The housing market and all the uncertainties that plague it are definitely on the minds of prospective buyers, sellers and investors.
As the Federal Reserve (Fed) seeks to curb inflation through higher interest rates, it indirectly drives up the cost of a mortgage (a 30-year fixed-rate mortgage) that 90% of buyers get. The US average 30-year fixed-rate mortgage rose to 6.82% as of his Sept. 29. This is more than double what he was on September 30, 2021, when his average interest rate was 3.01%.
As a result, the affordability crisis plaguing potential homebuyers is growing as the average monthly payment has increased by more than 50% from last year. Mortgage rates hit their highest level since the 2008 housing crash this month.
See also Investors earned a 41% return on this real estate debt investment
With rising interest rates and still-historically high home and list price values, the market is starting to see a decline in demand and an increase in supply.
According to the National Association of Realtors, “Existing sales fell for the sixth straight month in July. Sales were down 5.9% from June and 20.2% from a year ago.”
According to Realtor.com, “the supply of homes for sale is increasing, up 27% at the start of September compared to the same period a year ago.”
House prices and house prices hit a historic high last year, but historically low interest rates allowed buyers to afford. Currently, the market is seeing a price correction as house prices and values are still near their peak, but interest rates are unable to meet increasingly affordable monthly payments. Additionally, as we see an increase in supply and a decrease in demand, more potential sellers are deciding to stay in place. I understand that if I refinance in 2020 or 2021, the interest rate will almost double.
real estate debt investment
Investing in real estate secured loans may offer a portfolio hedging strategy. Investing in debt is safer for investors as the physical assets are held as collateral compared to equity. When you invest in real estate debt, in most cases you are effectively lending money to a borrower who will renovate or upgrade their home and sell the property.
Related: Real estate debt investments offer relief with returns of 8% to 12%
Investing in debt allows investors to benefit from higher interest rates rather than buying the property themselves and paying higher interest rates to finance it. Lending at a higher interest rate yields a higher return for the lender.
While it is true that investing in debt has a lower ceiling for potential returns than equities, you can enjoy strong returns with the added security advantage even during times of market uncertainty.
The holding period for a debt investment is much shorter than buying a property that must be held before a return can be seen. The holding period by some debt investment platforms can be as short as 6 or 24 months compared to stock trading which is typically 5-10 years.
If the borrower defaults on the loan, the debt investor can recover some or all of the investment through a real estate auction. But for stock investments, they may run out of their capital.
Investing in real estate debt is a much safer bet as home prices are fair. Mortgage loans give investors more predictability regarding the amount and frequency of returns, in addition to the safety of their mortgage investments.
Chart: Courtesy of Redfin
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