Rising Interest Rates

US Federal Reserve Chairman Jerome Powell has been raising interest rates aggressively and companies in the real estate sector need to be aware of how this policy decision will impact their operations. We know that sustained interest rate changes have a profound effect on various sectors, from savings accounts to mortgages, and from stock and bond investments to borrowing costs. But how do these changes indirectly impact the commercial and residential real estate industry in particular? In this blog post, TalentWoo offers its insights…

Savings

First, let’s talk about what high interest rates mean for the average American consumer. After that, we can dive into what this means for real estate companies in particular. savings accounts and certificates of deposit (CDs) have been benefitting from rising interest rates. Banks are now offering higher returns on savings and money market accounts, although the speed at which this happens will vary from bank to bank.Savers are now shopping around for the best returns, with online banks and top credit unions often offering better rates than traditional banks. CD account holders who recently locked in rates will keep those yields for the term of the CD, unless they are willing to pay a penalty to break it.

Mortgage Rates

Secondly, the housing market will be impacted by the interest rate hike. While the federal funds rate does not affect mortgage rates, which depend on the 10-year Treasury yield, they often move in the same direction for similar reasons. As the 10-year Treasury yield falls due to market pricing in the potential for a recession, mortgage rates have also fallen. However, mortgage rates are still above 6.5 percent and are expected to remain high until inflation comes down or the economy slows materially. The high mortgage rates, following the rapid rise in housing prices over the past few years, has created a double whammy for potential homebuyers. Home prices are more expensive, and the financing is pricier, resulting in a slowdown in the housing market. The cost of a home equity line of credit (HELOC) will also increase since HELOCs adjust relatively quickly to changes in the federal funds rate.

Stocks & Bonds

Thirdly, stock and bond investors will be impacted by the interest rate hike. The stock market has been soaring as long as the Fed kept rates at near-zero for an extended period of time. Low rates were beneficial for stocks, making them look like a more attractive investment compared to rates on bonds and fixed-income investments such as CDs. Investors have been pricing in rate increases since late 2021, and the S&P 500 spent most of 2022 in a deep slump. Now, with the 10-year Treasury moderating, investors have sent stocks higher in the last few months because they think they can see the end of rate hikes. The the past several weeks, there has been no shortage of experts warning that higher rates should slow growth and corporate earnings, and like lead to outright recession. And it’s no wonder: the Fed’s message to investors continues to be ‘the beatings will continue until inflation improves.’ Higher rates and reduced earnings estimates mean additional volatility in the stock and bond markets.

Finally, borrowers will also be impacted by the interest rate hike. Anyone with any kind of floating-rate debt will feel the sting of higher rates, and new borrowers will be squeezed. For example, if you took out an adjustable-rate mortgage years ago, that loan may be resetting at higher rates, and it may be more difficult to secure a new loan. The average interest rate on personal loans is 10.81 percent, as of March 15, according to a Bankrate study. However, borrowers with better credit may still be able to access a lower rate. In 2021, the average rate was just 9.38 percent when the fed funds rate was near zero.

Impact on Commerical and Residential Real Estate

Builders and Developers

So now let’s discuss the Federal Reserve’s decision to increase interest rates and the corresponding impact on real estate industry businesses – commercial, residential and industrial. Higher interest rates make it more expensive for buyers to obtain mortgages, potentially slowing down the pace of home sales. As a result, homebuilders and developers may see a decrease in demand for new construction, leading to a reduction in building activity. This, of course, slows down company growth and hiring. These organizations will need to focus on targeted executive hires that can be strategic in acquisitions, finance, accounting, investments, and dispositions as opposed to hiring field personnel in construction, for example.

Residential Rental Companies

The opposite may be true, however, for multifamily property owners and single-family rental companies.  While it is true that higher interest rates could increase their financing costs, reducing their profitability, this will be offset by the greater number of renters created due to housing affordability issues.  And yes, higher acquisition costs may mean a temporary slow down in purchases of existing homes by SFR players or development of apartment buildings by multifamily developers, but rental communities have always performed well in higher interest rate environments. When Americans cannot afford to buy a home, they rent. This is good news for residential rental companies. Let’s not forget, that many of these companies are also building their own single-family rental communities to save costs (both in acquisition and maintenance). We predict that they are going are not going to be hit as hard as homebuilders and developers.

Despite many of these challenges, there may be some silver linings for the real estate industry. Higher interest rates could lead to a reduction in housing demand, which could ease competition among buyers and stabilize home prices. This could lead to a more balanced market, benefiting both buyers and sellers in the long run.  Falling home prices also bode well for institutional buyers of single-family homes, who typically ramp up acquisitions when deals are plentiful, such as in the 2008 housing crisis.

Non-Performing Loan (NPL) Deparments

In addition to institutional single-family rental companies, non-performing loan departments within banks may also go on hiring sprees. Non-performing loans are loans that borrowers have stopped paying, and banks need to find a way to recoup their losses. This department is responsible for working with delinquent borrowers, negotiating loan modifications, or arranging for foreclosures. The demand for these services may increase during periods of economic uncertainty, and banks may need to hire additional staff to handle the increased workload.

In conclusion, higher interest rates by the Federal Reserve can impact the real estate industry in various ways, from reducing demand for new construction to increasing financing costs. However, opportunities still abound for hiring in specific real estate verticals, such as single-family rental companies and non-performing loan departments in lending institutions. TalentWoo’s real estate recruiters can help companies navigate these challenges by providing expertise in identifying and attracting top talent in the industry. When companies are ready to start hiring, TalentWoo’s team of experienced recruiters can provide tailored solutions to meet their specific hiring needs.