Real Estate Investing as Interest Rates Rise



The housing inventory is low. Interest rates are rising. Tariffs on Canadian lumber have sent the price of construction sharply higher. Rents are going up relentlessly. You can call it inflation or the effect of tariffs on Chinese goods but consumer prices are soon likely to rise dramatically. Does any of this sound like a healthy real estate market?

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Historically, the real estate market roughly follows a 7 year cycle. If we consider 2011 as the beginning of the up cycle, we are at the tail end. However, there are still highly positive indicators operating in the market. Most notably, the employment picture remains very healthy, interest rates are up but barely off historic lows, the economy continues to grow, and inflation hasn’t yet reared its ugly head. The fact is, if the Federal Reserve can engineer a 2% inflation figure and a 5% unemployment figure forever, they’ll take it!

Keep in mind that the Federal Reserve is not a government institution. The fed might work closely with the government to maintain a stable economy but ultimately they cannot be told how to manage the money supply. That may be a good thing considering how ineffective the government is at getting anything done. Especially in a timely manner. What the government can do is contract or stimulate the economy with tariffs, regulations, infrastructure projects, and business programs.

Although these government policies can dramatically influence the economy, little is actually happening. If tariffs are going to be a factor, the beginning impact should be seen within a few months. Loosening of regulations takes years and can be reversed at any time. Nothing significant is happening with infrastructure or business stimulus programs. However, the fed has been predictably managing interest rates every couple of months and is likely to continue.

At the very least, there are a lot of dynamic factors going on. Regardless what the market conditions are, you’ll always hear real estate brokers saying “Buy now before it’s too late.” Today may well be the right market conditions to buy before it’s too late. At least your principle home. That will at least make you neutral to short term market conditions. Owning your home is a big hedge against inflation because the price is locked in. And while you may not have an interest rate at the bottom, you can still lock it in today at a relatively low rate. You can keep it there if rates continue going up or refinance if rates decline. Owning your home is still the best buffer for most Americans against a gyrating economy.

Considering the low inventory, many people seem to realize this isn’t a time to sell. The only way you can dependably benefit by selling is if you downsize. In that case, you can pocket some cash from the sale of the big home and reduce expenses like energy costs and property taxes for a smaller home. Selling to move up is risky today because higher interest rates plus a bigger mortgage means bigger payments – in many cases much bigger. And at this time, paper profits from rapid value appreciation are far from certain.

If you’re considering investing, now is still a good time to buy rentals. But only as long as these cash flow positive from day one. Even if people can barely afford today’s high rents, they can afford them. And will continue to for some time as long as unemployment stays low and pressure on wages is upward. But again, it has to cash flow because further strong appreciation is uncertain. Two years from now, you very well could be looking back to see this was the time to sell at the top of the market. Or you could be biding your time collecting a positive rent check to build a cash reserve to buy again during the next up cycle.

Flippers are the most in peril. But flippers also have the most flexibility if they are experienced. That flexibility comes with the ability to get in and out of a property in three to six months – while watching daily and weekly changes in today’s market. This is probably a good time to have less of your capital exposed rather than more. If you’ve had two or three active projects at a time for the past several years, now might be the time to ratchet back to one. If the market goes into a hot autumn and winter market, you can always jump back in. If the clouds on the economic horizon develop into a storm, you can quickly sell a small inventory and preserve capital for the next up cycle.

There will be another up cycle. It’s been nearly 7 years since the Federal Reserve lowered the fed funds rate to 0.15%. The longest interest rate up cycle is about 3 years once the Fed starts raising rates. There is a dependable history of the fed not rising the rate above 4% and 3 years is the typical duration for a rising interest rate environment. The current federal funds rate is 2.0 %. The Federal Reserve signaled it will raise rates to 2.5% during 2018, 3.0% in 2019, and 3.5% in 2020. Much can and will happen to the economy between now and 2020 but there has to be a top to this cycle. The window is closing.

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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.

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