Will Rising Interest Rates Change Real Estate Investing in 2022?

A big question on the mind of real estate investors in interest rates and we are starting to see more coverage about the potential for the real estate market to take a hit now that we’ve seen rates rise pretty consistently thus far in 2022.

Kitco had an article this week titled, “Mortgage rates have now reached ‘breaking point’; Investors need to watch this major market risk” The article interviews Ted Oakley the Founder of Oxbow Advisors.

The article opened with, “Mortgage rates are at the highest level since 2020, with the 30-year mortgage at 4%. This is in comparison to last year when the 30 year was down to 2.8%. “The consumer is going to be under pressure, and we already saw mortgage applications go way down in the last few months. That is what is happening in the marketplace,” emphasized Ted Oakley, Founder of Oxbow Advisors. “I suspect that the 4% rate on the 30-year mortgage is a breaking point.”

Do Interest Rates at 4% Change Real Estate Investing in 2022?

This got me thinking will 4% interest rates really change a lot of real estate investors appetite in 2022? In some markets, which are still seeing good price appreciation and rent increases, I think we may still see investors continue to actively pursue new projects. This is especially true for those who can find underpriced investment properties in their area.

In a lot of markets though, I think if the increase in mortgage rates continue to rise or stay at 4% we may see less investor activity as the recently historically low rates have driven a lot of investment in projects compressing cap rates. If rates continue to rise and home values fall there may be a number of markets where ARV won’t be there for the value add project.

Mortgage Rates Could Effect More Than Just Housing

The tweet below from Michael Goodwell shows an interesting relationship between mortgage rates and the Case-Schiller Home Price Index. As the graph shows, rising rates do have an effect on home prices.

You have to wonder what will happen to the US housing market if rates continue to rise significantly… Market influences cons sentiment, spending etc.

Below chart is US 30Y mortgage rate (purple, inverted) vs Case-Shiller Home Price Index MoM change (blue) pic.twitter.com/2O81IFU93K— Michael Goodwell (@MichaelGoodwell) February 15, 2022

If we continue to see rates rise and eventually hit 4% we could see a significant drop in demand for new homes which would directly impact the profitability for investors especially in single family homes. The corresponding drop in home prices could lead to some strengthening for multi family properties.