Good News for Renters, Bad News for Landloards

Median rent in the U.S reached a high of $2,053 in August of 2022. In the past two months median rent has fallen to $1,983. Good news for renters, but bad news for all those real estate investors.

The share of adjustable rate mortgages (ARM) as a fraction of total mortgages originated has increased to 10%. This is concerning given that ARM payments increase when interest rate increases. Since December 2021 5/1 ARM rates have increased from a low of 2.37% and are currently 6.06% as of November 10th 2022. The median price for a house sold in the third quarter of 2022 was $495,000. Assuming 80% loan, the principle and interest payment on 5/1 ARM on a 396,000 loan is $1,821.00. The payment on that loan increases to $2,672 when interest rates increase to 6.06%.

Affordability

The increasing prices of everyday goods, due to inflation, coupled with the increasing mortgage payments will impact personal consumption. For Real Estate investors with ARMs, increasing payments and decreasing rents can lead to decreasing cash flow and profitability.

Want to know more about Adjustable Rate Mortgages, the Urban Institute has this explainer

https://www.urban.org/urban-wire/should-borrowers-be-afraid-adjustable-rate-mortgages