The Fed recently decided to raise the US interest rate by 0.25 to 0.25-0.5% in an attempt to curb rampant inflation. To understand the implications of real estate in the United States, we need to go back. If we look at the 2008 global economic crisis that began in the United States, the recovery phases lasted about five years. Part of the criticism of the Fed at the time was that they did not respond quickly enough to actions aimed at revitalizing the market and thus letting it collapse. These moves now seem moderate compared to the immediate steps in the first months with the outbreak of the corona virus that prevented a huge economic crisis (grants, benefit packages for the economy, drastic interest rate cuts, etc.). These moves contributed on the one hand to accelerated growth in the US market and prevented certain markets from collapsing and on the other hand the growth in US household savings and the imprisoned demand created alongside supply and commodity supply problems (supply chain problems, SAA shortages and more) created inflation. The price craze did not miss the real estate market either, house prices in the US flew by about 17% in 2021 and reached an all-time high of a median price of $ 388,900.
There is no doubt that raising interest rates is meant to cool demand. It seems that the rise in interest rates and the reduction in US government assistance are expected to moderate the real estate market slightly. It is estimated that the market is expected to continue to rise by 6% -8% per year due to a combination of factors such as the shortage of new homes resulting from a decade of few construction starts as a result of the subprime crisis alongside population growth (in 2010 only 7 million homes were built Previous ones beginning in 1960). A shortage of between 5-7 million houses, a gap that will only be closed for another 9-11 years and also on the condition that the pace of construction will not be harmed for one reason or another.
When looking at the rental market it can be seen that prices continue to break records: Rental prices in private homes showed an annual increase of 14.9% The average rent in the US is at an all-time high and stands at $ 1628 (according to CBRE). 8% in rent. Despite the increase in the interest rate on mortgages, the monthly rent is higher than the mortgage payment (unlinked fixed interest for 30 years), which pushes first-time home buyers (who can receive relatively high financing percentages) to purchase apartments.
A necessary step to bring the market to a healthy state
The rise in interest rates by the Fed is an important and necessary step in order to cool inflation and bring the market to a healthier state. The Fed believes that by 2023 the rate hike will reach 2.8% (after which it will retreat back to 2.4%) but this will be at war with the growth rate in the US and the effect of the rate hike on it.
Protection against inflation
Over the years, real estate investments have already proven themselves in the face of inflation, whether it is the rise in rental prices or real estate prices as a result of rising construction prices alongside the erosion of non-CPI-linked financing, unlike in Israel.
In the end, residential real estate is a basic consumer product, everyone needs a roof over their heads, and looking at it in the simplest way, there is a severe shortage of supply in the United States, which currently only continues to worsen. Therefore, raising interest rates will cool the real estate market and we will probably not see price increases as we saw in 2021 that are not healthy for the market but more moderate increases similar to the increases we saw from 2015 until the corona crisis of 6-7%.
The author is a co-founder and CEO of RM GROUP
The author of the article is not an accountant and should not be considered a tax recommendation of one kind or another and that the appropriate bodies should be consulted.