What Do Non-farm Payroll & Interest Rates Mean for Real Estate?

Investors will need to be more selective and double-check their due diligence, but rising rates also discourage consumer home buyers. The already lackluster home market will see fewer buyers, which means more renters.
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Speculation abounds as to what the numbers in the U.S. Non-farm payroll report mean to investments of all types, real estate included. The subject is discussed in an article at NuWire Investor, including the influence of a predicted rise in interest rates when coupled with a less than stellar wage report.

The good news is that job growth is improving, and that precedes growth in wages. However, the current payroll report shows a decline of 5% in average hourly income. This is despite a fall in the unemployment rate by 0.2%. It seems there are more jobs around, but so far this hasn't translated into higher wages.

The Federal Reserve reports that a rise in interest rates should not happen for at least six months, and could even be passed into next year. A rise in interest rates obviously impacts real estate investment. If financing is more expensive, cash flows are depressed, and many homes that would be rentals at a lower rate are not viable when rates rise even a small amount. The problem with focusing on one or two influencing factors is that real estate investment is complex, and there are other factors in play.•Interest rates: It's true that an increase in mortgage rates will impact real estate investment, but the rise being anticipated by analysts isn't going to kill rental property buying. Investors will need to be more selective and double-check their due diligence, but rising rates also discourage consumer home buyers. The already lackluster home market will see fewer buyers, which means more renters.

•Wages: Depressing wage numbers also keep buyers out of the housing market. If they're not buying, they still need a home, so rental demand will continue to rise. These first two factors, if rental demand remains strong, will result in probable rent increases. This offsets all or part of the interest rate issue, as higher rents will help keep cash flows at acceptable levels with higher mortgage payments.•Millennials Still at Home: Many younger people who used to make up a healthy first-time homebuyer market are not buying now, many living with parents. Poor job prospects, stagnant wages, and an anticipated interest rate hike won't improve on this factor. Improvements in any of these factors are likely to be slow and incremental, so their first home away from home will likely be a rental. Increasing demand usually brings higher rents, so investors can afford higher mortgage rates.•Boomers' Influence: The Baby Boomer generation is retiring at a rate of around 10,000 people every day. Many seem to be downsizing, but not necessarily buying. If they are buying, smart flippers can do quite well rehabbing homes in desired areas and selling on the retail market. If they decide to rent, there's that higher demand thing again.

I'm not predicting any major changes in investor activity, just that real estate investment, particularly rental property, is more complex than just being wage and rate sensitive. I'm not considering a slowdown, as there are still bargains out there.

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