conversations with other locals in our industry here, I think RE is an excellent space to be for the right cities and countries. Inflation is here and I believe is here to stay for the next 5 years. Central Banks are influenced by the politicians. This means the gap between interest rate and inflation will remain. RE that is not over-leveraged will do well.

What can we expect once the market accepts inflation? What type of behaviour is then typical?

• Living in an inflationary environment is something people will just adjust to and accept. As people who lived through 1970s tell me, it was part of the norm.
• The days of pre-selling or pre-leasing will be over. Lease rates will continue climbing every month, waiting will become better for your pro-forma.
• By the time you build your product, your costs will be historical.
• Money will be like holding a hot potato, you'll want to re-invest to avoid losing due to high inflation.
• Placing capital will continue driving interest rates up, until a correction.

 

[ljean]

I can't help but feel that it could be interest rates that bring our current bull run to at least a halt if not a minor decline.

That is precisely the point of raising rates (at the very least, slow the rate of increase).

 

[JordanK]

225 - The economics of energy

Listen to this episode from The David McWilliams Podcast on Spotify. Economics has always been about energy. When the price of energy rises, everything follows. We go to the Gulf to understand the politics of energy and Putin's calculation that an energy war will cause a Western recession, just...

open.spotify.com

Very interesting episode on Ireland's biggest business/economics podcast. Coincidentally I shared the episode with my father and it turns out he grew up alongside the guest speaker out in the middle east. The episode discusses in more detail how energy prices are tied to power/politics/currencies/inflation. The micro picture and the macro picture.

 

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