Raising US Interest Rates: An Investment Opportunity or Chaos?

The Fed recently decided to raise interest rates, and the rise will not stop.

What are the implications in terms of real estate investing, and should anyone who already has a property start worrying?

Matan Partman, Guest Column

24/04/2022

Sunday, 24 April 2022, 08:36

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The Fed recently decided to raise US interest rates by 0.25 to 0.25-0.5% in an attempt to curb rampant inflation. To understand the implications for US real estate, one needs to go back. If we look at the 2008 global economic crisis that began in the countries The alliance, the recovery phases lasted about five years. Part of the criticism of the Fed at the time was that they did not respond quickly enough to actions aimed at recovering the market and thus allowing it to collapse. Benefit packages for the economy, drastic interest rate cuts, etc.).

These moves contributed on the one hand to accelerated growth in the US market and prevented certain markets from collapsing, and on the other hand the growth in US household savings and the captive demand created alongside supply and commodity supply problems (supply chain problems, shortages and more) created inflation.

The price craze did not miss the real estate market either, US house prices flew by about 17% in 2021 and reached an all-time high of a median price of $ 388,900.

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High increases both in the buyers segment and in the rental market (Photo: ShutterStock)

There is no doubt that raising interest rates is meant to cool demand.

It seems that the rise in interest rates and the reduction in US government assistance is expected to moderate the real estate market slightly.

It is estimated that the market is expected to continue to rise by 6% -8% per year due to a combination of factors such as the shortage of new homes resulting from a decade of few construction starts as a result of the subprime crisis alongside population growth (in 2010 only 7 million homes were built Previous ones beginning in 1960).

A shortage of between 5-7 million houses, a gap that will only close for another 9-11 years and also on the condition that the pace of construction will not be harmed for one reason or another.

When you look at the rental market you can see that prices continue to break records: Rental prices in private homes showed an annual increase of 14.9% The average rent in the US is at an all-time high and stands at $ 1628 (according to CBRE). 8% in rent. Despite the increase in the interest rate on mortgages, the monthly rent is higher than the mortgage payment (fixed unlinked interest for 30 years), which pushes first-time home buyers (who can receive relatively high financing percentages) to purchase apartments.

A necessary step to bring the market to a healthy state

Matan Partman (Photo: Yachz)

The rise in interest rates by the Fed is an important and necessary step in order to cool inflation and bring the market to a healthier state.

The Fed believes that by 2023 the interest rate hike will reach 2.8% (after which it will retreat to 2.4%) but this will be at war with the growth rate in the US and the impact of the interest rate hike on it.

Over the years real estate investments have proven themselves to In the face of inflation, whether it is the rise in rental prices or real estate prices as a result of rising construction prices alongside the erosion of non-CPI-linked financing, unlike in Israel.

In the end, residential real estate is a basic consumer product, There is a severe shortage of supply in the US which currently only continues to worsen. Therefore, raising interest rates will cool the real estate market and we will probably not see price increases as we saw in 2021 which are not healthy for the market but more moderate increases like we saw from 2015 to crisis The corona of 6-7%.

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• Real Estate

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• United States