“Higher Interest Rates Impact on the Real Estate Industry ” by Toby Kaye, CPA | Senior Associate – Tax
US interest rates have been trending higher over the last year. This trend was intensified by the results of the recent federal election. President Trump has promised to lower taxes and increase spending that may feed inflationary pressures in the economy. Creditors have demanded higher interest rates to compensate for these higher inflationary expectations. For example, 30 year fixed mortgage rates jumped from 3.5% before the election to 4.1% after the election. The trend appears set to continue in 2017 as the labor market tightens and the extent of the fiscal stimulus is announced by the government. Many analysts are predicting 2 or 3 further central bank interest rate increases during 2017.
Impact on Real Estate Industry
Higher interest rates have a direct impact on the real estate industry. Real estate developers pay more to carry financing until the projects are completed. These developers would need to increase commercial rents or unit sales prices to maintain the same return on investment. Real estate buyers will pay higher monthly mortgage payments reducing the purchase price they can afford.
Tips for Real Estate Owners
Real estate owners should evaluate the interest rate risk on existing holdings and planned projects by adjusting past projections to current interest rates and analyzing “what if” calculations based on several higher interest rate scenarios. Borrowers with variable rate debt should consider reviewing their bank’s terms for conversion to a fixed rate loan to protect against further interest rate increases. Borrowers holding a fixed rate loan with a balloon payment maturing in the next few years should consider pushing forward the refinancing before interest rates rise further. Any refinancing decision should take into account other costs including early payment penalty, etc.
Real estate owners, the time is now to evaluate your current loans. Feel free to reach out to your Apple Growth Partners account team member or a member of our real estate group to discuss the effect of these interest rate changes on your business.