Understanding the real estate market’s shifting dynamics is key for any investor. To help shed light on the current landscape, we caught up with Cameron Wu, Vice President of Investments at Arrived, to get his take on the current housing market, economic trends, and strategies for navigating today’s landscape.
Where’s the Real Estate Market Headed?
With high interest rates creating challenges in the real estate market, it’s essential to keep an eye on how these conditions are evolving. While the current environment has slowed things down, a recent drop in mortgage rates could signal a shift. Understanding these trends could help gauge what might be next for the market.
High interest rates have been challenging, making mortgages pricier and less accessible for many buyers. “Interest rates are such a big topic when it comes to talking about macro with real estate,” Wu says.
This extended period of elevated rates has led to a buildup in housing supply, creating a sluggish market where many buyers and sellers feel the pinch. “We’ve had high interest rates in our economy and high mortgage rates for nearly two years now,” Wu says.
The good news is that mortgage rates have already started to drop slightly, falling by 0.5% from May to August 2024. There’s potential for further reductions over the next 18 months, though the decline might be gradual.
While that is good news, it may not be an immediate pressure release for the real estate market. As rates decrease, we may face a “gridlock” effect. Increased mortgage rate affordability may attract more buyers. With an influx of buyers hitting the market, we may see prices remain elevated. However, this could be offset by a higher volume of properties hitting the market as interest rates drop and homeowners start selling their homes to upgrade or relocate.
“As rates come down, the rate differential is less and less pronounced,” Wu explains. This means the market could find a new balance rather than seeing dramatic price drops.
Looking at the Broader Economy
Broader economic factors are also a key consideration. The Federal Reserve has been using high interest rates to cool down the economy and tackle inflation. While this approach aims to stabilize things, it can lead to ongoing effects even after rates start to drop.
“We could see lingering recessionary effects even as rates come down,” Wu says. This means that even if mortgage rates fall, the market might still be affected by weaker job growth and slower economic activity.
In practical terms, this could mean that while lower rates might make borrowing cheaper, the overall economic slowdown could still impact job markets and consumer spending. Fewer job opportunities and cautious spending can dampen the housing market’s recovery.
The Upside of High Interest Rates
On the flip side, high interest rates can present an opportunity for diversifying into real estate development projects.
The high-interest rate environment, which has hit a ten-year peak, can open the door for some exciting investment opportunities. “We’ve seen such an increase in the interest rate environment over the last two years now to a ten-year high,” Wu says. This setup can be beneficial for real estate-backed credit investments, offering the potential for solid returns.
The Arrived Private Credit Fund focused on high-yield investments backed by real estate renovation and development loans. “Long term, it’s important to be able to offer a diversified option of both real estate equity investments and credit investment opportunities for investors,” Wu says.
For investors, this fund is a way to diversify their portfolios by blending the benefits of real estate equity with the potential high returns from credit investments.
