DOOM LOOP: Fed's new rate hike brings it to a 22-year high

Zachary McDonough · 2023-07-27T05:57:01-07:00

Alrighty...these seems gloomy. I've been seeing tons of headlines about new highs for rates. People are super scared, but there's one thing that I can think about...IT WILL BE CRAZY HARD TO FIND DEALS IN 18-24 MONTHS FROM NOW...Guys, in case you don't know, these high rates will inevitably throw us into some type of recession, minor or not. Some may argue that we are currently in a recession. That's above my pay grade so I won't argue that.Either way, BUYING IS HARDER NOW...due to high rates, but I assure people want to buy so we have pent up demand.We as real estate investors know that recession don't always equal housing crisis's or falling prices. According to CoreLogic, the last 6 US recessions have not experienced hardly any price drops (other 2008).If you're anything like me, you need to buy more houses to keep your business growing. So when I hear these reports, I need to buy now more than ever. In 18-24 months, the rate environment will be different. Lower rates means that buyers will flood the market, raising prices. Buying deals now will make life better later.But I want to hear what you think. Will prices fall? Are you waiting to buy?

Jaron WallingPro Member

Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes

3y

I'm completely over the idea of a recession. I don't know a single person that believes we're currently in a recession or going into one. All of my peers are traveling, taking vacations, working 9-5 jobs, and SPENDING MONEY. In my opinion the FED is doing a decent job of handling the inflation. That's a mute point though as smart investors don't wait around for government to do something.

Can you find a market with housing supply going up drastically? Every neighborhood in our market has like 12 houses for sale, and 98% of them don't meet our buy [box] criteria (flip or LTR). We want to BUY but hunt is incredibly hard. These prices are locked in. I don't see much changing in 2023.

6 Reply

Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

3y

Our rates in Canada are also at a 22 year high. The thing is for much of the last 22 years (aside from a 2 year period around 2006-2008), the interest rates were really low. Where they are now is where they normally were.

for house prices, it depends on inventory, sales and price of the home. More expensive homes may be harder to sell, then again people want bigger, so it may be someone buying their second or third home who has the money to buy those. In my small town, I see less expensive homes selling quickly, higher priced homes sitting on the market as well as some either rentals or first time buyers (ie duplex, townhouse) going on the market.

2 Reply

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

3y

Buying and selling as usual. I never let the market determine what I do. When rates are higher (they're still not very high) then other things are lower...

Always many ways to make money in any market. People always have and always will. If anything, a scary market will keep all the newbies and lookie-loos away, leaving more room for real investors.

5 Reply

Zachary McDonough

OP

Rental Property Investor · Accokeek, MD · Member since 2020 · 106 posts · 87 votes

3y

Quote from @Jaron Walling:

I'm completely over the idea of a recession. I don't know a single person that believes we're currently in a recession or going into one. All of my peers are traveling, taking vacations, working 9-5 jobs, and SPENDING MONEY. In my opinion the FED is doing a decent job of handling the inflation. That's a mute point though as smart investors don't wait around for government to do something.

Can you find a market with housing supply going up drastically? Every neighborhood in our market has like 12 houses for sale, and 98% of them don't meet our buy [box] criteria (flip or LTR). We want to BUY but hunt is incredibly hard. These prices are locked in. I don't see much changing in 2023.

In my market, there's hardly any inventory. Prices are up around 4% YoY. Super hard to find buy box listings on the MLS. Some are occasionally be found but we are getting beat out.

and completely over the idea? I am pretty sure we won't have one but I still think its possible. I would love to hear your thoughts.

1 Reply

Zachary McDonough

OP

Rental Property Investor · Accokeek, MD · Member since 2020 · 106 posts · 87 votes

3y

Quote from @Bruce Woodruff:

Buying and selling as usual. I never let the market determine what I do. When rates are higher (they're still not very high) then other things are lower...

Always many ways to make money in any market. People always have and always will. If anything, a scary market will keep all the newbies and lookie-loos away, leaving more room for real investors.

This is why I wrote this. Over the past year, I have closed more deals since the lookie-loos are gone. I've nearly doubled my portfolio (only 7 houses total).

0 Reply

Zachary McDonough

OP

Rental Property Investor · Accokeek, MD · Member since 2020 · 106 posts · 87 votes

3y

Quote from @Theresa Harris:

Our rates in Canada are also at a 22 year high. The thing is for much of the last 22 years (aside from a 2 year period around 2006-2008), the interest rates were really low. Where they are now is where they normally were.

for house prices, it depends on inventory, sales and price of the home. More expensive homes may be harder to sell, then again people want bigger, so it may be someone buying their second or third home who has the money to buy those. In my small town, I see less expensive homes selling quickly, higher priced homes sitting on the market as well as some either rentals or first time buyers (ie duplex, townhouse) going on the market.

Our inventory is down but DOM is up for similar reasons!!

0 Reply

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

3y

And let's note that interest rates are really pretty low historically. Investors, and everyone else, have just bee getting spoiled the past decade or so....it's much healthier for the country overall to have them at the place they are now.....

3 Reply

Chris SeveneyBusiness Member

Moderator

Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

3y

We may not have a recession but banks are over tightening their belts and those who are over leveraged are going to either need rescue funds or sell. So there will be plenty of opportunity.

Whether there is a recession can only be dictated by what the Fed does, if they start printing money again then no, but if they continue to reduce the money supply they want to create a recession to bring pricing back down because the middle class cannot afford anything. The goal of breaking housing is to make it more affordable again since prices went insane because they pumped $4T into the economy.

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Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

3y

Financed homes have never been more expensive. The interest rates have more than doubled and most markets have not had a significant decline in price. The properties do not meet my profit expectation. Therefore, my last RE purchase was Dec 2021 (I purchased $4m that month).

In addition, I am not confident that commercial MF (>4 units) financing issues will not affect non commercial residential property (<5 units). If the commercial MF issues affect non commercial RE, we could experience price declines. If the commercial MF does not affect the non commercial MF, then possibly commercial MF will be a buy opportunity.

Regardless, I am at my longest duration without a purchase in over a decade.

In addition some large residential syndicators have also not purchased.

I suspect investors that are purchasing are settling for profit margins that would not have gotten a 2nd look 2 years ago.

Good luck

4 Reply

Zachary McDonough

OP

Rental Property Investor · Accokeek, MD · Member since 2020 · 106 posts · 87 votes

3y

Quote from @Dan H.:

Financed homes have never been more expensive. The interest rates have more than doubled and most markets have not had a significant decline in price. The properties do not meet my profit expectation. Therefore, my last RE purchase was Dec 2021 (I purchased $4m that month).

In addition, I am not confident that commercial MF (>4 units) financing issues will not affect non commercial residential property (<5 units). If the commercial MF issues affect non commercial RE, we could experience price declines. If the commercial MF does not affect the non commercial MF, then possibly commercial MF will be a buy opportunity.

Regardless, I am at my longest duration without a purchase in over a decade.

In addition some large residential syndicators have also not purchased.

I suspect investors that are purchasing are settling for profit margins that would not have gotten a 2nd look 2 years ago.

Good luck

Hmmm.. interesting. Why would commercial affect SFH though?

I could see commercial taking a hit but not sure why it would affect SFHs, you know?

0 Reply

Zachary McDonough

OP

Rental Property Investor · Accokeek, MD · Member since 2020 · 106 posts · 87 votes

3y

Quote from @Chris Seveney:

We may not have a recession but banks are over tightening their belts and those who are over leveraged are going to either need rescue funds or sell. So there will be plenty of opportunity.

Whether there is a recession can only be dictated by what the Fed does, if they start printing money again then no, but if they continue to reduce the money supply they want to create a recession to bring pricing back down because the middle class cannot afford anything. The goal of breaking housing is to make it more affordable again since prices went insane because they pumped $4T into the economy.

Do you believe their goal is to break housing? It's crossed my mind but they would hurt a lot of the middle class. At the end of the day, the real winners would be cash-heavy high networth people who can scoop up properties.

0 Reply

Mike D.

Investor · Marion, IA · Member since 2010 · 177 posts · 117 votes

3y

Now is the PERFECT time to be buying. There is no threat of wages dropping or unemployment. Intereste rates are about as high as they will be. Prices and rents will only go up. Take a look at your county assessor website and see how often houses sell for what they did 5 years ago.

I remember the same negative media back in 2009. Nobody was buying. I bought several 4 plexes then and they have since trippled in value.

Find a good deal in a good area and I promise you will be so glad you did 3 years from now.

1 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

3y

Quote from @Zachary McDonough:

Quote from @Dan H.:

Financed homes have never been more expensive. The interest rates have more than doubled and most markets have not had a significant decline in price. The properties do not meet my profit expectation. Therefore, my last RE purchase was Dec 2021 (I purchased $4m that month).

In addition, I am not confident that commercial MF (>4 units) financing issues will not affect non commercial residential property (<5 units). If the commercial MF issues affect non commercial RE, we could experience price declines. If the commercial MF does not affect the non commercial MF, then possibly commercial MF will be a buy opportunity.

Regardless, I am at my longest duration without a purchase in over a decade.

In addition some large residential syndicators have also not purchased.

I suspect investors that are purchasing are settling for profit margins that would not have gotten a 2nd look 2 years ago.

Good luck

Hmmm.. interesting. Why would commercial affect SFH though?

I could see commercial taking a hit but not sure why it would affect SFHs, you know?

If commercial residential falls 25% so unit price is 75% of current cost, how can it not affect non-commercial residential.

Let's assume for this example non commercial is ~10 reduction to residential unit cost (due to worse financing etc). Let's also use $100k/unit for commercial residential and $110k/unit non-commercial residential. 4 unit would be $440k and commercial 5 unit would be $500k before price decline due to the financing issues affecting commercial properties. This is equilibrium prior to rate increased and commercial finance issues. Now the commercial drops 25% so the 5 unit costs 5*$75k or $375k. Would you purchase 4 units for $400k if you could get 5 units $375k? The quad price drops causing triplex to drop causing duplex to drop causing SFR to drop. A new equilibrium will be found with non-commercial residential units being slightly more than commercial residential units.

Commercial residential is coupled with non-commercial residential and vice versa.

In my market non-commercial has not fallen (it has season fall, but not a YOY fall), but commercial RE has. At the beginning of this month I saw a 18 unit listing that was ~15% from price prior to rate increases.

Good luck

0 Reply

Erin ChurchPro Member

Real Estate Agent · North Augusta, SC · Member since 2017 · 254 posts · 233 votes

3y

If the numbers work, I'm buying :) Because I prefer buy and hold, I'm less concerned about the ARV of the property in the next year or three and more interested in the rental rates. If those seem like they'll remain strong, then I'm in! :)

2 Reply

Chris SeveneyBusiness Member

Moderator

Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

3y

@Zachary McDonough

Define breaking? They need to slow the price increases in housing otherwise it will stimey the economy

If housing goes back to 2020 prices is that breaking it? No it’s not.

I look at it in simple terms - will rates come back down before Inventory rises or not

If not then pricing will come down as salaries cannot keep up. First time entry level home went from $1000/month to $1900/mo in 3 years and income qualification from $55k to $90k.

For me it does not matter I am locked in at 3% and am not moving in next 15 years.

It really is which side of the fence do you fall on

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V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

3y

Inventory will come up as rates come down(within 1-1.5%) of where most mortgages are locked in(4%). I'm definitely seeing some downward trends in some pockets, but the big hit was Q4 22 last year. I don't think anything breaks at this point. We'll increase, possibly, one more time this calendar year and keep for 6-8 months I believe. I think wage inflation is coming down a bit, and we'll see inventory rise/less YoY house growth % as we trend back to a Fed Funds of 2-2.5

1 Reply

Chris Miller

Member since 2018 · 83 posts · 26 votes

3y

@Zachary McDonough

On a common sense level, prices almost doubled in many areas post Covid within just a couple years. The FED just went a very significant and fast rate hike inducing a recession. In my opinion things will have to get ugly at some point here. Generally speaking, prices really haven’t gone down much. But interest rates have doubled. I’m always willing to buy a good one if it makes sense but personally I’m expecting big opportunity with a significant recession in the relatively near future.

0 Reply

Brandon Stone

Member since 2018 · 13 posts · 12 votes

3y

mortgage requests are at an all time low. I think inventory is going to grow a ton and prices will drop. Whatever you buy, buy 60-70% below ARV to cover yourself. I wouldn't buy a home right now either, its WAY cheaper to rent.

0 Reply

Jonathan R McLaughlin

Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes

3y

Quote from @Brandon Stone:

mortgage requests are at an all time low. I think inventory is going to grow a ton and prices will drop. Whatever you buy, buy 60-70% below ARV to cover yourself. I wouldn't buy a home right now either, it's WAY cheaper to rent.

Which is why it’s a great time to own rental property.

1 Reply

Brandon Stone

Member since 2018 · 13 posts · 12 votes

3y

Quote from @Jonathan R McLaughlin:

Quote from @Brandon Stone:

mortgage requests are at an all time low. I think inventory is going to grow a ton and prices will drop. Whatever you buy, buy 60-70% below ARV to cover yourself. I wouldn't buy a home right now either, it's WAY cheaper to rent.

Which is why it’s a great time to own rental property.

not necessarily. Unemployment is expected to rise which will put pressure on renters. Its a good time to be dynamic and to potentially exit on any properties that do not perform well. As much as I like real estate, cash is king, and you need to be positioned in a way where you can enter the market at any moment.

1 Reply

Travis BohlingBusiness Member

Property Manager · Gilbert, AZ · Member since 2011 · 65 posts · 78 votes

3y

The free money bonanza of the past 20 years is over, at least until the next pivot. It will be interesting to see how investors adjust their portfolio allocations now that the risk-free rate is so generous.

[email protected]602-898-3924

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Jonathan R McLaughlin

Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes

3y

How do you square mortgage requests at an all time low with inventory growing a ton? Just curious.

And it may be cheaper to rent, but rents have risen as fast or faster than housing prices in most places. So much of the price run up has been supported. Not all of it, it has definitely been frothy, but a good chunk.

It’s also a great time to sell. We just exchanged a performing property and used the equity to fund the down payment on a larger one with only a small cash contribution.

Always a reason to sit on the sidelines. Make sure it’s a strategic decision vs. just general gloom and doom.

0 Reply

David Haan

Member since 2023 · 6 posts · 3 votes

3y

The drop in RE prices in the 1990 recession was longer and less steep, I think overall it was 17%? Your barplot shows just the first year which did not have a steep drop like 06, so it's a bit deceiving

1 Reply

Mark WilliamsPro Member

Real Estate Broker · Huntington Beach, CA · Member since 2010 · 64 posts · 35 votes

3y

Hey Zachary,

I appreciate your candid thoughts on the current market situation. It's true that headlines about rising rates can be concerning, but it's important to remember that challenges often come with opportunities.

While it might seem tough to find deals right now, your perspective on the pent-up demand is spot on. People still want to buy homes, and that demand can drive the market forward.

It's also encouraging to see you acknowledge that recessions don't always mean falling prices. The past has shown resilience in the real estate market during economic downturns.

In uncertain times, taking action can potentially lead to significant rewards. Remember, the real estate market is dynamic, and by seizing opportunities today, you position yourself for a brighter future.

Ultimately, the key is to stay informed, adapt to market conditions, and keep moving forward. Keep up the positive outlook, and I believe you'll continue to find success in real estate investing!

-Mark

[email protected]714-745-6164

0 Reply

V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

3y

Quote from @Brandon Stone:

mortgage requests are at an all time low. I think inventory is going to grow a ton and prices will drop. Whatever you buy, buy 60-70% below ARV to cover yourself. I wouldn't buy a home right now either, its WAY cheaper to rent.

Inventory can only grow if we get a mass supply of houses via new construction and/or massive layoffs. I do not believe we'll see either, I see a small uptick in layoffs but nothing enough to cause a massive sell off. People will hold on to their home the hardest and longest(low rates + shelter). It's really the discretionary buyer that is coming along hard(er) times like STR that bot in 22 thinking this growing linearly-- that's not a huge % of market. And those houses are rarely LTR for families so it'll create an investor dynamic(which turns predatory if things really fall).

In areas it's cheaper to rent, then rent demand goes up so your house:rent ratio likely is favorable.

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DOOM LOOP: Fed's new rate hike brings it to a 22-year high

DOOM LOOP: Fed's new rate hike brings it to a 22-year high

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