A onetotwo hundred basis points increase in lending rates ( 1 % to 2 %) would shatter the punch bowl into fragments . It is my opinion that an imediate 2 % interest increase would collapse the economy overnight . Main Street and small capitalist entrepreneurs would bear the brunt of the widely spread financial damage .
Image by Gerd Altmann from Pixabay financially . As purchasers and borrowers elect not to purchase , that may compound and create more unsold inventory . Some sellers may get desperate and reduce the price to sell quickly . The lowered price would result in a higher Cap Rate . Higher interest rates will lower all real estate prices on a macro level .
How dramatic will lower real estate prices be over time ? Between 2007 and 2010 we witnessed the downward value contagion spread resulting in substantially lower values and increased Capitalization Rates .
The fourpronged whammy is not a new phenomenon . It has just been forgotten while enjoying the Federal Reserve ’ s ' freeforall 200 proof infused financial punchbowl .'
Interest rates are increasing because the government realizes that inflation will only accelerate if they do not stop or slow it . Increased interest rates will result in newly originated loans having higher payment structures . Higher loan payments indirectly and over time cause Cap Rates to rise and values to go down .
Values may not go down immediately , but the demand to purchase income producing properties will subside because ownership makes less economic sense . To add flames to this fire government , including federal and state , is passing legislation that will destroy investor motivation to own .
Over time the fourpronged whammy will become apparent . 1 ) Rising interest rates , 2 ) increase in interest rates reflecting larger loan payments , 3 ) general loss of investor confidence in the overall economy , 3 ) loss of investor interest in purchasing an income property , 4 ) overburdening & abusive government intervention into property ownership will come home to haunt the entire real estate market across the United States . 5 ) All of the above will cause Cap Rates to go up , and property values go down .
Remember that increased debt service based upon higher interest rates is not considered in the capitalization approach . But , over time , as interest rates go up , borrowers will feel the sting of higher debt service payments . Some property transactions may become less appealing
MEET DAN HARKEY
Dan is President and CEO at California Commercial Advisers , Inc . He consults on subjects of Business Growth & Private Money . Dan often creates articles interrelated to these subjects . He has been active in the real estate and financial services industry since 1972 and possesses a lifetime teaching credential for secondary and adult education . He has taught over 350 educational seminars on subjects related to real estate lending , private money lending & loan underwriting for commercial / industrial properties .
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