Real estate investors know that interest rates affect more than just mortgage payments. Rising rates can lead to decreased buyer activity, which may shift demand from home purchases to rentals. In Sacramento, where home prices have surged in the last five years, this could create opportunities for investors. However, you’ll want to weigh the higher rates against a backdrop of increasing rental prices.
In this blog post, we’ll explore how interest rate changes impact
Sacramento's rental market, and what investors should consider in the coming months.
Understanding the Current Interest Rate Landscape
The Federal Reserve has raised interest rates several times since early 2022. These hikes were implemented to combat inflation, which soared to a 40-year high in mid-2022. Historically, as inflation rises, so do interest rates. Conversely, when inflation rates begin to drop, the Fed often responds by cutting interest rates.
According to recent data, inflation has been steadily declining, suggesting a potential easing of interest rates in the near future. However, in mid-2024, we’re still waiting for a drop.
The Effect of Rising Interest Rates on Home Buying
Increased interest rates directly impact mortgage rates, making
home buying more expensive. According to a recent report from the California Association of Realtors, the average 30-year fixed mortgage rate is currently around 7.5%. This increase has already contributed to a slowdown in home sales across the state, with Sacramento experiencing a 31% drop in year-over-year sales in July of 2024.
When
home ownership becomes less affordable, many prospective buyers remain in their rentals. This shift in demand can create a competitive rental market, driving up prices and occupancy rates.
The Effect of Rising Interest Rates on Rent Prices
While increasing demand for rentals is typically good news for landlords, it’s important to note that rising interest rates can also impact supply. Higher borrowing costs may lead developers to delay or cancel new construction projects, exacerbating the existing supply-demand imbalance in Sacramento’s rental market.
Rents are higher than they’ve ever been in Sacramento right now, and that’s partly due to the higher interest rates that homebuyers have to pay.
What Can Investors Expect in the Coming Months?
The Federal Reserve's decision-making process regarding interest rates is influenced by a variety of economic indicators. Here’s what we’re watching:
- Potential Rate Cuts. The Fed's recent comments suggest there may be discussions about potential rate cuts in the upcoming months. However, any cuts would likely be gradual and may not significantly impact borrowing costs for some time.
- Increased Rental Demand. With home buying becoming less affordable due to high interest rates, more individuals are likely to turn to renting as a viable option.
- Supply Chain Constraints. The ongoing effects of supply chain disruptions and labor shortages may hinder new construction and development projects in Sacramento.
