Interest rates play a vital role in deciding the cost of borrowing money (loan), but how do higher interest rates affect the rental market?
Based on tighter credit standards, corrected housing prices, and a declining surplus of unsold properties, the average mortgage rates have remained historically low over the last 30 years, from 2013 to 2022.
However, the Federal Reserve has recently raised mortgage interest rates to combat inflation, making property buying extremely expensive.
The U.S. central bank uses the mortgage interest rate to control red-hot inflation, including rent and home price inflation. As a result, higher interest rates may ultimately drive rent prices up even further, which is not what California renters hope to hear.
A basic understanding of interest rates and their future can help you make financially sound mortgage decisions as a California investor and a single-family owner. Such choices include deciding whether to increase rental prices or choose between mortgage types.
So, are increasing interest rates to blame? Will this drive a corresponding increase in rental rates as well? Or will rents fall as mortgage loans become more expensive?
To answer all these questions, we present this report on how increased interest in the single-family rental market can potentially affect the real estate market as a whole.
Impact of Increasing Mortgage Rates on the Housing Market
Interest rates are critical to the housing market for several reasons. First, they determine how much investors and property buyers will have to pay to borrow to buy a property. Secondly, they influence the value of real estate.
While low-interest rates tend to increase demand for property, driving up prices, high-interest rates generally do the opposite.
Here are the various ways in which increased interest rates of single-family homes impact the market, both good and bad.
Bad: It Makes Borrowing Money Expensive
Higher interest affects the cost of borrowing money for investors, landlords, and property developers. When mortgage interest rates go up, taking out loans to finance the building construction or acquiring new rental properties becomes more expensive.
Having said that, property owners and landlords may eventually recover those costs through residents with higher rent prices, leading to a significant rent increase.
Good: Results in Increased Demand for Rental Units
Recently, increased interest rates have significantly affected the demand for rental properties. As the increased interest has triggered the cost of borrowing money for home buyers, it has dramatically affected monthly mortgage payments, making them expensive.
According to Yahoo Money, mortgage interest rates have risen by four percentage points since the start of 2023, the most noticeable year-to-date increase in over 50 years.
The national median monthly payment has also gone up by 3.7% to $2,012 in October from $1,941 in September, making a new record. With home buying becoming increasingly unaffordable, many investors prefer to continue renting rather than buying a home, leading to less inventory of rental units on the market.
Bad: The Cost of Living Goes Up
Rising interest rates can impact the overall cost of living. It adds to the cost of borrowing money for other expenses, such as mortgages, car loans, and credit card debt, which may also increase. It can further lead to an overall rise in the cost of living, putting pressure on tenants to pay higher rent prices to mitigate these other expenses.
Good: The Home Selling Process Speeds Up
Rising interest rates often complicate home buying or selling, and decreasing interest rates make buying and selling easier.
For instance, if you are a home buyer who wants a 4% rate on a 30-year fixed mortgage on a home worth $400,000, your monthly installment would be $1,900.
But if you qualify only for a 5% rate on a 30-year fixed mortgage, your monthly payment would rise to $2,138. A 1% increase in interest raises your cost by $238, or roughly 13%. As a result, from a home buyer’s perspective, as mortgage rates increase, affordability decreases.
Bad: Setting Rental Rates Becomes Challenging
Rising interest rates may significantly impact determining the right rent prices in California. It is essential for both investors and residents to understand potential impacts and to consider the long-term financial effects of any rental agreements carefully.
Often DIY landlords struggle with setting reasonable rental prices under even ideal economic circumstances. We often see property owners charging much less than the market, which indicates significant revenue loss over the life of their investment ownership.
Under challenging economic conditions like today, DIY landlords may not recognize the right time to reduce their rental rates to compete in a changing market.
Ultimately, landlords who set their own rents may continuously miss out on revenue because they charge too little. Or they may face increased vacancies and lost income because they’ve overcharged their tenants.
Good: Overall Property Value Increases
Housing prices and property value directly correlate to mortgage rates. Increased interest will not significantly affect property value and housing prices if the economy proliferates. As long as the nation’s economy continues to grow and see job and wage growth, a rise in mortgage interest rates should not paralyze the housing market.
Factors that can Help Mitigate the Impact of Increasing Interest Rates
While rising interest rates on single-family rentals in Berkeley, California may have a negative impact on the rental market, there are several factors that may mitigate this impact.
Local policies and regulations
Local policies related to rental housing can help to ensure that renters are protected and that the rental market remains stable. Berkeley has a strong history of rent control and tenant protection, which can help to limit rent increases and provide stability for renters.
Additionally, the city has recently implemented policies aimed at increasing the supply of affordable housing, such as the Affordable Housing Impact Fee, which requires developers to contribute to the city’s affordable housing fund.
Increasing availability of affordable housing options in the area
Berkeley has several affordable housing developments, and the city has made efforts to increase the supply of affordable housing in recent years.
This can help to ensure that renters have access to affordable housing options, even if rental prices increase due to rising interest rates.
Other economic factors
Other economic factors, such as the strength of the local job market, can impact the demand for rental properties. If the job market remains strong, renters may be willing to pay higher rents to secure a home in the area.
Additionally, the overall state of the economy can impact the rental market, as economic downturns may lead to a decrease in demand for rental properties.
It is worth noting that rising interest rates on single-family rentals may not impact all renters in the same way. Some renters may be able to absorb the increased cost of rent, while others may struggle to make ends meet. Moreover, the impact of rising interest rates may vary depending on the specific location and type of rental property.
Tips for Single-Family Homeowners to Deal with Rising Interest Rates
As a landlord in Berkeley, California, rising interest rates on single-family rentals can present several challenges. However, here are some tips and strategies that landlords can use to deal with these challenges and maintain a successful rental business.
- Stay up-to-date with the market: Keep an eye on the rental market in Berkeley and stay informed about trends and changes that may affect your business. This can help you make informed decisions about rental prices, tenant screening, and other aspects of your business.
- Be prepared to negotiate: With rising interest rates, tenants may be less willing to pay higher rents. Consider offering incentives such as lease renewals, upgrades, or other perks to entice tenants to stay.
- Consider long-term financing options: Look into long-term financing options that may help you weather changes in interest rates. For example, a fixed-rate mortgage may provide more stability than a variable-rate mortgage.
- Maintain your property: Keeping your property well-maintained can help to attract and retain tenants, even in a challenging rental market. Make sure that your property is clean, well-maintained, and has up-to-date amenities.
- Consider renting to students: Berkeley is home to several colleges and universities, and renting to students can provide a steady source of income. Consider marketing your property to students or partnering with local colleges and universities to find tenants.
- Seek professional advice: If you are unsure about how to navigate the rental market in Berkeley, consider seeking professional advice. A local property management company or real estate agent can provide the required guidance and support.
By following these tips and strategies, landlords in Berkeley can effectively deal with rising interest rates on single-family rentals and maintain a successful rental business.
With a focus on staying informed, negotiating with tenants, and maintaining a well-maintained property, landlords can thrive in a challenging rental market.
Stay Updated About the Single-family Rental Market With California Pacific Realty
It can be tricky to make a new real estate investment when the mortgage rates are high, and there are frequent changes in local market conditions. One of the sure ways to stay informed is to partner with a reputed property management company like California Pacific Realty.
Our professional property managers understand local market conditions and track trends daily on the neighborhood level. Our team leverages that information to optimize rental rates for all investors and property owners like you, so you’ll no longer have to guess when setting rental rates. Instead of an arbitrary rental strategy, we use market data to set rates and incorporate regular increases so you’re continuously optimizing your investments. That’s not all.
We can also help you attract and screen potential tenants, place them in your single-family home, and handle ongoing maintenance and repair tasks. We help you collect monthly rent payments and deal with the day-to-day needs of your tenants, giving you peace of mind.
If you’d like to learn more about interest rates and mortgages, connect with us at California Pacific Realty.
