“Is now a good time to finance real estate given our current rate environment?”
This is a very common question potential home buyers and residential real estate investors ask. Lending industry professionals may have a hard time answering this question because rates have risen significantly from their lowest points over the past few years.
A large portion of lending industry professionals may have gotten their start after the crash of 2008, and in that time, we have seen unusually low interest rates as a result of the quantitative easing put in place by the Federal Reserve. We saw this policy start changing in 2018, reversed in 2019, and then return to what was referred to as quantitative tightening in 2022. That quantitative tightening has led to a steep and rapid increase in interest rates.
Quantitative easing is a monetary policy tool used by central banks to stimulate the economy by buying government securities and other financial assets from banks and financial institutions. What affected our interest rates most was the purchasing of mortgage-backed securities. This involves increasing the money supply in the economy through an injection of new money into the financial system to lower interest rates and encourage lending and investment. This process is typically employed by central banks when traditional interest rate policies are ineffective, such as during times of economic recession.
Although interest rates are higher now than they were at the onset of quantitative easing, they are still lower than what the average has been since 1971. When reviewing the history of rates provided by Freddie Mac, we find that the average interest rate on a 30-year fixed mortgage for your average homeowner has been 7.75% since 1971.
When you're looking at the history of those same rates from 1971 until the end of 2008 — which is prior to the quantitative easing or injection of capital into the market from the central banks — you will find that the average interest rate for the average homeowner using a 30-year fixed mortgage is 9.12%. Presently, we are seeing lower rates than these for real estate investors looking to use conventional financing to purchase up to 10 finance properties with agency-backed financing.
Barring any enormous injection of capital from a source such as the central banks, it is widely believed that we will not see interest rates reach the point that we did during the period of quantitative easing from 2009 to 2022. Interest rate history shows that we experienced over 40 years of decline. It is believed that it is possible that we could see 40 years of increasing interest rates. If that is the case, and we experience a continued increase in interest rates as a reversal of what we have experienced, the interest rates today are the lowest that they will be for some time.
A fixed interest rate can turn a 30-year loan into a significant asset in a rising-rate environment. Additionally, the current inflationary environment has continued to erode the U.S. dollar's value consistently over the years. This means that with a fixed rate, the borrower may never even pay back the principal that they borrowed over that 30-year window.
Inflation has made it necessary to consistently increase rents, allowing real estate investors to grow their income year after year. However, the bank or funding institution that loaned the money for 30 years receives the same dollar amount each month. As the value of the dollar decreases over time, the bank is actually receiving less each month as they are being paid back.
Real estate investors can benefit from double-digit increases in their cash flow. Meanwhile, banks that provide the majority of the capital for real estate investments are facing compounded declines in the value of their repayment period due to inflation. This is why having a fixed instrument for 30 years that is being paid off by a tenant can be one of the greatest gains for a real estate investor.
In addition to cash flow, tax benefits, and appreciation, the predictable return is having someone else pay off the lender with a declining instrument like the U.S. dollar. Every dollar paid down is a dollar added to your return on investment.
About the Author:
Aaron Chapman is a veteran in the finance industry with expertise in complex transactions since 1997. He is ranked in the top 1% of over 300,000 licensed loan originators and closes over 100 transactions per month. Learn more at aaronbchapman.com.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.
SecurityNational Mortgage Company, and its loan officers, unless individually licensed and specifically denoted in their credentials, are not qualified to, and are prohibited from representing themselves as accountants, attorneys, certified financial planners, estate planners, investment specialists, or tax experts, and will not advise you in those matters. Always seek the advice of a licensed professional. This article is for informational purposes only, contains the opinion of the author, not necessarily the opinion of SecurityNational Mortgage Company, and should not be construed as lending advice. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over life of loan. Reduction in payments may reflect longer loan term. Terms of the loan may be subject to payment of points and fees by the applicant. Aaron Chapman, NMLS#267844, SecurityNational Mortgage Company Inc., Co. NMLS# 3116, AZ Banker# 0904315, Equal Housing Lender. Any amounts, figures, payments, or loan terms stated are based on continually changing markets, rates, loan programs, and borrower-specific qualifications, and subject to change without notice. See loan officers featured for a personal consultation and accurate pricing.