The rate of inflation is now at its highest since the period of the 1980s. Credit standards are now exceptionally tight. There is a rapid decline in terms of surplus for homes that are not currently selling. The interest rate associated with home ownership has dramatically increased. As a result, all of the processes associated with buying and selling have been impacted.
So, what’s the end result? People are now swaying away from buying a home and are turning to rentals; however, the cost of rent and lease prices have also increased dramatically. Continue reading to learn why.
How Do Higher Interest Rates Affect Real Estate Buyers and Investors?
When interest rates increase, buying and selling a home becomes increasingly difficult. While it is true that a loan for refinancing or making a purchase is an optimal move, you should ensure that the loan is a fixed-rate loan. Taking out a loan with an adjustable rate will prove detrimental. This type of loan will adjust in periodic intervals as the interest rates on the market fluctuate.
In addition to this, you should consider the following prior to making a decision because interest rates have a direct impact:
- The Local Real Estate Market – Generally speaking, the real estate market is oriented according to the local landscape. Prior to choosing to make a purchase or refinance, it is essential that you review the capitalization rate of the real estate market. The reason being is, this rate goes up when the interest rates go up.
- The 10-Year Treasury Yield – The 10-year treasury yield has a direct impact on mortgage rates and exactly how the Fed manages rates. While long-term financing is less impacted by hikes in the interest rate, short-term financing is impacted tremendously.
- Demand and Supply – Certain types of housing are higher in demand and lower in supply. Examples include affordable housing, city homes, and other types of housing that is attractive to the workforce.
Median US Rent Rate
As of May 2022, the rent rate within the United States rose 15% from one year to the next. This resulted in the average rent becoming $2,000 a month or more. For example, in Austin, Texas, rent rates rose a whopping 50%. In cities like Nashville and Seattle, rent rates exceed an increase of 30%.
The supply of rentals is significantly lower than the demand. Because of this, the rent prices will not only stay elevated, they will continue to increase drastically.
What is the Main Problem in the Housing Market?
One of the main issues impacting the housing market is the fact that there is a significant housing shortage throughout the country. This stems from years of underbuilding to create the supply to meet the demand of the properties. Homebuilders are now experiencing a bout of discouragement – in terms of creating new projects. However, this is exactly what must be done in order to lower the costs of rentals.
In addition to this, real estate developers have been quite hesitant to make any big investments since the year of 2008. That stems from the fact that they have not been rewarded for their efforts. As a result, the equity owners have placed a higher emphasis on balance sheets and the cash payouts from the various types of housing companies that experienced complications during the financial issues that arose in 2008.
The Impact of Shelter Costs
The high cost of rent and leases will result in complications – in terms of the inflation metrics dropping. According to research, the average cost to rent or lease makes up more than 30% of the total consumer price index. As a result of this, many people are having to make changes to their general level of standard of living.
This will have to be done on a short-term basis in order to come to a point where more housing becomes available and – in turn – lowers the costs of both home ownership and those associated with renting and leasing property.
119-Year Rent Difference
The U.S Bureau of Labor Statistics has determined that the rent prices are a total of 1,631.22% higher in 2022 than in 1913. In the last 119 years, rent prices have increased at a rate of 2.65% each and every single year. The difference between the two amounts is a whopping $16,312.17! This was determined by utilizing the following formula for inflation:
2022 CPI/1913 CPI * 1913 Value = 2022 Value
What is Inflation?
Inflation is the overall decline of the purchasing power of currency over a period of time. The rate of inflation is the rate that is experiencing a decline of purchasing power either monthly or annually. In short, inflation actually means that a dollar buys less than it used to buy, over a period of time. As a result, both services and products increase in cost.
Consumers have to work harder to buy the same amount that they were able to buy in the past.
Property owners raise rent – in a legal manner – to keep up with the current rate of inflation.
Rental and Lease Income to Expenses
While it is true that landlords can raise rent or lease prices with the increase in inflation, it also means that they incur more expenses. In most instances, though, real estate investments remain a good option for those that want to avoid the effects of inflation.
It allows property owners to keep up with the increasing costs and expenses. Additionally, because of the fact that inflation causes the price of housing to go up, fewer people are able to afford to purchase and become homeowners. In turn, the demand for rentals and properties that may be leased increases dramatically.
As an investor in the real estate market, inflation results in higher demand – but less supply. If you rent out property, you are more likely to get the rent and lease rate that you desire. Yes, it may be higher than normal right now, but shelter is a necessity.
People will pay what you charge – as long as it does not exceed the current rent averages. This is because it is easier and more affordable to rent than to purchase housing.
While rent prices are up, you must keep in mind that more money will go into your pocket, but you will face heavier expenses. A portion of your income will be offset by this due to the general nature of having to manage and effectively maintain your rental or leased properties. The following outlines all of the expenses you are likely to see increased during this period where high inflation rates are common:
- Mortgage Rates
- Property Taxes
- Interest Rates on Loans
- Insurance Premiums
- Marketing Costs
When Can Rent and Lease Rates Be Increased?
The following outlines the periods where you may legally increase rent and lease amounts:
- After the Lease Expires
- During Lease Conversion
- When a New Lease/Rental Agreement is Made
You should make sure the increase is based on the current market rates and the laws of the state where the rental is located. Tenants should be provided with a written notice with the notice period that is mandated by the state. In most instances, this is 30 days. You should also request confirmation from the tenant that the written notice has been received.