The Effect of Interest Rates on Real Estate

Real estate is one of the sectors that is most affected by the movement of interest rates.  Most real estate is bought by individual middle class people and the current interest rate effects the monthly mortgage payment.  When they are looking to purchase a home they are not so much concerned with the actual price of the house but how much is the monthly payment.  The recent rise in rates initiated by the Federal Reserve has caused the price of homes all over the U.S. to decline in recent months due to slack demand. The hottest housing markets have suffered the most, like Las Vegas and Florida. 

While interest rates were at record low levels in the recent past home builders couldn’t build houses fast enough.  Like all markets this had the effect of increasing the supply of homes and thereby decreasing prices further.  While some select markets are still booming the overall housing market in the U.S. is in decline and looking for a bottom.  Therefore it would be wise to remember the first rule of investing which is, buy low, sell high.  An easy way to search for a market bottom is to check the covers of the major weekly news magazines Time and Newsweek.  If the headlines are something like “Real Estate Market in Severe Decline or is Crashing” then you can be fairly certain the bottom of the market is close by.  When the general public knows about it there is no one left to tell.

Great Real Estate Glossary of Terms

To become familiar with the terms used in real estate let me recommend a site our friends at the Wall Street Journal have put together with the most comprehensive real estate glossary I have ever seen.  Check it out at:  www.realestatejournal.com/toolkit/reglossary/

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Buying actual real estate is a lengthy and complicated process.  Just ask anyone who has sat through a closing on a house.  After signing your name 12 times or more and shuffling papers for 15 minutes the deal is done!  An easier way to purchase interest in real estate is by clicking your mouse and investing in a Real Estate Investment Trust (REIT).  Not many beginning investors have the time to evaluate a property to the extent it requires.  By investing in REIT’s you can own a diversified portfolio of real estate without leaving your house on a cold winter’s day. 

REIT’s Come in Many Flavors

Residential housing is not the only area of real estate available to invest in.  There are REIT’s that specialize in commercial property, healthcare property, self-storage, industrial and office space, retail malls and hotels.  It is wise to consider these because some outperform the others in different economic conditions.  For example self-storage REIT’s seem to perform well regardless of the economy.  People have to store junk no matter what.  Just like Proctor & Gamble (PG) does well in any economy because you still have to wash your clothes and floors. 

Medical property REIT’s also have an enduring quality because the need for healthcare facilities is always on the rise.  This is caused primarily by the aging of baby boomers so the trend should continue for a while.  Residential REIT’s might be in for some hard times in the near future due to the cooling off of the U.S. housing market.  In an article by Marc Charles, Investor’s Daily Edge presented here he gives the ticker symbols of some REIT’s he thinks should outperform the rest.

Special Tax Rules for REIT’s

“By law, they have to distribute 90% of their taxable income to shareholders. In return, their income – unlike other companies – goes untaxed. Uncle Sam can’t touch it until it gets into the hands of shareholders. So 35% more cash is available to distribute to shareholders.”.  This is a direct quote from an article presented here by Andrew M. Gordon, Investors Daily Edge.  In the article he describes how the returns from REIT’s generally outperform the market in general.  If you are looking for a investment that pays high dividends and capital gains with an able to sleep at night risk factor then REIT’s are worth looking into.  However, you will being paying taxes every year on your investment.  If this is unacceptable you might consider checking out municipal bonds that are always tax free.

More About REIT’s

Below are three articles from Investor’s Daily Edge.  Plus a link to Investopedia if you are looking for an in depth study of real estate investment trusts. 

Andrew M. Gordon’s article discusses how resilient the REIT market has been and it is  entitled The Sector that Keeps on Ticking

Charles Devalle’s article shows the historical growth of the REIT market and how world growth will keep it afloat. It’s All REIT

Marc Charles article gives you some REIT ticker symbols he thinks will do well.  The Right REITs for Yield, Safety and Growth.

www.investopedia.com/articles/04/030304.asp

Ken Mueller