Following the most recent rate hike occurring this past September, many analysts predict the Federal Reserve will raise interest rates again in December and possibly a few times in 2019. U.S. News & World Report recently spoke with GFG Capital Co-Founder Mauricio Gruener to find out how these rising interest rates could affect the housing market.
Despite rising interest rates typically having a ripple effect across the housing market as the Federal Reserve increases borrowing costs, multifamily residential units, including apartment buildings, have been experiencing solid growth, growth that may continue if mortgage rates continue to climb and home prices remain strong. Those two aspects raise the barrier to individual homeownership, with the apartment owner reaping the benefits.
Furthermore, people are currently staying renters for an extra year or two in order to save up more money for a down payment on a home – not only because the rates are higher, but also because if the potential buyer does not qualify for a cheaper rate, they will have to put more money down.
In order to withstand the higher rates, Gruener believes that investors may want to consider real estate investment trusts, or REITs. He says that throughout the previous Federal Reserve rate hike cycles, REITs have held up well. In fact, REITs averaged a return of 16 percent compared to the 10 percent of return stocks during the 23-year time frame between 1994 and 2017, explains Gruener as he cites data that compared the FTSE Nareit Equity REITs index with the Russell 3000 index.
“The moral of the story here for us is if economic footing is solid and expectations remain tame for both growth and inflation, then real estate should be able to hold up relatively well across different access points,” says Gruener.