Looking at U.S. economic and financial projections for 2022, little is certain except for this: property interest rates will surely be higher at the end of 2022 than they are today.
Since interest rates drive so much in the investing world — real estate maybe most of all — it’s worth considering how the Fed’s plans to raise interest rates are already affecting everything from mortgage rates to popularity of loan products. Most importantly, what does it all mean for property investors and homeowners alike?
Mortgage rates will rise faster than the Fed’s rates
In the Spring of 2021, the average 30-year mortgage cost a little over 2.5%. As noted by The Wall Street Journal, now, we’re over 3%. Since the Federal Reserve hasn’t raised rates yet, you might ask, “Why are mortgage rates going up?”
Well, mortgage lenders expect rates to increase. They don’t want to underprice their capital just before the Fed raises rates. So, they’re getting ahead of the curve, with the Fed announcing a few months ago that they were going to raise rates as much as three times in 2022. Recently, they hinted that they could start the increases sooner than later. This is in reaction to inflation data and unemployment rates continuing to drop. It’s important to remember that the Fed has a dual mandate to reach for full employment and stable prices. The delicate balance between these two isn’t always a simple equation.
Homeowners looking to tap their home equity will explore alternative means of borrowing
As interest rates rise, lenders will offer different mortgage products. Sure, most borrowing will likely be in the form of a traditional 30-year fixed-rate mortgage. However, for the past two years, and as of this writing, the most common thing to do if you want to turn your home equity into cash is to refinance. You probably got a lower rate and your home is likely worth more than when you bought it. So, you can transfer some of that value into your bank account.
Many of us have wonderfully cheap mortgages and the value of our property continues to rise. If we want to cash out on some of our equity, refinancing would mean increasing the interest rate on the outstanding balance of our mortgage. In order to avoid this, you’re likely to look at a second mortgage or a home equity line of credit. You’ll see lenders advertising these loan products more frequently and, for lots of us, the smart financial decision will be to keep your primary mortgage and blend it with a second loan product, rather than refinancing the entire house.
The impact of corporate bond issues on property investments
Investment grade bond yields are averaging 2.37% according to Standard and Poors. Put another way, that’s the average interest rate corporations have to pay on the capital they borrow through bond sales. Such cheap capital has driven an active bond market in 2021. Corporations have levered up and they’re flush with cash. It’s reasonable to expect bond issuance to slow as rates climb. That 2.37% figure is the highest it’s been in a while. Still, it’s rather cheap. If corporations need cash, they’ll still be able to borrow at some pretty attractive prices for a while.
Investment grade bonds actually showed a negative rate of return in 2021. That’s taking into account both yields and price changes. In other words, they lost more value in the year than they paid out in coupons. This trend is expected to continue in 2022. This shows the demand for stable, even if rather low performing, income-bearing assets.
Property investment demand will continue to be strong
Conditions in the bond market are part of what’s driving investors (like WeWork Founder Adam Neumann) to real estate. With rising property values and net operating income increasing with rental rates, real estate is still an attractive alternative asset for the ROI-seeking investor With the rise in wages, we would expect to see rental rates continue to increase based on insight from Attom Data.
At Knox, we’re seeing strong evidence from our prospective customer base that property investing demand will continue to rise. For homeowners who are ready to move, they’re realizing that the economic conditions are ideal for turning the home they’re moving out of into a passive income stream that can help them secure financial freedom.
Homeownership will still be attractive for most
Mortgage rates are still so low that home ownership affordability is still very attractive. This has caused bidding wars, record mortgage applications, and housing price increases for several quarters. In the coming year, homes will become less affordable with each Fed rate increase. We still have a long way to go before homeownership looks unattractive for the average American.
With the appreciation that many have seen in their home’s value over the past few years, for those that are moving, now is an ideal time to turn their house into an investment property. Great lenders like Knox will help you maximize your return on equity with the right type of loan, and we expect to see home values continue to appreciate.
Want to learn more about Knox and how we can help you turn your home into a passive income generating investment, schedule a consultation today.