What are your predictions for the RE market? 6.5% interest rates
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
4yAs rates increase, buying power goes down. I'm seeing more houses on the market, price reductions across the country, fewer new mortgages, etc. There are a lot of buyers that have been priced out of the market.
I predict we'll continue to see inventory grow and prices go down. I don't know if we'll see huge drops, but 10% or more seems reasonable. With fewer people buying, rentals will be in demand and we'll see rent rates increase.
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- Member since 2019 · 223 posts · 261 votes4y
I would like to know if anyone had any data that shows rental prices vs interest rates. It makes since to me that higher rates would result in less new homebuyers and less investors buying rentals. That would keep rental inventory low therefore should increase or at least hold rental rates steady. I don't have any data to support this though.
- 4yJaron WallingPro MemberRental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
@Paul De Luca I agree! So as investors we should solely focus on opportunities in front of us?... less worrying about future rates, values, etc. I'm ready for a rehab project but getting the wife to understand it has been a challenge. She's risk adverse.
- Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes4yPut together a spreadsheet and do the math.
Quote from @Jaron Walling:
@Paul De Luca I agree! So as investors we should solely focus on opportunities in front of us?... less worrying about future rates, values, etc. I'm ready for a rehab project but getting the wife to understand it has been a challenge. She's risk adverse.
It depends on the numbers but with a first flip, do you know your entry costs? carrying costs? rehab costs? tax ramifications, time line? what happens if a contractor doesn't finish the job? how much do you want to make on the project? what continigencies do you have? how long will it take to sell or to fill with a tenant? how much rent is realistic? what if the renter is difficult to deal with?
Take a yellow pad and identify what your wife's fears are about this. She may have a point or she may just fear the unknown. Once you have solutions for each item, then she can make an informed decision.
By the way, most flippers over estimate the return and under estimate the amount of money needed and the work involved.
- Real Estate Agent · Chicago, IL · Member since 2018 · 1k+ posts · 1k+ votes4y
Quote from @Jaron Walling:
@Paul De Luca I agree! So as investors we should solely focus on opportunities in front of us?... less worrying about future rates, values, etc. I'm ready for a rehab project but getting the wife to understand it has been a challenge. She's risk adverse.
It's all we can do, I think. If a deal makes sense, pull the trigger. Make sure you have reserves to weather a storm if necessary.
- 4yJaron WallingPro MemberRental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
@Account Closed Thank you for the response. We have no contingencies other than our inspection period. Kind of derailed the thread here but with <2 days to make a decision I'm stressing.
Her biggest fear is tapping the majority of our liquid funds to get this deal done. I've worked with great contractors on other projects and plan to utilize them again. I'll swing hammers for roughly 40% of the remodel (installing the kitchen cabinets, painting, electrical fixtures, exterior repairs, and minor plumbing stuff in the shower. She's never been part of that process since we started dating. This property hits the 1% rule all day long. We reviewed our rehab budget together but it sounds like I need to justify the investment more clearly.
- Rental Property Investor · Mississippi Gulf Coast · Member since 2022 · 206 posts · 168 votes4y
CJ M nailed it. Don't worry about interest rates. Evaluate each property on its own merits. The number work or they do not. When I started investing many years ago my rates were usually between 7-9%. I made lots of money. Remember rents are going up due to inflation. The rising rents should help your calculations.
When considering the offer, a good quasi rule in this market is to pay what you think that property would be worth in six months to one year. If the seller goes for it, you have a cushion. In the end, with a fixed mortgage or cash purchase, you need only be concerned with where rental rates are going. I recommend that people for the time being stick with four units or less until we get past the elections, China, the Russian war, etc. Then again a good deal is a good deal.
I was an investor in the 2000s and did very well. Even at the end of 2008-2010, you could do well then after picking up the pieces. There are always good deals out there.
- Investor · cary, NC · Member since 2008 · 27 posts · 7 votes4y
@Eliott Elias ??? What makes you think rates will drop to 2s?
- 4yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
Quote from @Jaron Walling:
Quote from @Theresa Harris:
Quote from @Eliott Elias:
Rates will go back to the 2's early next year
I think they may go down a bit from where they are now, but they won't go that low.
Theresa, I have two fears, #1 future appraisal coming in low 3 months from now after we remodel the place, and #2 rising rates killing our cash-flow. It barely works at 6%.
It might be better to wait on the refinancing.
- lets say you purchased a SF house for 100K (I know there are no prices like that, but for simplicity, lets say it is a 100K), your mortgage is (again, for simplicity, lets say 1K per month. )What cash flow would you consider good?
Quote from @Account Closed:
@Mary Jay
Depends on things like:
1. How much of my time will it take before I cashflow
2. CoC %
3. Cash flow
4. Neighborhood
5. Bank terms (but that's really just a component of #2 and #3)
6. How much equity I'll have in property
7. Etc., etc.
- Rental Property Investor · Canton, OH · Member since 2017 · 1k+ posts · 1k+ votes4y
@Mary Jay
It's not as simple as a house costs $X and that equates to me wanting $X in cashflow.
I also look at how much time, money and stress it'll take me to get it rent ready/cashflowing? Is it in a neighborhood that will experience quick appreciation? What are average rents in the area? Can I gain significant equity in the property by forcing appreciation through rehab...or just simply buying it at a low price?
That being said, if you want some very "general" numbers, I would say I don't get excited for anything under a 30% CoC return (I shoot for 100%+ after refi). Cash flow can range from $200-$800+ depending if I refi or not...meaning higher end of cashflow if I don't refi, and lower end if I pull as much $ out of the equity as possible.
Hope this helps.
- You seem like you have a lot of knowledge.
Quote from @William Anderson:
CJ M nailed it. Don't worry about interest rates. Evaluate each property on its own merits. The number work or they do not. When I started investing many years ago my rates were usually between 7-9%. I made lots of money. Remember rents are going up due to inflation. The rising rents should help your calculations.
When considering the offer, a good quasi rule in this market is to pay what you think that property would be worth in six months to one year. If the seller goes for it, you have a cushion. In the end, with a fixed mortgage or cash purchase, you need only be concerned with where rental rates are going. I recommend that people for the time being stick with four units or less until we get past the elections, China, the Russian war, etc. Then again a good deal is a good deal.
I was an investor in the 2000s and did very well. Even at the end of 2008-2010, you could do well then after picking up the pieces. There are always good deals out there.
How do you predict what you think the property will worth in 6 month or one year? For instance, what do you think, will the Mississippi Gulf Coast and Florida Real estate go up or go down in 6 month-1 year?
In theory, it should go down because the interest rates are up significantly. Right? - I agree with you...its complicated.
Quote from @Account Closed:
@Mary Jay
It's not as simple as a house costs $X and that equates to me wanting $X in cashflow.
I also look at how much time, money and stress it'll take me to get it rent ready/cashflowing? Is it in a neighborhood that will experience quick appreciation? What are average rents in the area? Can I gain significant equity in the property by forcing appreciation through rehab...or just simply buying it at a low price?
That being said, if you want some very "general" numbers, I would say I don't get excited for anything under a 30% CoC return (I shoot for 100%+ after refi). Cash flow can range from $200-$800+ depending if I refi or not...meaning higher end of cashflow if I don't refi, and lower end if I pull as much $ out of the equity as possible.
Hope this helps.
Thank you for your reply! - Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes4y
How do you predict what you think the property will worth in 6 month or one year? For instance, what do you think, will the Mississippi Gulf Coast and Florida Real estate go up or go down in 6 month-1 year?
In theory, it should go down because the interest rates are up significantly. Right?Another Mississippi investor here (though not on the Gulf Coast.) Mississippi real estate has been underpriced for so long I can't help but think prices will either remain stable or increase, although I would not do what @William Anderson suggests and bid what I think the property will be worth down the road. I want to pay what a property is worth right here, right now. During the Recession I was buying properties for 30K that rented for $850 a month. We are talking about 3/2 houses with two-car garages on a 1/4 acre lot. You won't find those anymore unless they are real mess. That same house is now worth 86K but will rent for $1050. With those figures more and more out-of-state investors are looking at Mississippi. There are some risks with that, because they don't know the area, but still hard to beat numbers like that right now.
Quote from @Mary Jay:
Hi guys,
There was a great topic on the real estate predictions. I cant find it.
What do you think will happen with the real estate prices? Now the interest rates are 6.5% I see some prices are dropped may be 15K but still there is a very low inventory...In my area we have 3 houses for sale under 420K which is suuuper low. At a normal market I would expect about 20-30 houses for sale in that area
So, I because of that low inventory cant imagine prices dropping too much.
What do you think?
National average for 30 year is hovering at 5%, not 6.5%. We are nowhere near dire rates. Demand for real estate is being artificially destroyed and I can find no reason it will not rebound once the Fed's goal has been accomplished and or we are in a recession, particularly because rents have outpaced home price appreciation and wages are rising.
Key point regarding recessions... real estate prices have gone up in the majority of them.
Quote from @Cathleen Ohannigan:
@Eliott Elias ??? What makes you think rates will drop to 2s?
People are addicted to cheap money and it is the easiest way out of a self induced recession. 2's sounds a bit rose tinted glasses to me, but we will definitely see 3's in 12-18 months.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes4y
There is a lot of paid research you can subscribe to and you can predict housing economics on a macro level pretty well, but you can't account for short term, black-swan type events like covid.
Unless the US population suddenly shrinks by 20% or we find a way to will 5 million housing units into existence, supply/demand will continue to create upward pressure on price. Ramping up production to close the gap may take 8-10 years.
The upward pressure is limited by affordability, which is interest rates and wage growth. If wages grow faster in 2023 because of inflation (this year 5.1% wage growth vs 9.1% inflation) and rates come down as they always do in a recession (on average 1.8% historically) home prices have more room to continue rise.
Inflation will remain the biggest factor, because RE is generally a good hedge against inflation, so as the dollar continues to loose real value, home prices will go up at least at the same rate. Inflation will also be a huge boost to leveraged investors as their debt looses value (just like it helps erode our national debt).
There is a good argument for internal migration away from smoke and forest fires, away from drought zones. We see it every day with our relocation clients moving to Milwaukee. The Midwest is America's most climate resilient area: plenty of fresh water, no hurricanes, no fires, no floods, no triple digit summers. Those are the typical reasons stated, plus moving closer to family. This is an emerging trend, as many young people still exercise the dream of their parents and move south.
Affordability will curb the growth in some markets on the west coast and in the south to smaller gains; it seems very possible that we will see a trend change in which markets will grow the fastest over the next decade.
Short term you have to expect anything, but it is very unlikely that we will see median home prices go down - worst case we will see them go sideways. But if the median goes sideways, days on market and inventory increase, we will see individual price drops, there will be more deals to be had. The HPES (100 top housing economists) expect home price growth to normalize again for the next 5 years and grow "only" at about 4-5% p.a. - that's national average.
- Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes4y
Here's what I'm seeing in my market of Nashville-One of the areas that had the most appreciation during this mad frenzy. Prices have already come down. In many cases, I'm seeing about a 10% decrease from the highest comp in the neighborhood. On average I'd saying I'm seeing between 5-7% of a price drop from the highs of a few months ago.
It's a very difficult time to be renovating homes. I'm basing my ARV about 7% lower than the current comps, as I know for SURE I won't be able to sell at the same price as existing comps. In fact, I'm buying a house next month and my original plan was to do a wholetail, but I'm going to keep it as a rental instead. The reason I'm doing this is because the house is going to appraise more than I could sell it for. This is a SHARP contrast from what the story was the past 2 years.
In terms of what I see happening....
Builders are the most sensitive to interest rate increases, so new housing starts has slowed down significantly. This won't be felt in the market until 9-12 months from now when that inventory should have been hitting the market.
Demand has slowed down big time and will probably continue to do so. I have a lot of investors telling me they are going to wait it out and see what happens. This is great news as it leaves more deals for us active investors as we have less competition.
Overall, the market will not appreciate much, if any over the next couple months as we enter the slow season.
Inventory will remain low due to the slow down in building
Once inflation comes down, rates will go back down to probably the 4s.
Anyone that waited to buy until rates came back down will once again be competing in a low inventory, high demand market with multiple offers.
This is entirely my opinion, we will see what ends up happening....
- 4yJaron WallingPro MemberRental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
@Luka Milicevic Good conversation in this thread! Appreciate your post about Nashville as it's very close to Indianapolis.
- Rental Property Investor · Mississippi Gulf Coast · Member since 2022 · 206 posts · 168 votes4y
Quote from @Mary Jay:
You seem like you have a lot of knowledge.Quote from @William Anderson:
CJ M nailed it. Don't worry about interest rates. Evaluate each property on its own merits. The number work or they do not. When I started investing many years ago my rates were usually between 7-9%. I made lots of money. Remember rents are going up due to inflation. The rising rents should help your calculations.
When considering the offer, a good quasi rule in this market is to pay what you think that property would be worth in six months to one year. If the seller goes for it, you have a cushion. In the end, with a fixed mortgage or cash purchase, you need only be concerned with where rental rates are going. I recommend that people for the time being stick with four units or less until we get past the elections, China, the Russian war, etc. Then again a good deal is a good deal.
I was an investor in the 2000s and did very well. Even at the end of 2008-2010, you could do well then after picking up the pieces. There are always good deals out there.
How do you predict what you think the property will worth in 6 month or one year? For instance, what do you think, will the Mississippi Gulf Coast and Florida Real estate go up or go down in 6 month-1 year?
In theory, it should go down because the interest rates are up significantly. Right? - Rental Property Investor · Mississippi Gulf Coast · Member since 2022 · 206 posts · 168 votes4y
My six-month idea is because the market is cooling now. Price increases in my market have slowed to a stop. Rates have come down a bit but I believe that prices in six months will be lower than they are now in my area. They are not going to take a big dip. I see the market going from a seller's market to more of a balanced market with concessions on the part of sellers. Also, the DOM has increased and that makes some sellers nervous which leads to negotiating prices. Thus, my six months means simply, if you are planning to pay $200k now for a house but think it may go to $185k then offer that price now and see where it goes.
Susan, nice to see a fellow MS investor on the forum. When I tell people out of state about our housing prices in MS they don't believe me at first.
- Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes4y
I see no evidence that demand for real estate is being destroyed. The agents I talk to tell me that things are just returning to normal.
- Rental Property Investor · Mississippi Gulf Coast · Member since 2022 · 206 posts · 168 votes4y
"Destroyed?" You are correct, the market is reverting to a more normal market (balanced market) in my area. We have two markets here. One is locals who need housing ($100k-$250k) and the other market is people moving here to retire or buy a second home and investors. The out-of-state people are usually (except for investors) buying homes in the $300k+ range and represent most of the new home construction buyers.
There is a steady demand from out-of-state buyers which has been keeping builders very busy. Only recently are a few new homes not sold before they were finished. Custom home building on the beach is moving along at a brisk pace. New restaurants and businesses are still opening.
I would agree with you this on balance a fairly normal market. As a real estate broker on the Coast, I do my best to keep up with trends.
- Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes4y
After Katrina it is hard for me to understand why anyone would build a house on the beach. I just remember New Orleans and the rest of the Gulf trying to fit into Jackson, and we weren't in very good shape. Short memories, I guess.
- Texarkana, TX · Member since 2017 · 58 posts · 34 votes4y
A lot of the people posting in this post (myself included) only know low interest rates for the last 20 years rates have been low. My father doesn't think of 6.5% interest as very high. My parent's 1st house was at 9.5% during the Reagan years and they had good credit and was considered a really good rate. We needed rates to go up in order to slow down the housing market, it was too crazy out there. The good thing many people were on the sidelines due to only having traditional financing can now compete with investors. Yeah, the size of the house you can afford is smaller but how much house do you need? Most families can function between 1800-2000 sq/ft. We may have to get used to money being a little bit more expensive for the next couple of years. That may mean everything isn't turnkey and you have to pick up a paint brush and learn some skills to keep your costs down. The sky isn't falling because rates went up to correct itself.
If the numbers make sense, I am still buying real estate with my team. If it doesn't make sense in your own market, try out of state investing. There is still a lot of opportunity and deals to be made even at a higher interest rate.
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