What will happen if rates stay above 5% for the next 5 yrs

Question

I just wanted to post this question, and get opinions on what people think. There appears to be in this form majority that feels interest rates are going to go down significantly within the next 12 months.

Some believe this increase home prices significantly.

So I want to pose a question, what happens if that does not happen and interest rates stay out there more historical of 5% above over five years?

What happens then?

Please note, none of us have any idea what is going to happen but every investor should look at certain scenarios to see how that would impact their portfolio.

Russell Brazil · Answer

Rates Will stay above 5% for the next 5 years.

The same thing that happens to resl estate in any given time will happen.

Andrew Freed · Answer

@Chris Seveney - All we can really do is control our own destiny. I personally will be buying cash flowing multifamily. I can make properties cash flow all day at a 5% to 6% rate. Historically that is close to the average. I think people have been spoiled with low rates and expect them to be here for the foreseeable.

What I will add is the US debt is sky rocketing each day. If the mortgage rates are higher, that means the US debt payments will be higher because its tied to the federal fund rate. I personally think the government is incentivized to lower rates in the future to keep their debt payments down. If you had the ability to control your credit card interest rate and you had a ton of debt, wouldn't you lower it?

Carlos Ptriawan · Answer

easy, every smart guy moving from equity investment to debt investment like that's what happened these days but it's dangerous too when everyone is chasing "Chris investment model" LOL

with today's interest, only Nvidia and some tech can survive, Chris, most business in America is started dying anyway....

Adam M. · Answer

I personally don't think we will see the same rates that historically, nostalgic investors yearn for from the late 2000s through the 2010s.

RE has cycled through for decades but I think cycles will evolve while maintaining notions of their baselines. Could rates come down? Of course, but it shouldn't be something that investors depend on to make underwriting work out. Rates increasing is also a test-- to optimize operations, add true value (and I mean AUTHENTIC value to local economies and communities none of this rubbish you see on social media) and to give an opportunity to investors who know what they're doing. Interest rates are one variable of many that make up good investments and investors that understand that and work alongside it will be able to continue to create palpable returns. @Chris Seveney great post :)

Chris Seveney · Answer

Exactly. The way I like to look at things is you tell me the rules I play by and I will go out and win the game. If those rules include interest rates at specific amounts, I will still find a way to win. But it will not be the same way I was winning when rates were 3% (or maybe it is - but reality is there will be some changes to the business as 3% rates is like a professional team playing against a pee-wee team).

Glen Wiley · Answer

The answer to this depends on the local market. Here's my perspective:

The current rates are historically low, we all got spoiled by free money during the 2%-3% mortgage rate era. I don't think we will see meaningful reductions in rates in the next few years (if ever).

Many areas have SEVERE housing shortages. In these areas, if rates drop, I expect buyers to come out of the woodwork. Basic economics, increase demand without similar increase in supply will raise prices.

There is a growing strong latent demand, people are delaying household formation or doubling up with other families right now.

If rates stay the same, the growing latent demand will begin to force its way into the market as people capitulate and decide they simply have to have a place of their own.

In areas with consistent population increases and current housing shortages, stable rates will lead to strong appreciation of existing housing values and increased median home prices.

Andrew Freed · Answer

At 25% down. Nope, not in tertiary markets where you normally can find multifamily in excess of the 1% rule.

Kevin S. · Answer

At what % DP would it be to cash flow all day long, Andrew?  I imagine that would be difficult in and around Boston?

Bradley Buxton · Answer

@Chris Seveney

Interesting question. I think there will be a gap between when interest rates drop and buyers enter the market but sellers will still not give up their low rates. For example, if rates drop below 6% many more buyers will enter the market putting more pressure on demand and raising prices while owners with 3% ish rates won't sell until rates go to at or below 5%. There is such a supply and demand issue in many markets that low rates will drive prices higher. In Reno, NV there is such a supply constraint because of geographic limitations and an influx of tech and manufacturing jobs from CA rates at 5% will cause a buying frenzy driving prices even higher.  In other markets where building is unlimited on flat land, there will be a smaller effect on the rates and supply and demand forces.

Bruce Woodruff · Answer

I believe they will settle in lower, if only because it's an election year.

But that doesn't answer your question does it?  :-)

I agree that where they are is actually low (my first house came with an 18% rate). Also, my MO is that the rates don't matter. At all. What matters is: can you get cash flow/appreciation with the deal or not? Interest rates are just one factor in the equation.

You can offset high (er) interest rates by buying lower priced properties or fixers, or putting down more cash, or having a desperate seller do partial financing or buy down the rates...

So if rates stay above 5% for the next 5 years I think 2 things happen: 1) More experienced/less timid investors have a huge advantage for a while, 2) eventually when everyone realizes this is the 'new normal' then things just go back to normal with slightly higher rates.

But what do I know?

What will happen if rates stay above 5% for the next 5 yrs

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