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CALL US NOW! 515-233-8228
Is the Fed's Interest Rate Increases going to Hurt the CRE Market?
Why is the Federal Reserve Raising Interest Rates Now?
As everyone is seeing with nearly every product purchased, inflation has increased dramatically in a short period of time. The consumer price index for January, which measures the costs of dozens of everyday consumer goods, rose 7.5% compared with a year ago, which is the fastest since February 1982. Many of us will remember mortgage interest rates in the 18% to 20%+ range in the early 1980s. To combat inflation, the Fed increases their rates to slow the money supply down and hopefully reduce the inflation rate back a normal 2% annually.
How Many Rate Hikes will the Fed do in 2022?
Some in the Fed anticipate hiking the interest rates three or four times this year. However, they noted that “every option is on the table” when it comes to the central bank’s battle against inflation. Rate hikes are believed to be 25 bps (0.25 percentage points) each, however, 50 bps increases cannot be ruled out. Major banks are expecting four to six interest rate hikes in 2022 to fight the spike in inflation which is running at the highest level in nearly 40 years. As a note, the Federal Reserve will meet eight times in 2022. There are too many variables that cause the Fed to raise or not to raise rates at each meeting, so it is impossible to predict exactly, however, it is reasonable to predict rates are going up. When the Fed meets in March, some economists are even predicting a 50 bps increase to slow the 7.5% inflation rate reported in the consumer price index report for January.
What do rising interest rates mean for CRE investors?
It means when your multifamily's loan term is up for refinancing, odds are very good you will see a significant increase in your quoted interest rate vs your current interest rate. Much like restaurants increasing their prices for meals due to rising food costs, CRE investors will see their cash flow decrease with higher interest rates, therefore, sponsors will need to increase rents to cover their costs. The question many business owners are asking now is how high can I increase what I charge and still be competitive?
Should I refinance now or wait until my pre-payment penalty ends?
That is the multi-million dollar question. Do you wait and see where the interest rates are going or do you go ahead and pay off the pre-payment penalty? It really depends on when your investment properties' term expires. First, you really need to be checking each of your loans now to see when they expire. Second, check what the pre-payment penalty amount would be. Then run a couple interest rate scenarios at where you think the interest rate will be when your loan term expires vs where the current interest rates are. Next, compute the payment amounts and divide the pre-payment penalty amount to see what the recapture rate will be to see if it makes sense to refinance now and pay the pre-payment penalties.
The U.S. 10 Year Treasury Bills are the index many mortgages follow. As of February 10, 2022, they just topped 2.00% and just two months ago, on December 2, 2021, the 10 Year T-Bills were at 1.34% which equals an increase of 66 bps in just two months. This shows the volatility in the markets currently and while this increase does not mean the rates will continue to rise, which is uncertain and can happen without notice, it does show how the markets are currently moving.
Howell Investment Finance can assist you in your investment property analysis to see if it makes sense to refinance now or wait and see as every property is different as each sponsor's needs vary as well. Howell Investment Finance can help you determine if HUD, Fannie Mae, Freddie Mac, or other CRE mortgages are the right fit for you at this time of rising interest rates.
If you're looking to refinance your multifamily or mixed-use building, call Howell Investment Finance as they have successfully closed over $100 million in loans for investors in Ames, Cedar Rapids, Iowa City, West Des Moines, Sioux City, and the Quad Cities. They can help you find the right HUD, Fannie Mae, Freddie Mac or bridge mortgages and will guide you through the maze of CRE financing so that you can make an informed investing decision. Schedule a consultation by calling (515) 233-8228 today, or learn more about their loans by visiting the website.