It doesn’t matter where we get our news, none of us have been able to escape talk about an upcoming recession, rising interest rates, and “historically” high inflation.
Seeing the Federal Reserve raise interest rates another 75 basis points can definitely be disheartening. Although it is certainly a warning, it shouldn’t be a reason for investors to lose their heads.
We’ve become accustomed to interest rates being extremely low, especially during the pandemic. Seeing houses receive multiple offers way above asking price and going under contract within hours of being listed was common in many markets. The demand for homes versus available inventory and “cheap” money via low interest rates created a buyers’ frenzy. As a result of these forces, the real estate market experienced tremendous never-seen-before growth.
With rising interest rates, however, investors are already experiencing several shifts in the market.
1. Increasing inventory
Many sellers who wanted to sell their homes have waited. Because of rapid appreciation, many people were afraid to sell their home too soon and leave money on the table. Now that the market is shifting, inventory on the MLS has been increasing. Several months ago, some markets had as few as three to five homes on the MLS; now these markets show as many as 30-40 houses listed. Realtor.com projections have changed from a 0.3% rise in inventory to a 15% increase.
2. Pickier buyers
During the market runup, buyers were willing to purchase homes that didn’t necessarily meet all their desires or needs because there were so few homes available. Low interest rates allowed buyers to make offers over the asking price, knowing they would still qualify for the house. With interest rates rising, buyers are being pickier. With more properties on the market to choose from, they are not as desperate. If the floor plan doesn’t fit their needs or if the master bedroom or bath isn’t exactly what they desire, they aren’t making an offer.
3. Houses sitting on the market longer, dropping prices, and offers that don’t favor the seller as much
Depending on the market, prices are starting to drop. If you pay attention to your local MLS listings, you’ll begin to see longer times on the market and more price drops. You’ll also notice no more offers with inspection contingencies waived, and sellers will start splitting closing costs with the buyer.
These trends mean more opportunities for investors. You will find more deals at a more attractive price. Make sure to have dry powder (cash) available for you to take advantage of the deals. This is the time when real wealth is built.
And, be sure to know your numbers. Although that is always important, it’s especially critical now. If you make a mistake, you won’t have a hot market to cover it up for you. An old investor once told me even an idiot looks like a genius in a hot market. Check your numbers—and check them again.
Finally, know your exit options. It could be risky to buy with only one exit strategy in mind. If you are a fix-and-flip investor and your rehabs begin to sit on the market, your holding cost will jump, lowering your profits. This might be a great season to begin working the BRRRR method and building a rental portfolio of short-term rentals or corporate housing. Just be sure to have multiple options for success.
Now is the time to invest—not to freak out. Don’t allow all the alarming news to push you to the sideline. Instead, use it to make yourself smarter.
Jason Engelman has more than a decade of executive management experience. For the past five years, his focus has been managing investment portfolios within the real estate and energy industries.
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