The high cost of borrowing money is expected to bring real estate values down as the Federal Reserve continues to raise interest rates.
In such a volatile market, investors should be “patient and prudent,” Florida-based real estate veteran David Phelps said. “If you’re patient and wait, the good opportunities will come.”
Phelps said the parabolic rise in real estate markets on the West Coast, Phoenix, Boise, Denver and Salt Lake City likely will revert faster.
The contraction in the economy could last as long as three years and inflation isn’t going to ebb any time soon, Phelps said.
After nine consecutive rate hikes, the federal funds rate is 5% — the highest it’s been since 2007 — as the Federal Reserve strives to rein in inflation. But increasing rates can be detrimental to economic growth and result in deflation and high unemployment.
“The Fed goal is to get inflation back to 2%, but I don’t see that happening,” he said. “They’d have to have an all-out recession — unemployment would have to go from 3.4% to 10%. Politicians won’t let that happen.”
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More People Renting Housing
Rising interest rates are making renting more appealing than owning a home for many consumers, said real estate investor Adam Leffler, who is developing a build-to-rent community of 155 single-family homes and 218 townhomes near Huntsville, Alabama.
“Rent is more attractive than mortgage payments,” Leffler said. “Wealthy people are holding onto their cash. They’ll pay $12,000 a month while they’re waiting for a market correction.”
Older and higher-income households have shifted from owning their homes to renting their dwellings over the past decade. Total renter households increased by 4.12 million between 2010 and 2021, according to ApartmentData.com, which tracks 19,000 build-to-rent homes in 12 metro areas.
Most build-to-rent (BTR) communities — 61% — are in the suburbs where land is more plentiful and school districts tend to be better. And because they lease quickly for longer terms and enjoy strong rent growth, investors have responded favorably to the communities.
“The outlook is outstanding for this new asset class,” said Cindi Reed of ApartmentData.com. “Today’s renters have outgrown apartment living. Higher incomes and a difficult buyer’s market mean renting is still the best option for many people. With a robust investor appetite for these properties, we see the BTR trend staying hot — and filling a void in the current rental housing market.”
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