Why We Are Not Buying Real Estate Right Now:
Understanding the Current Market Conditions

     Real estate has long been a proven stable investment option, offering the potential for substantial returns and a sense of security. However, it’s essential to recognize that the real estate market, like any other, experiences fluctuations and cycles. Currently, there are several reasons why we are not buying real estate right now. In this post, we explore the various factors affecting the market and highlight the impact of federal rate hikes and economic conditions on real estate investments.

The Effects of Federal Rate Hikes

The Federal Reserve announced that it’s holding interest rates steady, following its June meeting, leaving the federal funds rate at a target range of 5.0% to 5.25% This move snapped a string of 10 consecutive rate hikes in an effort to significantly reduce the high inflation we are all experiencing .

Federal rate hikes have a significant influence on the real estate market. When interest rates rise, borrowing becomes more expensive, which directly affects the affordability of housing and the demand for real estate. Let’s dive into the key aspects of how federal rate hikes impact the real estate market:

1. Increased Borrowing Rates
One immediate effect of federal rate hikes is the rise in lending interest rates. Higher interest rates lead to higher borrowing costs for borrowers. As a result, potential buyers might face challenges in securing affordable financing rates and terms, leading to difficulties in making the numbers work.

2. Reduced Buying Power
Higher rates directly impact buyers’ purchasing power. As interest rates increase, the amount buyers can afford to borrow decreases, limiting their options in the market. This reduction in buying power contributes to a decrease in demand and may lead to a decline in property values in the short term.

3. Slower Market Activity
The combination of increased interest rates and reduced buying power tends to slow down the real estate market activity. Potential buyers, like Twenty Five Eight Capital, become more cautious and conservative with their underwriting, and the overall transaction volume decreases. Sellers may also be reluctant to list their properties for sale due to the increased interest rates, decreased buying power and variable capitalization rates resulting in a more sluggish market.

Economic Factors Affecting Real Estate Investments

Apart from federal rate hikes, various economic factors can influence the real estate market. Understanding these factors is crucial for making informed investment decisions. Let’s explore some of the key economic factors impacting real estate investments:

1. Market Volatility
The overall volatility in the economy has directly impacted investments such as stock, bonds and real estate. The current uncertain economic conditions and fluctuations in the stock market has made investors hesitant or unable to allocate their funds towards other investments such as real estate. Market volatility can lead to a lack of confidence in any alternative investment vehicles.

2. Job Market Stability
The stability of the job market is closely linked to the demand for housing. In times of economic uncertainty, job losses occur and reduced job security can discourage potential homebuyers from making significant financial commitments. The reduced income can significantly impact the housing market, resulting in decreased demand for purchasing and higher demand for renting.

3. Housing Affordability
The affordability of housing plays a vital role in real estate market dynamics. Currently, in the Mid Atlantic markets where we invest, there is a continued steady rise in home and rental prices, coupled with stable wage growth, but the with rising interest rates there has been can a decrease in housing affordability and buying power. As a result, many potential buyers have been priced out of the market and are unable to purchase a property.

Expert Insights on the Current Real Estate Market
To gain a better understanding of the current real estate market conditions, it’s crucial to consider expert opinions. Here are a few expert perspectives on the current state of the market:

Jeff Ostrowski of Bankrate has written about the impact of federal rate hikes on the housing market. He mentions that the majority of housing economists agree that prices could slightly fall further, but the decline won’t be as severe as the one homeowners experienced during the Great Recession

Fannie Mae Chief Economist Doug Duncan, highlights the importance of economic stability for real estate investments. He recommends closely monitoring the job market and overall economic indicator, which continue to be strong. He believes 2024 stands to be a better year for housing

Weight the Pros and Cons:
Investing in real estate offers the potential for substantial returns, and at Twenty Five Eight Capital, we are committed to upholding our core principles of investing: conservative underwriting, thorough due diligence, value add upside, cash flow potential and preservation of the invested capital. We understand that the current market conditions, including federal rate hikes, economic volatility, and sales prices, can impact these principles. However, we remain optimistic and focused on our long-term goals.

Despite the challenges posed by the current market conditions, we firmly believe that opportunities will arise in the near future. We are prepared to seize those opportunities and acquire high-quality assets that align with our investment strategy. Tony Robbins once said, ‘Stay committed to your decisions, but stay flexible in your approach.’ We believe that staying informed and adaptable is crucial for all investment partners. While there may be risks associated with any investment, it’s important to keep your eyes on the long-term benefits.

So while the current market conditions present challenges, we are optimistic and motivated to overcome them. At Twenty Five Eight Capital, we stay true to our investment principles and remain focused on long-term goals. By staying informed, adaptable, and patient, we are confident in our ability to identify profitable opportunities and deliver value to our investment partners. Together, we can thrive in this ever-changing real estate landscape.