The current environment leads to what may be the highest housing costs of all time. According to the residential real estate brokerage firm Redfin, the median monthly mortgage payment in April 2024 (based on average 30-year mortgage rates and home prices) was $2,843, 13% higher than the median mortgage payment one year prior.7 “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 for portfolio diversification by including real estate in their asset mix, a commonly used vehicle is a real estate investment trust (REIT). However, higher interest rates create headwinds for REITs.
“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,” says Tom Hainlin, national investment strategist at U.S. Bank Wealth Management. “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. Year-to-date through April 30, 2024, REITs are again in negative territory, with the Developed REIT index returning -7.2%, compared to a year-to-date total return of 6.0% for the broader S&P 500. Over the 12-months ending April 30, 2024, the S&P 500 gained 22.7% while the Developed REIT index was essentially flat.8
Housing’s economic influence
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.