Rising interest rates energize rental market

Buying a home is getting very expensive thanks to rising interest rates and it is making the cost of renting more attractive.

“The effect of rising interest rates is direct on a number of sectors in real estate, especially residential houses,” Marcus & Millichap CEO Hessam Nadji told FOX Business’ Maria Bartiromo on Monday. “Prices are affected, sales have slowed.”

The Federal Reserve has hiked interest rates eight times since 2015.  For consumers looking to buy a home, that translates into higher borrowing costs. But according to Nadji, consumers preferred to rent even before rates began to rise.

“The demographics have changed. The financial crisis was a very hard hit to the consumer on the housing front,” he said. “So we’ve seen the housing apartment rental market show incredible strength and it continues to show strength because of the fact that now you have this compounding effect of higher interest rates and price appreciation on the housing side pushing more people into the rental market.”

The Fed in September raised interest rates for a third time this year and signaled it would raise borrowing costs again in December.

The Fed raises interest rates to prevent the economy from growing too fast and thus causing inflation, but Nadji said that investors are “mostly concerned” about the Fed raising rates prematurely.

“The investment community is telling us that they hope there is a little bit of a pause because it takes six to nine months for the effect of the higher interest rates to work its way through the economy,” he said.

Nadji also sees warning signs in the commercial real estate market.

“If you look at commercial real estate broadly we are still seeing very little overbuilding. We still see the absence of bad loans about to create a problem on the leverage side of the equation,” he said, and he added that tax reform “still hasn’t had time to work its way through.”