The Intersection of Inflation, Interest Rates & Real Estate Investments

You might say we all saw it coming. Some may have blatantly chosen to ignore it or some merely distracted by the much-needed return to life after the murkiness of the past two years. In any case, we are now feeling the inevitable financial fall out of the pandemic. Some have gone as far to suggest Covid has broken our economy by leaving us with disrupted supply chains, labor shortages, and an unhealthy appetite for consumption.

Although the long-term effects of the pandemic have yet to be determined, we are now navigating some of the short-term consequences; finding ourselves at a crossroads where the impact of rising inflation and interest rates is intersecting with our impulse to invest.

In February 2022, the annual inflation rate in the United States hit 7.9%; the highest it’s been since 1982. To off-set the rising inflation rate and to ultimately try to slow the economy, the Federal Reserve has since ordered an increase in interest rates; a complex balancing act that requires caution and restraint so supply can ultimately catch up with demand. As we watch inflation rates rise, we can only expect mortgage rates to rise with them. And after enjoying years of borrowing cheap money, we now may see mortgage interest rates for a conforming 30 year fixed loan surge well above 5%.

This surge has resulted in 3 camps of buyers:

1.) Buyers choosing to wait it out, hoping that rates will return to the low levels we’ve had in years past and praying they don’t climb further.

2.) Buyers seeing this as their window of opportunity to leverage the decrease in market competition.

3.) Buyers considering creative solutions to offset the higher purchase costs. For instance, more buyers are leveraging recent legislation such as SB-9, and searching for properties that will lend to multi-generational living and/or a passive income source. This approach is resulting in extended searches as these buyers are on the hunt for very specific and oftentimes rare properties.

Despite buyers being split across multiple camps, we’re still left with an overall strong Seller’s market - multiple bidders, non-contingent terms and accepted offers ranging from $200K-$400K over-asking. However, the main difference we’re seeing is in the number of offers.  Homes that saw 5-10+ offers in 2021, are now seeing 2-5 offers.

Experts have forecasted rates to fluctuate throughout 2022 only to end around 4.5% this year and then remain in the 4-5% range through 2024.  The ultimate question is: will rising inflation and rates actually hit a tipping point that will send the real estate market into a true price decline or is this slight cooling in buyer demand the extent of the “decline” we will experience?