Will rising interst rates significantyl increase caps(reduce prices)

In Buying Property - Asked by GARY G. - Apr 24, 2010
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Paul F.
Novi, MI

The sreads on long term mortgage rates - those most closely associated with CAP rates, has spread greatly due to the lack of funds in the market. When lenders enter the market again spreads will probably drop. This should keep CAP rates about the same.

Apr 26, 2010
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Brad L. K.
Columbus, OH

Lenders are slowly starting to enter the market again, and so are investors. Since more lenders have entered the market the spreads have come down, but the 5 and 10 year T-bill rates have also been rising. Long term interest rates will continue to rise so long as the US government continues to pile on more debt and must continue to sell this debt to investors. As investors continue to become more and more concerned with the US debt levels they will continue to diversify their currency holdings away from the US dollar. The US will have to raise the interest rates that they pay to attract investors to the US dollar which will increase long term interest rates. Since the value of commercial real estate is now based more on cash flow than speculation, higher interest rates will reduce values. If you are considering selling in the next few years, you may want to sell now before interest rates increase. If you are considering buying, buy now before interest rates increase.
Brad Kitchen
Alterra Real Estate Advisors

Apr 27, 2010
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Richard E.
Los Angeles, CA

In a normal market and generally speaking the answer to your question is YES. However, this is not a normal market and the only certainty is uncertainty. The general consensus is that the Government is using every trick at its disposal including the purchasing of trillions of dollars of bonds in order to suppress interest rates as best they can to keep this extraordianly volatile market from complete collapse. How long they can artificially keep rates low is anyone's guess but at some point market forces have to kick in unless of course China decides to pull the plug on all the debt we've accrued with them (not likely).
Historically, as interest rates have risen so have CAP rates it stands to reason the higher interest rates are the lower the price and the same is true for CAP rates. That said, CAP rates can also rise or fall independent of interest rates based on market volatility and market velocity.

May 11, 2010
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