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Resources Interest rates are rising. Here’s what multifamily investors need to know.

Interest rates are rising. Here’s what multifamily investors need to know.

By Lauren Zumbach from Story by J.P. Morgan

The Federal Reserve has been raising interest rates since March in an effort to control inflation, which is the highest it’s been in decades.

What do the central bank’s moves mean for multifamily investors? Jim Glassman, Managing Director and Head Economist for Commercial Banking at JPMorgan Chase, broke down what’s changing and shared five key takeaways with Story.

1. The Fed doesn’t control mortgage rates — but its actions affect them

In an effort to control inflation, the Federal Reserve began raising the target range for the federal funds rate, or the interest rate banks charge each other to borrow overnight, from near-zero levels in mid-March. In June, the central bank raised the target range to 1.5% to 1.75% and said it “anticipates that ongoing increases in the target range will be appropriate.”

The Fed doesn’t set mortgage rates for single- and multifamily properties the way it controls the federal funds rate. However, its monetary policy influences those rates, which tend to rise and fall with yields on 10-year Treasury notes.

During the pandemic, part of the Fed’s strategy for supporting the economy involved buying billions in Treasury securities and mortgage-backed securities each month, which helped keep interest rates down, Glassman says. The Fed began scaling back its purchases last fall and ended them this March.

It is now allowing those assets to roll off as they mature, which is why both 10-year Treasuries yields and mortgage rates are up from pandemic lows, Glassman says. Thirty-year mortgage rates have climbed from 3.25% during the pandemic to 5.5% to 6%, reflecting assumptions that the Fed will fully unwind its efforts to reduce rates during the pandemic.

That increases the cost of financing for anyone seeking a loan, and reduces the amount of a loan that a typical borrower can qualify for.

2. While rates are rising, they’re still relatively low

if investors needed interest rates to be zero from fed, then they're in trouble

The Fed’s effort to bring interest rates down during the pandemic was an emergency measure to boost the economy, Glassman says. That means the new, higher rates are a return to normal conditions, not an effort to brake the economy’s expansion.

“Honestly, if [investors] needed interest rates to be zero from the Fed in order to justify these investments, then they’re in trouble,” Glassman says.

While interest rates matter to investors, other factors, like whether their multifamily properties are located in markets that are drawing an influx of new residents — like the Southeast, Texas and Mountain States — will have a much bigger impact on their success, he adds.

3. Opportunities to act on changing rates are limited, but it’s still smart to keep tabs on the market.

Investors should still keep an eye on interest rates so their expectations are in line with the market, he says.

Glassman doesn’t expect to see significant additional increases in interest rates beyond a return to a “neutral” level unless inflation turns out to be a much bigger problem than economists expect, which could force the Fed to take more dramatic steps to slow the economy down.

“Right now, the Federal Reserve is only in the process of taking its foot off the gas. If it finds it has to step on the brakes … you would be thinking differently about how to hedge that,” he says.

4. Will higher mortgage rates create more renters? It’s complicated.

i wouldn't be shocked if real estate prices flatten this year

When interest rates rise, it limits the price of the home a prospective buyer can afford. You might think that would lead would-be homebuyers to choose to keep renting, boosting demand for apartments.

However, housing prices tend to react quickly to changes in consumers’ buying power, Glassman says. As mortgage rates dropped during the pandemic, giving people the ability to finance bigger purchases, home prices rose.

With mortgage rates climbing back to or above pre-pandemic levels, “I wouldn’t be shocked if real estate prices flatten this year, or actually go down,” Glassman says.

Affordability also isn’t the only factor people weigh when choosing to rent or own. Young, single people are more likely to rent than families, and interest rates won’t change that, he says.

5. The impact on multifamily property prices is tough to predict

Rising mortgage rates make it more expensive to finance properties, which seems like a challenge for investors.

But rates aren’t rising in a vacuum — they’re going up because the U.S. is working its way out of the pandemic, wages are rising and the economy is doing well, Glassman says. With all those forces in play, it’s tougher to predict how prices will respond.

“Everything’s getting better, and honestly, I’ll bet that an investor in multifamily would much rather have a healthy economy and high interest rates than a poorly performing economy and low interest rates,” he says.

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