The Impact of Rising Interest Rates on Modesto’s Real Estate Market

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modesto-rising-interest-ratesThe Impact of Rising Interest Rates on Modesto’s Real Estate Market

The past few years have seen interesting developments in the Modesto real estate market. . All those who have been active participants in this market must have noticed along the fall in the interest rates. Just as the market was expected to rebound and the interest rates to increase, both fell even further. In fact, never before has the market seen mortgage rates as low as 3%.

Real estate investors couldn’t have asked for more after the incredible cash returns they were able to achieve with favorable financing. Wouldn’t it be a dream to just sit back and contemplate low interest rates and low prices for years and years to come? It certainly would, but unfortunately it is also farfetched from reality. The past year has seen a major increase in the real estate values toward the pre-recession values, and it wouldn’t be incorrect to assume that an increase in the interest rates in the years to come is on the cards.

So what’s the impact of the increase?

There are many serious investors in Modesto who are watching the increasing values in the market with a growing sense of urgency. The reason behind their action is that they want to invest while the deals are still favorable. However, it wouldn’t do any harm to remember that while prices are important to watch, it is equally, if not more important, to keep a check on the rising interest rates. Interest rates are comparatively difficult to predict, especially as they tend to move in either direction at lightning speed without any prior notice.

The slightest change in market demand or policy can affect the mortgage rates or the investment returns in the blink of an eye. Just look at it from a cash flow perspective. An increase of 1% in interest rate is equal to an increase in the property value; and if you were able to acquire a loan at 4%, the principle and interest payment will be the same as the loan interest.

Simply stated, a 1% increase in interest rates portrays a difference in value in dollars along with a decrease of approximately 20% in monthly returns.  There is no other motivation for investors to finance properties before this incredibly bumpy ride settles down. While the opportunity still prevails, it would be smart to reap the harvests of financing in the range of sub 5% and make the most of the low interest rate.

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