This blog post was written at the onset of what would become a series of interest rate increases. Here was our take on the situation:
Inflation has been making the headlines since the cost of basic goods rose at an accelerated rate. Just like the economy had to adjust to inflation in the early 1980s, the Federal Reserve is once again attempting to cool down prices by raising interest rates. To get inflation back to the benchmark rate of 2%, the Federal Reserve has done four interest rate hikes in 2022 alone. Higher interest rates reduce buyer demand, which in turn slows down the economy.
However, even with the rising interest rates, demand for housing and other essentials like vehicles are still high, which means that the Fed is planning more rounds of rate hikes. In fact, on September 21, 2022, another 0.75% interest rate hike took place in hopes of combating troublesome inflation figures.
Though the end goal is to help regulate costs, the idea of rising interest rates can cause homebuyers to panic. What does this mean for builders and how can you navigate these changing tides? By partnering with Marketplace Homes and taking advantage of our unique solutions, you can rest assured that you’re getting the best possible outcome for your business.
Let’s Look at The Facts
It’s no secret that we’re living in some interesting times. In 2020, a pandemic stalled demand for basic goods and services. Then, a reopening world caused demand to rise to a fever pitch, making inflation tough to control.
A variety of other factors are also at play, which make the nation’s economy difficult to fully predict. Thankfully, real estate remains an evergreen need that even rising interest rates can’t eradicate. All we need to do is weather the storm and get more creative with ways to keep buyers and builders connected. To navigate this situation successfully, builders should work know the facts first:
On Wednesday, September 21, The Fed officially raised interest rates by another 3/4 of a percentage point, or 0.75%. Another hike of the same percentage occurred in early November 2022.
Existing market data predicts that there could be another .5% increase in December and more small increases like this in 2023. The 2022 calendar year is projected to end with a benchmark rate of 4%-4.5%.
There are still many interested buyers.
Even when 2-3% interest rates hiked to the 5% range, the demand for housing remained strong. There are still many buyers out there that aren’t as sensitive to higher mortgage rates too. A few more basis points are unlikely to shake off the need for new housing in emerging and existing markets.
Our current interest rates are still relatively low.
In spite of what the news is saying, we are still enjoying some of the historically lowest interest rates of the past few decades. For reference, in the early 80s, interest rates were as high as 18%. There’s nothing like seeing everything in perspective in a graph and knowing that we are still hovering in a percentage zone that buyers in 1983 couldn’t even imagine.
Home prices are slated to decrease (but opinions are mixed).
According to multiple studies and observations, the interest rate hikes have already decreased standard market buyer activity. We are now in the stage of decreasing housing prices, which is a “correction” to the increases that weren’t keeping up with wage inflation. This price decrease is just part of the market cycle, and it’s something to watch when you need to make the best financial plans. Specifically, U.S. housing GDP is predicted to decrease by 8.9% by the end of this year and another 9.2% in 2023. However, other speculators see prices stabilizing or even increasing into 2024.
The same trends seem likely for 2023.
Although many factors influence how much rising interest rates control the cost of basic goods, experts predict that a total 4.5% increase could also be in store for 2023. However, the Federal Reserve will only react to the current conditions, which may be different than expected if the time comes to increase rates again. There is a general expectation that 2023 won’t be as dramatic as 2022, but the Fed is ready to pivot if another major hike is necessary.
Is it time to panic?
The short answer is no. Real estate has experienced a variety of challenging seasons and there is an upside and downside to each scenario. Though the September 2022 rate hike is supposed to help cool demand, there are still many buyers who are financially able to weather these conditions and play the long game. Here are some reasons why this situation can become an opportunity for builders.
Increasing rates can actually motivate buyers.
When someone wants a dream home, the prospect of acting fast to lock in a rate before they increase can turn the tide in a builder’s favor. And if rates increase even more, refinancing is also an option when rates potentially cool in the future. In fact, due to the high cost of food and other basics, the Fed expects to raise interest rates even more beyond September 2022.
Buyers are getting creative.
A smart buyer sees that home values are still high, even though there are some signs of cooling. They can use equity from a home in an expensive market to buy a new build in a more affordable emerging market. The rise of remote work is even motivating high earners to cross state lines and get more bang for their buck in housing. So, you may get someone selling their 1.2 million SFR in LA to get a $550k Texas home that they can pay for in cash.
We have excellent institutional connections.
Long story short – institutional investors are ready to buy. Large portfolio investors, with whom Marketplace Homes has excellent connections, have the ability to pay cash and don’t need to worry about mortgage rates. Our efficient portfolio acquisition and disposition services help our investors obtain excellent properties in established and emerging markets.
We offer solutions that enable buyers to save money and act quickly.
Our partnership with most of the nation’s top 20 builders positions us to offer unique incentives other brokerages can’t. For example, our new construction programs enable buyers to cash out on their existing home so that they can make an excellent offer on a new build. When someone buys a new build from one of our partners, we can also offer a 1% commission that saves them money. Many brokerages don’t have the bandwidth to implement these incentives, which makes Marketplace Homes an excellent place for builders to find buyers.
As you can see, Marketplace Homes is prepared to offer builders, investors, and open-market buyers creative solutions that are tailored to the times. Our special incentive programs and connections to institutional buyers and retail investors make us uniquely qualified to help you when conditions are challenging for the standard brokerage.
Weathering Every Season with Practical Solutions
Just like the economy corrected after sharp inflation in the early 1980s, we will get through these times once again. You don’t have to set aside your building plans either when you work with a full-service real estate brokerage with excellent investor connections. We also help many standard buyers lock in on a new home by offering competitive commissions.
Our special incentive programs also enable buyers to cash out on equity and pay down mortgage interest points on their loans. When there are challenges, Marketplace Homes offers real-world solutions. Contact us today to find out how we can help you meet your real estate needs.
Alicia Persson is a Content Strategist SEO writer at Marketplace Homes, utilizing previous years of experience on real estate teams that specialized in investments and property management. Before she joined Marketplace Homes, she was also a freelance writer for 7 years, leading to a specialization in real estate and home living content for boutique digital marketing agencies. During her writing years, she learned the basics of SEO and gained experience writing for many different clients, making her versatile at creating diverse content.
She is a proud University of Virginia master’s graduate and enjoyed her undergraduate years at the University of Mary Washington. When Alicia is not writing, she plays keytar and sings in a local 90’s rock cover band, or she spends time with her amazing family.