The 5th Rate Hike and its Impact on Investors
Marcus and Millichap shared a key update on how interest rate increases hurt single-family homes, but are good overall for apartment investors. Today, we break that down.
The FED has raised the rate for the 5th time this year and is the 3rd .75% increase in a row. These aggressive increases are not surprising based on the inflation numbers through 2022.
While inflation has had a rampant upward trajectory in 2021 and 2022, we are starting to see CPI Inflation and Core CPI Inflation stabilize at 8.2% and 6.3% respectively. As we know, inflation compounds, and even with this stabilization, it is showing no signs that it is coming down yet.
A few factors at play that are causing inflation:
- Ukraine War – cutting the availability of oil, natural gas and food
- China’s zero-COVID policy – shuts down cities which is stalling manufacturing and shipping
- Transportation challenges – global supply chains are struggling by sea, rail and truck. This slows the movements of goods driving down availability, which increases prices.
What is the FED’s answer to inflation?
The FED is trying to cut demand by increasing interest rates, which will align demand closer to the current supply. We are a debt driven society, meaning we use debt to fuel growth, the economy may need to go into a recession to get inflation under control. While this sounds scary for some sectors, commercial multifamily performs well even during times of recession, because people still need a place to live, and they will be further unable to buy a single-family home with rising rates. Due to the large inadequacy of supply of single-family home construction, we do not see a significant drop in single-family home prices, therefore making the overall price plus interest rate out of reach for most Americans.
The impacts have been most rapidly seen in the single-family housing market. Below you can see a drop the peak. There has been around a 28% drop since January of 2021.
Buyers and sellers of single-family homes have separate expectations as to what this means. Sellers are slow to move, and buyers start to change their underwriting.
Stocks down, Multifamily = Safe Haven
The stock market has fallen sharply this year, by more than 20%. This leaves commercial real estate as one of the best investment options for investors who are thinking longer term and are wanting to keep their portfolio stabilized through these environments of increased rates and stabilizing inflation.
Growth Vue Properties continues to focus on value-add commercial multifamily investments, both before and after the pandemic. Earlier this month, GVP provided two products that can provide strong and stable cash flows, as well as tax incentives, for investors who are wary of the volatile stock market and single-family home markets.
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