This week, mortgage rates dropped for the fifth week in a row. Sure, they are still high at an average of about 6.31% for a 30-year fixed-rate mortgage. And that is only for the best-qualified borrowers with a 20% down payment. But that is what experienced investors tend to be. Here are the reasons why you should be looking at right now as one of the better investment opportunities over the next 9 to 18 months…
Mortgage rates have been climbing all through 2022, hitting a peak at just above 7%. The real estate industry, just like Wall Street, builds in expectations of what the economy is going to do over the next 3 to 6 months. The sharp interest rate increases that the Federal Reserve has instituted this year were already built into mortgage rates at above 7%. With five straight weeks of drops in the mortgage rate, the industry is now building in what it expects to happen 3 to 6 months in the future.
The Fed’s interest rate hikes are intended to tame the runaway inflation that we have been experiencing. But inflation is NOT what is happening with real estate right now. Almost every market has at least stabilized, and many markets are seeing slight decreases in prices. So, what real estate investors are looking at are some of the most reasonable purchase prices in a long time with increasing inventory and a decreasing number of retail buyers because 6.5% interest rates have priced them out of the marketplace.
At the same time, the Federal Reserve raised interest rates again in December by 0.5%. That is a lower rate increase compared to the last five months of raising it by 0.75%. Inflation, as measured by the Consumer Price Index, cooled considerably in November and was at its lowest level in nearly a year, according to the Bureau of Labor Statistics’ closely watched index. What we can expect going forward from the Feds is that there will be future rate hikes but at a slower pace than we saw in most of 2022.
Where real estate investing is at right now. During the earlier months of 2022, high mortgage rates were built in because of the unknown. The above 7% interest rate got a little ahead of what the Feds actually did up to this point. That’s why rates have been retreating for several weeks. Still, the Feds have made it clear that rates will continue to rise in 2023. Looking out 3 to 6 months we don’t know exactly what those rate hikes will be, but we can reasonably expect them to go higher. In some months there might not be any increase at all. In other months it might be a 0.5% bump or a 0.25% bump.
At this point in time, we have seen mortgage rates decrease for five straight weeks to get better aligned with changing expectations about inflation. And we know there will almost certainly be more rate increases in the near future… The reality is that today’s 30-year average of about 6.31% is probably the best we will see for the next 9 to 18 months. Investors should seriously be thinking that the market, right now, is probably the best it is going to get any time soon.
What do you think 2023 offers real estate investors? Please leave your comment.