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PENSCO Blog

PENSCO Blog

Fresh alternative asset insights and the latest news on real estate and private equity investing.

Rising Rates, Affordability May Pressure the Market

House with a question mark

  |  By Chris Shanahan, CISP®

The U.S. housing market is entering 2019 under a cloud of uncertainty, and concerns are mounting that rising mortgages rates and a decrease in affordability could result in a slowdown in the New Year.

The Federal Reserve is currently expected to raise interest rates, which would mark the fourth increase this year, and it is expected to institute more interest rate increases in 2019.

These rate hikes are pushing mortgage rates higher. After mainly staying below 5% since 2010, the 30-year mortgage rate surpassed that mark this year, and, according to a Reuters poll of 35 property market analysts, mortgage rates are expected to stay above 5% for the next three years. Zillow predicts fixed rate mortgages will reach 5.8% in 2019, a high that has not been seen since the “dark days” of 2008.

“In 2019, rising rates will compound the effect of still-climbing home values, making homeownership even less affordable,” Zillow said.

Meanwhile, a report from Fannie Mae’s Economic & Strategic Research Group says it has become more “pessimistic” about home sales in 2019. “Affordability, especially for first-time homebuyers, remains atop the list of challenges facing the housing market,” it said.

What Worrying 2019 Housing Market Forecasts Mean for Self-Directed IRA Owners

Real estate investing, particularly investing in single-family homes, is a popular strategy among self-directed IRA owners. Many PENSCO clients purchase single-family homes as investment properties, which they rent to tenants. The intent is to grow their retirement savings account through capital appreciation as well as rental income.

Real estate properties held in IRAs cannot be used as a primary residence by the IRA owner. In addition, IRA owners must either have enough cash in their IRA to buy a property outright or else an investor may choose to use a non-recourse loan to finance the purchase. IRAs cannot take out traditional mortgages to buy real estate.

These restrictions mean self-directed IRA investors have a bit of a different lens when assessing the housing market. Many are looking for homes in areas that will provide rents that are high enough to cover all expenses, maintenance costs and property taxes associated with the house. Self-directed IRA investors are also looking for strong rental markets so they can keep their property occupied on a consistent basis.

While housing market forecasts for 2019 may be cautious, Zillow predicts that higher interest rates will limit the number of homes that potential buyers can afford, prompting some would-be home buyers to continue renting.

“As a result, recent (and very slight) drops in rent will reverse and turn positive again,” according to Zillow.

Realtor.com predicts rising mortgage rates and home prices will make it more difficult to buy or sell a home in 2019.

“With mortgage rates expected to hit 5.5 percent by the end of the year, monthly mortgage payments will rise 8 percent putting home ownership more out of reach especially for younger Gen-Z, Millennial, and other first-time home buyers,” Realtor.com states.

This could fuel demand for rental properties or keep current renters in their home for longer.

Source: Realtor.com 2019 Housing Forecast

A Weakening Outlook for Home Price Appreciation

IRA real estate investors seeking not only a steady stream of rental income but also capital appreciation may not be happy about the 2019 outlook.

As shown in the graphic above, Realtor.com expects home price growth will continue to slow, increasing at a rate of only 2.2% in 2019. A Zillow survey of housing experts and economists anticipates a 3.79% increase in home value growth for calendar 2019 – a cool down from strong growth of 8% in March of this year.

“For buyers, it’s only going to get more costly to buy in 2019, especially the most-demanded entry level real estate. To be successful, buyers should think through how they’ll adapt to higher rates and prices,” realtor.com advised.

Real estate has the potential to yield long-term gains, and it can be attractive to investors seeking to own alternative assets in a retirement account. But these cautious 2019 housing market predictions reiterate the importance of ensuring any real estate investment made with IRA dollars aligns with your long-term retirement savings goals and risk tolerance.

If you expect to use your self-directed IRA to buy real estate in 2019, be sure to conduct adequate due diligence. It’s always a good idea to also work with a financial professional who has experience with holding real estate in an IRA before pursuing real estate investment opportunities, especially in the face of rising rates.

To learn more about investing in real estate using an IRA, you can read my blog on Property Investing Basics. You can also download our guide.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity.  Alternative investments are not FDIC insured and are subject to risk, including loss of principal.  PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”).  Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.