Higher mortgage rates and home prices may keep many potential buyers on the sidelines. According to the residential real estate brokerage firm Redfin, the median monthly mortgage payment in February 2024 (based on average 30-year mortgage rates and home prices) was $2,685, down from an all-time high of $2,735 in mid-October, but up 1.9% from February’s median mortgage payment.7 However, steeper monthly mortgage costs continue to be a burden for those looking to purchase a home. “The combination of higher home prices and elevated mortgage rates creates a meaningful headwind for new homebuyers,” says Haworth. “They either need to be able to make a bigger down payment or they must earmark more of their monthly budget for housing costs.”
Impact on real estate investing
For those looking to add diversification by including real estate in their portfolios, a commonly used vehicle is a real estate investment trust (REIT). However, higher interest rates create headwinds for REITs.
“Real estate as an asset class was one of the first to be repriced lower in reaction to higher interest rates,” says Tom Hainlin, national investment strategist at U.S. Bank Wealth Management. “Although REITs are often considered a way to hedge the risk of higher inflation, the unfavorable interest rate environment has resulted in REITs underperforming other parts of the equity market,” Hainlin says. “Improved yields on U.S. Treasury securities create cash flows that look much more attractive in today’s market when compared to REITs.” As a result, demand for REITs has fallen. However, after spending much of 2023 in negative territory, REITs enjoyed a modest rebound at the end of the year. For all of 2023, the S&P Developed REIT Index gained 11.69%. Despite the rally, REITs significantly trailed gains of 26.29% for the broader S&P 500, a benchmark measure of U.S. stock market performance. Year-to-date through March 25, 2024, REITs are again in negative territory, with the Developed REIT index down 3.36%, compared to a year-to-date total return of 9.78% for the S&P 500.8
Haworth points out that certain types of REITs have performed better. “Data centers, cell towers and light industrial properties have generally been the best performing REIT sectors as demand remains strong,” says Haworth. “The REIT market is struggling overall, however, due to persistently high interest rates.”
Housing market’s influence on economic growth
Fed policy has clearly placed housing and other real estate markets on the front lines of efforts to slow the economy's pace and lower inflation. Thus, regardless of the extent of your real estate holdings, it’s important to keep in mind that the housing market can have a significant impact on the broader economy and capital markets generally. “The formation of households is one of the main drivers of economic growth in the U.S.,” says Hainlin. “It has a large spillover effect on the economy, including materials that go into building or remodeling, and furnishings for homes.”
Be sure to consult with your wealth management professional to determine when and how real estate investments might be a good fit for you.