IREM Blogs

Are Low Interest Rates Always Good for the Real Estate Market?

October 23, 2017 | Nat Kunes

The Federal Reserve raised interest rates in June, signally that government leaders think the economy is gaining strength. The latest hike is being met with mixed responses. Many people believe low interest rates are good for the economy, while others, perhaps many lenders and investors, may disagree. However, not every banker is in favor of higher interest rates, and not every borrower is hoping rates stay low indefinitely.

So what is the answer? Are low interest rates good for the real estate rental market?

It’s wise to take a look at the potential impact on the overall economic stability and growth in the United States. With that in mind, you may learn more about its impact on the financial health of your own business.

Arguments for continuing low interest rates

Low interest rates mean consumers shell out less of their hard-earned money on reducing financed debt – making it possible for some to commit to a long-term mortgage. Monthly payments on a $100,000 30-year fixed mortgage at a 3.92 percent rate would be $473 compared to $616 for the same loan financed at 6.25 percent. That is a difference of $51,480 over the life of the mortgage.

The power of a low-interest environment means investors are more willing to infuse capital into the market. This willingness to deploy capital means we should see more single-family and multifamily home projects moving from the drawing board to the development stage, which will create (or sustain) jobs for wage-earners and increase revenue potential for property managers, brokers, and real estate agents.

Low interest rates help people who are cash-strapped and overburdened with significant debt. Building an investment portfolio is easier in a low-interest environment than it is where the rates are escalating, or stable at higher lending rates.

The flip-side of the coin: the case for gradually increasing interest rates to fuel growth and stability

While low interest rates make it possible for first-time homebuyers to qualify for a mortgage loan, saving for the down payment usually takes longer because money parked in a savings account simply doesn't grow fast enough to incentivize saving. For example, putting $10,000 in a savings account paying 1 percent interest APY, compounded daily for 12 months, will produce $10,100.50 – only $100.50. Both younger and older Americans find it difficult to accrue enough cash to buy a home today.

Low rates can also create challenges for governments and private pension fund managers struggling to meet obligations. When pensioners fear they might not get their full retirement benefits, the markets often see these investors buying into high-risk stocks and bonds that they would otherwise avoid.

Those involved in the real estate market should know that low interest rates tend to artificially inflate housing prices. That is great for sellers looking to boost net profit, but for retirees and others hoping to stay in their homes, when interest rates go up, property values will fall.

Aiming for balance

As you can see, there are winners and losers whenever interest rates are artificially high or low. Some financial experts believe the economy still needs a few more years at rock-bottom rates to fully recover from the 2009 crash. Others feel the time is ripe for raising the rates to relieve some of the pressure-cooker stress many pension fund managers are experiencing. Low-interest rates are propelling growth and artificially inflating assets, but for now it appears the government leaders think the positives outweigh the negatives.

Depending on whether you are an investor looking to add rental properties to your portfolio, or you run a growing property management company, or you are a real estate agent representing sellers in a high-value market place, it is important to understand how carefully controlled interest rates influence your financial stability and growth.

About the Author

Nat Kunes is the Vice President of Product for AppFolio. He works on a daily basis with property management professionals to identify industry trends and product features that are included in AppFolio's property management software.

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