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Interest Rates Have Gone Up, How Does That Affect Real Estate?

April, 2015
by Karl Niehaus, President, CREI

Commercial Overview:

FOREIGNERS KEEP INVESTING IN USA REAL ESTATE. While we may see some domestic changes in 2016 due to uncertainty regarding the cost of borrowing money, continued foreign investment in U.S. real estate seems almost assured, influenced heavily by economic and social instabilities abroad. The Association of Foreign Investors in Real Estate (AFIRE), whose membership represents an estimated $2 trillion (+) in global real estate holdings, shows in its 2016 annual survey that 64% of its member-respondents expect to have "modest or major increases in their investment in USA real estate in 2016," and another 31% expect to "maintain or reinvest their investments." Significantly, none of the AFIRE respondents planned a major decrease for 2016. As Emerging Trends also confirmed the 12-month cross-border real estate investment totaled $31.2 billion through June of 2015. The more money seeking out real estate, the better for sellers.

Economic Overview:

INTEREST RATES HAVE GONE UP, HOW DOES THAT AFFECT REAL ESTATE? According to the experts and countless other metrics of the US real estate market the expansionary upcycle of 2015 should continue in 2016. John Williams, San Francisco Fed President, stated at the Economic Forecast Conference hosted in January that interest rates will rise "gradually" throughout 2016, and that inflation should rise "gently" in line with the Fed's 2% target over the next several years. This suggests that, while many experts may expect cautious increases by the Fed to keep the "general interest rate stability in 2016," the as-yet-undeterminable interest rate hikes will play an important role in 2016's real estate market. The forecast for this year remains strong, but as the cost of borrowing money goes up, prices for real estate typically come down.

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