There is not a lot of movement in multifamily right now. Interest rates aren’t the whole story, but they do have a large impact on sales. High rates mean buyers can pay less. They also keep sellers, who bought at a lower rate, from wanting to sell and move up. That’s because their new property will have the higher rate. Even worse, sellers know that buyers will have to pay less, which means their properties are devalued. This means fewer owners will be interested in selling.
It’s Psychology
Much of this is psychological. Higher or lower rates don’t really mean that buyers pay any less or more – they only shift that payment between the seller and the bank. Higher rates mean banks get more and sellers less. Higher rates mean that buyers pay more in interest and less to the seller. Which means that rate changes shouldn’t discourage buyers or encourage them in a low rate environment. But they do have an effect on sellers.
Home Buyers
If you are in the market for a primary residence for yourself, you are looking at a 30 year amortization at about about 6.25%. That’s a bit lower than it has been but certainly higher than 5 years ago. Buyers are hoping that rates will go down but inflation has proven to be stubbornly high. If President Trump has his way the Fed will decrease rates, but right now, it looks like they will not do so. The Fed is expected to keep the Federal Funds Rate unchanged this week at its next meeting.
Due to this, sellers will want to keep their currently low mortgages and not size up or move unless they have to. Fewer sellers means higher home prices, so we will likely see no change in the housing market.
Multifamily Buyers
What a frustrating time for multifamily. We’ve gone the past few years with high rates, which is depressing the number of sales. Potential buyers are hesitant and potential sellers are holding on. I own a 16 unit property which is nearing the 5 year mark, where we had hoped to sell. With rates this high, to sell now seems like leaving money on the table, so we are considering putting off selling right now.
Buyers right now are looking at about a 7% rate with a 20 year amortization. Pretty expensive. It’ll be a percentage point and a half lower with agency debt.
What to Do
Sadly, I don’t know what will be in the future. As ever, there’s never a bad time to be in real estate, but only wise buyers and sellers will do well right now. It’s not like 5 years ago where anybody with little experience could find a good deal. Take extra care in your diligence. Evaluate many deals to find the right one, but don’t stop looking.
