Usually, the last thing anybody wants to hear is that interest rates are going up, but Jamie Dimon seemed almost thrilled at the idea in an interview on Monday. The CEO and chairman of JPMorgan Chase told CNBC he believes not only is the country headed for some of its best growth in decades but also that the Federal Reserve is going to hike rates far more than had been anticipated back in 2021.
Despite other experts predicting four rate hikes in 2022, Dimon says there could be more, and the economy will be all the better for it.
"The market is different," Dimon said in his interview with CNBC. "We're kind of expecting that the market will have a lot of volatility this year as rates go up and people kind of redo projections. If we're lucky, the Fed can slow things down and we'll have what they call a 'soft landing'."
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Raising interest rates and the current real estate market
As of the most recent available data from the National Association of Realtors, existing home inventories continue to lag far behind, with only 2.1 months of supply available in November 2021. This pushed the November 2021 median price for one of these homes to $353,900 and the average home price to $372,400. That's a 13.9% gain in median home prices and an 8.6% gain in average prices in just a year -- an absolutely berserk growth speed.
Despite this, there continue to be problems with getting new homes off the ground, with a drop of 0.8% in single-unit starts year over year (YOY). This is due to a combination of factors, including ongoing materials and labor shortages and a massive increase in new construction starts (39.1% YOY) for structures with five or more units. There's still a long list of properties to be built, with a 40.7% increase in single-family housing units authorized but not started and a 55.3% increase in the same for five-plus unit structures.
Rental demand for multifamily remains strong, according to research by CBRE, which predicts a 95% multifamily occupancy rate for 2022 and an 8% projected growth in urban rents. It expects to see more units started and finished because of this, helped in part by an increase in multifamily purchase cap increases for Fannie Mae and Freddie Mac to $78 billion.
Interest rate hikes will help cool a Flamin' Hot Cheetos real estate market
Dimon's predictions of four (or MORE!) interest rate hikes from the Feds may sound like it's a total nightmare creature coming for us, but the truth is we needed interest rate hikes to start in 2021. Since the Fed rarely raises rates more than a quarter of a percent at a time, the 1.25% or so increase that may occur over the next year is just enough to start cooling the residential real estate market and, as a knock-on, slow the massive number of investors getting into the multifamily space for the first time.
With any luck, rising interest rates will cause already stretched homebuyers to cool their rabid pursuit of homes of their own, giving inventory time to build up again in both the existing-home and new-construction markets. This is great for investors who own multifamily, of course, because many of those buyers will continue to rent the units they're in while they wait for housing prices to come back down to Earth a bit.
It's funny how people react to interest rate hikes. Even the threat of a quarter-percent rise is enough to create a retraction or a frenzy, depending on what the market looks like. With prices as high as they are right now, I expect the buyer pool to shrink, taking some of the pressure off everyone involved in the real estate market.
But, of course, interest rates aren't just scary to homebuyers. Sometimes, they're scary to new or extremely cautious investors as well. Since the multifamily segment is already getting a bit bloated with things like Class A housing, driving cap rates down due to excess inventory, a rising interest rate will further constrict cap rates for new property buyers. That makes it a lot less attractive to investors who are only in it for the short term to put the money that's burning holes in their pockets into real estate.
Established landlords stand to benefit from interest rate hikes from pretty much every direction, as solid tenants who may have once been interested in buying a home choose to rent while they wait for the whole market to cool and other investors back away from the market, looking for someplace to put their money to gain higher returns.
