Part 3: Interest Rates & Mortgages
What are the some of the most important economic factors you should be concerned about when considering an investment in single-family rentals (SFRs)? There are literally hundreds of factors you could consider, but our Research Services Team has done the hard work for you, and narrowed it down to the five factors that have the largest impact on the profitability of SFRs in 2016. We’ve already covered employment and construction; today we’ll go over interest rates and mortgages.
Interest rates will be on the rise in 2016. They were raised for the first time in seven years in December, and economists expect at least another 1-3 additional hikes this year. Interest rates have a widespread effect across all types of spending, from entertainment and discretionary expenses, to larger ones, such as cars. However, as one of the largest purchases anyone will make in their lifetime, rising interest rates impact the ability people have to buy homes. Despite the recent interest rate hike, however, it’s a great time to buy SFRs, and below we’ll explain why this seemingly contradictory statement is actually true.
Interest rate hikes are associated with a strong economy, and recent data shows that the U.S. economy is stronger than it has been since before the Recession. In fact, according The New York Times, “the Fed cited job growth as a key reason for raising rates.” Unemployment is at an 8-year low, at 4.9%, and while wages have grown, they have not risen at the same rate. This means that debt is still a factor for many Americans, especially the millennial generation, and homeownership is down.
Somewhat counterintuitively, despite the strong economy, homeownership levels are down. While not the major reason to date, the Fed’s decision to raise interest rates will impact homeownership rates going forward. Because of this hike, and future hikes, mortgages will become increasingly unaffordable for first-time homebuyers, especially cash-strapped Millennials. Here’s why: rising interest rates affect the 10-year treasury bond, which is correlated with the 30-year fixed-rate mortgage, the most commonly utilized mortgage rate for owner-occupied homes.
However, a strong economy and robust employment does correlate to additional household formations. According to the Census, in December of 2015, an estimated 8.8 thousand new households were formed. While new households are forming, they are primarily composed of renters, and will continue to be for some time. Overall, this means more renters will be entering the market, and will most likely spend longer periods of time as renters than they typically did in the past.
The demand for SFRs from the renter segment is expected to increase, especially by those renters with families. SFR’s come with amenities not found in apartments, such as back yards, and are often in proximity to good schools, so the segment looking to rent SFRs is distinct from those looking solely for apartments.
Increasing interest rates are great news for real estate investors. While it does mean that using leverage will be a little bit more expensive for investors, it will be offset by more renters in the market, rising monthly rents, and less competition for purchasing quality properties in strong markets. 2016 is a great year to diversify into single-family rentals and you don’t miss out on this opportunity.
To learn more about why 2016 is a great year to invest in SFRs, and to create a strategic plan tailored to your own investment goals, sign up for a free consultation today.