Higher Interest Rates Create A Greater Need For Rental Housing
By Mercedes Shaffer l Published in AAOC Magazine (Article P 28)
Here’s another reason it’s a great time to own rental property. Rising interest rates combined with high home prices are preventing many would-be buyers from purchasing a home. The rising rates are diminishing purchasing power and creating a market where someone can get a much nicer rental home then they can afford to purchase, making it more enticing to rent then own.
Coupled with other demographic trends including a large generation entering the workforce who are looking for housing, as well as the Millennial’s placing a greater focus on spending for experiences rather than tying up capital in housing, younger potential buyers are driving up the demand for rental housing. Let’s explore further the drivers of this interesting market.
We still have very low inventory in Orange County and significantly higher mortgage rates are preventing a massive number of homeowners from selling their homes. With 72% of all owners having a 30-year fixed rate mortgage of 4% or lower, many do not want to give up their low interest rate and buy a new home at a higher rate. For a seller who wants to downsize, if they sell now, they could end up having the exact same monthly payment for a much smaller home.
Diminished Buying Power
To show you how this works, consider that an owner with a $2,000,000 home and a 3% fixed interest rate for a 30-year mortgage would have the same monthly payment as an owner with a $1,500,000 home with a 6.5% interest rate. It doesn’t make sense for the homeowner to downsize. This illustrates why even fewer homeowners are placing their homes on the market. They don’t want to give up their low-interest mortgage.
Those who are selling now are oftentimes opting to rent because they can cash out and lower their monthly payment by renting a home.
The active listing inventory at the start of the Fall season sat at 3,638 homes for sale in all of Orange County. The 3-year average prior to COVID was 6,520 homes on the market at the exact same time of year, which is 79% more for sale signs. As interest rates remain elevated and we head into the winter season, inventory is continuing to diminish, which is typical for this time of year. In 2023, the question will be whether or not inventory decreases at the same pace as buyer demand.
While some buyers are waiting for a housing market crash with hopes of getting a great deal, distressed homes (both short sales and foreclosures combined) made up only 0.2% of all listings in Orange County with only 5 foreclosures and 2 short sales in October. By comparison, during the housing crisis of 2008 there were almost 6,000 distressed homes on the market.
Real estate prices and rents have been skyrocketing for the past two and a half years. Once the Feds abruptly raised interest rates, that changed everything. While they are trying to tamp down inflation, the market has been behaving like a seesaw. When interest rates went down slightly, buyers flooded the market and real estate prices went up. When interest rates remained elevated, buyers retreated from the market and rental prices rose. Both housing prices and rental rates factor into inflation, so it’s a difficult balancing act for the Fed to figure out.
With such low inventory, what I’m seeing is my sellers that have properties that are highly desirable, with excellent marketing, are getting multiple offers and sometimes even setting record prices in both residential and multifamily. With the right market savvy my buyers are also benefitting from great opportunities. Properties that are coming on the market overpriced and not properly presented are sitting longer and having price reductions. Ill-timed and unprepared buyers are losing out on deals.
Just a year ago when interest rates were below 3%, anything and everything sold, but today’s shifting market is a “professional’s market” requiring expertise in navigating the changing conditions with data, knowledge and skill.
If you have questions about buying, selling or dong a 1031 Exchange I can be reached by phone or text at 714.330.9999, by email at InvestingInTheOC@gmail.com or visit my website at www.InvestingInTheOC.com. Mercedes Shaffer is a real estate agent with Pacific Sotheby's International Realty and specializes in helping clients buy and sell real estate and perform 1031 Exchanges. DRE 02114448. *Data taken from the MLS and ROH