Interest rates haven't dropped as predicted. What should investors do?

In 2023, many experts predicted a decline in U.S. interest rates, expecting them to fall below 6% by the end of the year. However, as we find ourselves in mid-2024, the Federal Reserve has met three times without announcing any rate cuts. Current mortgage rates remain above 7%, contradicting earlier forecasts. This situation leaves many potential investors questioning their next move. So, what should investors do while waiting for a rate cut?

Predictions and Outcomes

At the end of 2022, various organizations projected different interest rate scenarios for 2023 U.S. citizen primary homes:

• National Association of REALTORS®: Predicted rates to be 6.5% by the end of 2023 and 6% in 2024 .
• Freddie Mac: Expected rates to stay above 6% throughout 2023 .
• Fannie Mae: Forecasted rates to reach 6.8% by the end of 2023, increasing slightly to 6.9% in 2024 .
• National Association of Home Builders: Expected rates to be around 6.89% by the end of 2023. Source

For international buyers, it’s important to note that the mortgage rates discussed here refer to primary rates for U.S. citizens. Foreign national clients should expect to pay about 1-1.5% higher due to the increased risk for lenders. This higher rate reflects the challenges of recouping costs if a foreign national defaults compared to a U.S. resident or citizen. However, the benefits of buying in the current market, such as less competition and better negotiation opportunities, apply equally to international investors.

Despite these predictions, the Federal Reserve's stance has kept rates higher than anticipated, largely due to persistent inflation and a robust job market . As of May 2024, the average 30-year fixed mortgage rate is 7.02%, with the 30-year refinance rate at 7.03% . These rates have deterred some buyers, but they also present unique opportunities for those willing to act now.

Federal Reserve Actions and Market Reactions

The Federal Open Market Committee (FOMC) has held its policy rate steady between 5.25% and 5.5% for six consecutive meetings, including the latest on May 1, 2024 . Despite widespread expectations for rate cuts this year, the Fed's decision reflects ongoing concerns about inflation and economic resilience. The Fed’s cautious approach has influenced mortgage rates, keeping them elevated longer than many anticipated.

Benefits for Investors During High-Rate Periods

1. Less Competition: High interest rates have deterred many buyers, reducing competition in the market. This environment allows investors to negotiate better deals on properties. With fewer buyers, sellers are more likely to entertain lower offers or provide concessions.

2. Better Price Negotiations: The reduced competition also means sellers are more flexible on price. Investors can secure properties at lower prices now, despite higher interest rates. This strategy can be advantageous, especially when considering the potential to refinance later at lower rates.

3. Refinancing Opportunities: Buying now with higher interest rates and refinancing when rates drop creates an opportunity for investors to potentially benefit from current lower home prices. As the market becomes more competitive when rates eventually fall, property prices are likely to increase. By securing properties now, investors can gain equity and refinance to lower rates in the future, optimizing their investment.

Strategic Advice for Investors

For those who can afford to invest now, it is advisable to proceed with purchasing properties. Waiting for rates to drop might mean facing higher home prices as demand increases. By buying now, investors can take advantage of current market conditions to negotiate better prices and secure properties that may appreciate in value over time.

Summary Investors do not need to be passive in the face of high interest rates. Buying now has strategic advantages, such as better negotiation power and the potential for future refinancing. Don't let the current interest rates dictate your investment strategy if you have the means to invest now. You can always update your mortgage terms later, but the purchase price you negotiate now could offer significant long-term benefits. Consider new construction options and negotiate in today's less competitive market, rather than waiting for the "ideal" time when demand and competition are higher.

Disclaimer - The information provided in this blog post is for informational purposes only and should not be considered as investment advice. Please consult with a financial advisor before making any investment decisions.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.