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Ask the Financial Expert: How Will Rising Interest Rates and a Strong Dollar Affect Real Estate?

Ron Joelson •  March 25, 2015 | Your Finances, Ask the Expert

Do you have questions about finances or the markets? We’re starting a new series that will allow you to submit questions to experts at Northwestern Mutual. Each month, our financial experts will answer two questions.

This month, our experts are talking about real estate, interest rates, the strong dollar and what it means to you financially.

Our Experts: Ron Joelson and John MrozQuestion 1: The Fed recently removed the word “patience” from its most recent statement signaling the possibility that rising rates are on the horizon. What impact would rising rates have on the real estate and financial markets?

Ron: The interesting thing for me was that when Janet Yellen did remove the word “patience,” she also said, “We’re not going to be impatient.” I think the market keyed in on that along with the fact that the Fed lowered its expectations on just about every major measure. The market then reacted to that with the view that, despite removing the word, there probably is going to be a fair amount of patience. I concur with this. I just don’t think the Fed is going to get ahead of a slow market. I don’t expect the Fed to do much this summer—and maybe won’t until the end of the year.

So when you look at the Fed story and rates, rates are so low at this point that I don’t think rates any lower will have a positive real estate impact. I also think rates a little bit higher probably shouldn’t have much of an impact either.
John: When it comes to the real estate market itself, an increase in rates will decrease people’s purchasing power. The difference between a 4 percent 30-year fixed mortgage and the same mortgage at 5 percent can be significant when you start talking about purchasing power. At 4 percent, someone who is able to set aside $1,500 a month for principle and interest can buy a home valued at about $315,000. At 5 percent, that person can spend only $280,000.

So the fact that the Fed came out with this statement (that indicated rates probably won’t be rising too quickly or too soon) is a good thing; investors having less purchasing power would mean home sellers would probably have to keep prices muted, if not dropping. So overall I think it is a good thing for the retail investor buying homes.

Question 2: What do low rates and the strong dollar mean for the real estate market?

Ron: It has an impact when it comes to foreign investment in real estate in the U.S. Foreign investors want to diversify out of their countries. They’re concerned about their currencies and want to park capital in safety. So investors are coming here for real estate. For the institutional investor, it’s getting harder and harder to find the properties of value that are decent for us.

John: For real estate investors in the U.S., if you’re an American buying into a real estate investment trust (REIT) that buys American properties, whether the dollar is stronger or weaker won’t have a big impact. But for investors here who invest in global REITs or global real estate mutual funds, the stronger dollar will make it harder for them to see strong returns when those returns from properties owned in foreign countries are translated back to the U.S. dollar.

For more on how the strong dollar could affect real estate and the financial markets—in addition to more insight about the recent Fed statement—listen to the podcast Ask the Financial Expert, moderated by Mark McLennon, Northwestern Mutual’s vice president of investment product development.

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