What Investors Need to Know About How Interest Rates Affect the Housing Market

Mortgage interest rates directly impact affordability and the value of real estate in the housing market.

Investors have experienced an interesting market in the past few years, driven at first by ultra-low interest rates and record-high home prices.

Let’s explore how interest rates affect the housing market, including the factors that influence interest rates and how you can find alternative sources of financing for your investment properties.

How do interest rates affect the housing market?

To illustrate the impact of interest rates on the housing market, we can pull insights from the past few years.

During the Covid-19 pandemic, interest rates fell to record lows for several reasons, including:

• Global economic uncertainty due to lockdowns
• Federal Reserve interventions to counter the economic fallout
• Increased demand for “safer” investments, such as U.S. Treasuries

These factors drove down interest rates to stimulate borrowing and spending and protect the economy.

Let’s break down how these factors then impacted buyer demand and home prices.

Interest rates influence demand

In January 2021, the average 30-year fixed mortgage rate fell to a record low of 2.65%, according to Freddie Mac data.

This led to a flurry of purchases and refinances to take advantage of the low rates.

In general, when interest rates fall, demand increases. When interest rates rise, demand falls.

In the years following the pandemic, demand remained relatively high despite rising rates and home prices.

Research revealed that this could be attributed to a combination of lifestyle changes following the pandemic, and the fact that while rates were increasing they remained historically favorable for some time.

The highest interest rate recorded was 18.63% in October 1981.

Rate impact on home prices

Interest rates directly impact the cost of borrowing.

When interest rates are low, the cost of financing a home purchase is lower, making homes more affordable for buyers.

This increased affordability often leads to higher demand for properties, which, in turn, can drive up prices.

Additionally, as the cost of financing decreases investors may be able to afford larger loan amounts and more expensive properties. This can contribute to higher demand in various segments of the housing market.

One major factor contributing to high home prices in recent years was also the lack of home supply coupled with high demand.

Current interest rate trends

In the previous example, you can see how the economy and Federal Reserve actions have influenced (and continue to influence) interest rates.

In the months following the pandemic to the present, continued supply chain disruptions, increased consumer spending, and rising commodity prices have led to a sharp increase in inflation.

Let’s take a look at how the Federal Reserve’s actions and overall economic conditions are impacting current interest rates.

Federal Reserve funds rate

The Federal Reserve is still working to curb inflation by raising the federal funds rate, which is the interest rate at which banks lend money to each other overnight.

Changes in the federal funds rate have a ripple effect on other interest rates in the economy.

When the Fed raises the funds rate, it becomes more expensive for banks to borrow, leading to higher interest rates for consumers and businesses.

On the other hand, lowering the funds rate makes borrowing cheaper.

Overall economic conditions

While the Fed’s actions don’t directly influence mortgage rates, it has an indirect relationship with them through various factors, including:

• Housing market dynamics
• Inflation rate
• Job market
• Global economic conditions

Mortgage rates are more closely tied to long-term interest rates, especially those of 10-year Treasury bonds.

In October 2023, rates stretched to 8%. Rates have since come down, and experts predict that 2024 rates will continue to decrease.

Conventional loans vs. hard money loans

Higher interest rates create the same challenges for investors as they do for regular buyers.

However, this scenario also increases the demand for rental properties because buyers are priced out of the market.

Fortunately, alternative sources of financing exist to help investors move forward with their goals and meet the market demand.

Hard money lenders such as Park Place Finance bridge the gap left behind by traditional institutions. They understand the unique needs of investors and have creative financing solutions suited to these needs.

Conventional loans must follow the guidelines established by government-sponsored enterprises Fannie Mae and Freddie Mac, including strict income and employment requirements, loan limits, and restrictions on the number of properties.

Hard money lenders do not have the same requirements. Their focus is more on the value and profitability of the property being used as collateral, rather than the borrower’s finances.

How hard money lenders work

Hard money loans are crucial for real estate investors. Essentially, they allow you to move forward with your goals without the red tape of traditional financing institutions.

Hard money is prized by investors for the following reasons:

• Asset-based loans focused on the property’s value and condition
• Fast approvals and closings in days or weeks rather than months
• Flexible terms
• Ability to build a real partnership for many deals to come

Park Place Finance does not require tax returns or income verification for approval.

We primarily are concerned with the following:

• Credit
• Property details
• Debt ratio

An underwriting process based on common sense and the value of the deal unlocks more opportunities for investors and allows them to qualify more easily in a high-rate environment.

Park Place Finance: Your investment partner

Do you have your eye on the perfect property but have been unable to secure financing?

Do you need help with comparing properties to find the best fit for your investment goals?

At Park Place Finance, we pride ourselves on providing you with a personalized and efficient lending experience.

When you choose to work with us, you can rest assured that a team of real people will be dedicated to funding your deal as quickly as possible.

We offer the following loan products to investors:

• DSCR loans
• Fix-and-flip loans
• Bridge loans
• Construction loans

Each borrower will work with a dedicated Account Executive throughout the loan process, who will let you know what you need to do to get your deal approved and funded quickly.

Get started with our easy online form to supply us with important details about your next property, or give us a call at (866) 407-1599.