Hard truths about the high interest rate environment
In recent years, the USA economy has been on a roller coaster ride up and down with the volatile interest rate. Some people are wondering if we will ever be able to break free from this trend and how long it will take. While there is no definite answer regarding when this will happen, it's not too late to start preparing for the future.
Current high-interest rates will only keep going up
The first truth is that interest rates will only continue to increase in the next few (6-10) months. The Federal Open Market Committee (FOMC) has already raised interest rates from 0.75% to an annual rate of 1.5% this year, and they are expected to increase them again. High-interest rates will not bring economic growth back to the United States. It's important to remember that low-interest rates were not the cause of the Great Recession - both Covid-19 and war were. Raising interest rates will make it harder for businesses and consumers to afford debts, worsening growth prospects.
What does it mean for home sellers?
If you're considering selling your home in the next few months, you may want to prepare yourself for high-interest rates. According to experts, the current high-interest rate environment will only keep going up. The higher the interest rate, the fewer people will want to buy your home. High interest means that sellers are putting a hefty price on homes. The market is hot, and competition for the property is low; thus, sellers will demand a higher price for their homes.
Higher on-market inventory
Higher interest rates are one of the realities of the current high-interest-rate environment. Higher rates can impact people’s ability to borrow money, leading to increased borrowing costs and decreased profits. In addition, if a company has high levels of debt and outstanding liabilities, a higher interest rate can increase its financial risk. When the inventory level rises, it will impact the ability of buyers to find their dream home. Because sellers are still listing their homes at a high price point, they may not be able to sell because the demand is low or there is little activity on the market.
Fewer buyers
The high-interest rate environment is causing fewer buyers to enter the market, resulting in less demand for homes. As a result, it has resulted in higher prices for homes, especially in areas where prices have been stagnant for an extended period.
Lower prices if they want to sell
Interest rates usually indicate a mortgage rate, but they can also be applied to interest charges charged to borrowers. The higher the interest rate, the lower the home resale price. It is often estimated that about 12% of the home sales had a price drop in 2021.
What does it mean for home buyers?
When people refer to the current interest rate environment, they usually talk about the ultra-high interest rates we have seen over the past few years. It is often more difficult for homebuyers to qualify for a loan in a high-interest rate environment. It is because a higher interest rate requires a higher down payment, which can be difficult for borrowers who don’t have a large home equity cushion. High-interest rates can also lead to longer loan terms, making it more expensive to borrow money over the long term.
Interest payments on mortgages are way higher
Interest payments on mortgages are way higher than they've ever been before. It is mainly due to the high-interest rate environment that we're currently in. Higher interest rates mean that borrowers have to pay a lot more in interest payments on their mortgages. This increase in mortgage payments has a ripple effect throughout the economy, as it can lead to higher consumer prices and reduced spending.
Maybe lower prices on homes
One of the hard truths about the current high-interest rate environment is that prices on homes may be lower than what you would expect in a more normal market. Many people are selling homes now rather than holding them, assuming prices will likely drop more if they wait too long.
Better selection of properties
When looking for a property to purchase, it is always important to consider your specific needs and wants. In today's high-interest rate environment, ensuring you select the right property is even more essential. And you may get the opportunity to better selection of properties. When purchasing a home, there are many factors to consider, and an excellent real estate agent can help you make the best choices for your needs.
What does it mean for real estate investors?
The high-interest rate environment is causing some difficulty for real estate investors. Here are three hard truths about the situation:
More inventory
On the surface, it may seem more inventory is available than ever. However, many homeowners cannot sell their homes due to the high-interest rate. This has resulted in many homes remaining on the market for an extended period.
Softer prices
High-interest rates can cause softer prices. There is a correlation between mortgage rates and home prices. As a result, a rise in mortgage rates causes a drop in home prices as people hold off on selling their homes.
Hard to find cheap financing
It can be hard to find affordable financing options when you're looking to invest in real estate in a high-interest environment. Unfortunately, the high-interest rate environment has made borrowing expensive for many people. Overall, the high-interest rate environment is challenging for both individuals and businesses. However, staying calm and taking things one step at a time is essential.
What is the best game plan for someone who wants to grow their real estate portfolio?
The high-interest rate environment has made it difficult for many people to grow their real estate portfolios. Here are how to play the game best:
Look for deal
It is essential to have a strategy for investing in real estate. Many people try to jump into the market without a plan, making mistakes. Knowing what you are looking for in a property and budget is vital. Once you have this knowledge, you can look for properties that match your criteria.
Make lots of offers
The high-interest rate environment is tough on borrowers. You need to understand the risks of taking on high-rate debt. To thrive in a high-interest rate environment, you must make lots of real estate investments.
Try floating debt with a plan to refinance
The high-interest rate environment has a significant impact on many people's lives. Some are struggling to keep up with the payments on their high-interest rate debt, while others are considering floating debt or interest-only debt in hopes of refinancing once rates come down in years or never if the property is cash flowing.
Try interst-only (IO) debt with a plan to refinance
In high interest rate environment investors resort to more exotic options that maximizes cash flow. Interest-only debt is another term for a balloon payoff. Each month you only pay the interest portion and at maturity, 30 years into the future for example, all of the principal is due at one time. The advantage of this approach lies in smaller monthly payments, allowing landlord to have a higher cashflow spread between rents and debt service. Borrower often refinance into other types of loans well before maturity of this loan, avoiding the balloon payment and earning an ultra low monthly debt service payment.
Sum it all up
It's no secret that the high-interest rate environment has had a negative impact on many people's lives. This article is intended to provide hard truths about this environment and help you understand just how serious it is for your specific situation. Then, armed with that knowledge, you can make informed decisions about how to protect yourself and your financial future best.
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