As we settle deeper into the new year this February, we’re beginning to see some patterns unfold that tell us a lot about what we can expect from the real estate market and the broader economy in 2022. By taking a look back at the impact that Covid-19 has had on the real estate market, as well as trends over the last few years and current events, we can come up with an educated guess as to where interest rates are headed in the year to come.

The Impact of Covid-19 on the Real Estate Market

Real estate was one of the markets most affected by the Covid-19 pandemic, as millions of Americans discovered that they no longer needed to make daily commutes. This caused a large shift to suburban and rural living, affecting rent markets and property values both in the major cities that people began leaving, and the small towns that became inundated with new residents and relatively few homes available to accommodate them.

In addition, manufacturing limitations, supply chain issues, and increased demand for new construction caused huge spikes in the cost of building materials for homebuilders, further driving up home prices. At the same time, the Federal Reserve reduced the Federal Funds Rate to 0.25, ensuring that interest rates remained low during a time where economic stimulus was necessary.

High Inflation Means the Federal Reserve Will Act

Economic conditions of the last few years have led to a period of high inflation, and the Federal Reserve has confirmed that it will be increasing the Fed Funds Rate by 25 bps. Some economists are calling for an increase of 50 bps. By the end of December, many experts predict that the Fed Funds Rate will be as high as 1.25-1.50%. As the economy continues to recover from the pandemic, this is all completely expected behavior and should not be a cause for alarm for real estate investors.

That said, these conditions point to a high likelihood of interest rate hikes for 30-year rental mortgages. Given that mortgage rates have been at historic lows for much of the last year, this return to normal means that the window is closing for real estate investors to take advantage of rates while they can.

How High Could Interest Rates Get?

Ultimately, it’s very difficult to predict exactly where interest rates will settle by the end of the year. Any number of unforeseen circumstances could have an effect on exactly how much interest rates increase by. Already at the time of this article’s publication, we’ve seen a shift of over 25 bps in 30-year investment mortgage rates, and it would not be surprising to see interest rates in the 5.5-6% range in the future.

There’s Still a Chance to Lock In Low Rates

If you’re wondering whether now is a good time to acquire new rental properties or refinance your existing portfolio, there seems to be a pretty convincing case for acting sooner rather than later. The more time passes, the more we can expect interest rates to rise, at least over the course of the foreseeable future. What we don’t expect is for interest rates to remain as low as they have been in the past year and a half.

At Pimlico Capital, we strive to offer the best service we possibly can, which includes making sure our partners are getting the best possible deals when financing their real estate investments. If you have any properties in mind, take a spin through our rate calculator to see what financing options you’re pre-qualified for, or give us a call now at 410-855-4600.