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Despite new language in the Federal Open Market Committee statement that suggested a potential slowdown in curbing inflation, Federal Reserve Chairman Jerome Powell maintained a hawkish tone on raising the federal funds rates during Wednesday’s press conference.

And with Fed rates expected to rise even further, industry experts and economists don’t expect mortgage rates to stabilize for at least another year.

“Even with the Federal Reserve raising its short-term fed funds rate by another large amount, longer-term interest rates look to move only slightly,” Lawrence Yun, chief economist at National Association of Realtors, said.

Mortgage rates, which are currently near a 22-year high, declined slightly from last week ahead of the Fed’s sixth rate hike announcement. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 7.06% on Wednesday from last week’s 7.16%, according to the Mortgage Bankers Association. 

The Fed’s short-term rate does not directly impact long-term mortgage rates, but it does steer market activity to create higher rates and reduce demand. 

“While the mortgage market has already priced in the latest Fed move, mortgage rates are still at 20-year highs that hurt homebuyers. Once inflation is contained, mortgage rates will start to drift lower. It may be another year or two before that happens,” Yun said.

The fresh language in the policy statement noted that the Fed is considering the “cumulative” impact of its hikes so far when determining future rate increases. Still, Powell presented a different tone in his press conference, indicating that thoughts of a potential pause would be premature.

“Bond yields fell after the Fed made their statements about raising rates and then shot back up after Jay Powell talked about higher rates for longer,” said Logan Mohtashami, lead analyst at HousingWire. “Tiny movement in bond yields from the start of the day but wild intraday action. Rates can end up slightly higher today if this slightly higher bond yield sticks.”

An occasional slip in mortgage rates is “inexplicable” on an upward trend that began almost a year ago, said Holden Lewis, home and mortgage expert at NerdWallet.

“The Federal Reserve clearly intends to keep raising short-term interest rates, which will raise the floor for mortgage rates,” Lewis said.

“A housing recession is here”

For home shoppers and sellers, mortgage rates have been quick to adjust higher in response to expected Fed moves, said Danielle Hale, chief economist at Realtor.com.

“In the last 12 weeks alone, mortgage rates have soared more than two percentage points, cutting significantly into homebuyer purchasing power and likely causing shoppers to revisit their budgets,” Hale said.

Existing home sales declined for the eight consecutive months in September, dropping to 4.71 million units from 6.18 million in September 2021. As of September, the median home price was $384,800 for existing homes of all types, an 8.4% increase year over year compared to September 2021, when the median home price was $355,100, according to the NAR. 

A housing recession is here, Marty Green, principal at Polunsky Beitel Green, emphasized. 

The swift jump in interest rates have dampened potential homebuyers’ willingness or ability to enter the market, and potential home sellers who are locked in to super low rates are not willing to reduce sales prices materially enough to motivate buyers, according to Green. 

“The question is, when will the Fed pivot and indicate a pause, or at least significantly reduce its pace of increases,” Green said.

Mohtashami also pointed in his recent commentary to a housing recession, citing falling sales, production, jobs and incomes in the housing sector. What the difference is in this “traditional housing recession” from the housing bubble years, is high household balance sheets and no credit stress. 

“They (Fed) know housing is in recession already, but they don’t care because they don’t see a credit bust or a job loss recession yet,” Mohtashami said. 

Goldman Sachs expects that the FOMC is leaning toward slowing the pace of tightening to 50 bps in December.

Roger Ferguson, former vice chairman of the board of governors of the U.S. Federal Reserve System, believes the Fed will raise interest rates by 50 bps next month, along with two 25 bps hikes at the start of 2023. 

Tables have turned for some sellers 

With mortgage rates more than doubling this year, and with rates expected to climb further in the coming months, sellers are becoming more realistic. Buyers, on the other hand, are more in tune with higher mortgage rates and have more leverage in the market, loan originators and real estate echoed.

“It is no longer a seller’s market,” said Nick Smith, founder at Rice Park Capital Management. “Days on market for homes that are sold, number of homes receiving multiple offers, mortgage applications, and actual home sales – they have all moved in a negative direction.”

“The good news is, sellers who are more realistic will try to beat the market,” Mitch Burns, license partner at real estate advisor at Engel & Völkers, said. “After 30 days, if the seller had not had an offer after maybe 10 showings, we’ll make an adjustment to drop the price.”

This translates to borrowers’ increased negotiating power, which they did not have when rates were in the low 3% levels at the start of the year.

If a home has been on the market for over a month, borrowers get quite a bit more flexibility, said Todd Davidson, LO at UMortgage.

“Sellers are willing to chip in for a 2-1 buydown or lower price or accept offers contingent on the sale,” Davidson said.

In a higher rate environment, buyers are increasingly opting for 2-1 or 1-0 rate buydowns to reduce their monthly mortgage payment. With the buydown, the borrower pays a lower rate during the first year or two, and after that, the full rate is paid for the remainder of the loan term.

While low housing inventory and sluggish new home construction still remain a challenge in the housing market, buyers are better positioned to negotiate contracts with contingencies, Davidson added.

“Six months ago, if someone would’ve given a contingent offer, they would’ve gotten laughed at,” Davidson said. “But now if a home is sitting on the market for 10 days, people are accustomed to homes selling so quickly (that) realtors and sellers would get a little nervous.”

Liberty McCoy was out Saturday urging voters to pass a Nov. 8 ballot measure to limit rent increases in Pasadena, California, because she’s afraid she’ll be priced out of the city where she grew up and where her aging parents live.

The librarian and her husband, a freelance consultant, received notice of a $100 monthly rent increase last year and another for $150 this year, bringing the rent on their home outside Los Angeles to $2,350 a month. They can absorb the increases for now — but not forever.

“A lot of times people are like, ‘Well, just try and pick up and move to someplace cheaper,’” the 44-year-old said. “But I have a job locally, my family, my friends. It would be a big challenge to uproot my entire life chasing cheaper rent.”

With rental prices skyrocketing and affordable housing in short supply, inflation-weary tenants in cities and counties across the country are turning to the ballot box for relief. Supporters say rent control policies on the Nov. 8 ballot are the best short-term option to dampen rising rents and ensure vulnerable residents remain housed.

Opponents, led by the real estate industry, say rent control will lead to higher prices for tenants in housing not covered by rent caps, harm mom-and-pop landlords relying on rental income for retirement, and discourage the construction of badly needed affordable housing. They have spent heavily to stop ballot initiatives, even going to court to halt them.

In Orange County, Florida, home to Disney World and other theme parks, voters will consider a ballot initiative to limit rent increases to the annual increase in the Consumer Price Index. But a court ruling last week means that even if it passes, it could be nullified.

Proponents in Orlando and other Orange County cities point to a population that has increased 25% since 2010 and rents that jumped 25% between 2020 and 2021 — and experienced another double-digit increase this year. The housing shortage was magnified by Hurricane Ian, with an estimated 1,140 rental properties suffering $44.5 million in damage.

“I’ve had a lot of constituents reach out to me, and they are fearful of becoming homeless. They don’t know what to do,” said Orange County Commissioner Emily Bonilla, who authored the ballot initiative ordinance after hearing from tenants facing rent increases upward of 100%.

Last year, voters in St. Paul, Minnesota, passed a ballot measure capping rent increases at 3% a year while residents across the river in Minneapolis backed a measure allowing the City Council to enact a rent control ordinance.

This summer, Kingston, New York, became the first upstate city to enact rent control. The measure means around 1,200 units — buildings built before 1974 with six or more units — must limit rents to a percentage set by a rent guidelines board.

Boston’s Mayor Michelle Wu was elected last year and made bringing back rent control to the city part of her campaign. The biggest hurdle to that proposal is that Massachusetts voters narrowly approved a 1994 ballot question banning rent control statewide.

“Rent stabilization can provide protections for everyone, but do so in a way that really targets benefits to low-income renters, renters of color, renters who are most desperately impacted by housing instability,” said Tram Hoang, a housing policy expert who was involved in the St. Paul campaign.

The fight over rent control has been most intense out West, where in 2019, lawmakers in California and Oregon approved statewide caps on annual rent increases. California’s annual cap cannot exceed 10% and Oregon’s is set at 7%, plus the consumer price index.

Both laws exempt new construction for 15 years, a compromise to encourage developers to keep building, and apply only to certain units.

But that hasn’t quelled tenant activism in California, where nearly half the state’s 40 million residents are renters. Advocates say the statewide law — which expires in 2030 — does not go far enough.

Voters in the San Francisco suburb of Richmond and Southern California beachside city of Santa Monica will consider measures to further tighten existing rent caps to a maximum of 3%.

In the city of Pasadena — home to the annual Rose Parade and Rose Bowl college football game — voters will consider a measure to create a rent oversight board and limit rent increases to 75% of the Consumer Price Index, which supporters say translates to 2% to 3% a year.

Rent stabilization advocates failed to collect enough signatures to qualify for the 2018 ballot, and they thought it would be hard this time around because the state had enacted protections. But campaign field director Bee Rooney said tenants financially wrecked by the pandemic were eager to back the initiative.

“Any amount when you’re not expecting it is a lot,” Rooney said. “Some people, their rent doubled or went up by 50%.”

Pasadena retiree Paulette Brown received the state-allowed increase of 10% in July, bringing the rent on her two-bedroom apartment to $1,175 a month. Budgeting will be tighter.

“I really can’t afford any mishaps, because I’m not able to save anything,” said the 64-year-old Brown, who lives with her daughter and grandson.

Opponents of the measure, which include the national and state Realtors associations, say curtailing rent increases to a fraction of inflation will result in property owners taking rentals off the market and doing minimal maintenance.

“What’s being proposed here is draconian and for the most part landlords who have good tenants aren’t trying to get rid of them,” said Paul Little, president and CEO of the Pasadena Chamber of Commerce.

Michael Wilkerson, senior economist at Portland, Oregon-based ECONorthwest, describes both the California and Oregon state laws as “anti-price gouging” measures aimed at protecting the most vulnerable tenants from exorbitant increases, while encouraging new housing development.

Rent-control policies have been around for decades, put in place after World War II in New York City and elsewhere to combat rising housing prices and again in the 1970s in the Northeast and California. However, the real estate industry has since succeeded in passing state laws that made it difficult, if not impossible, for many local municipalities to cap rents.

The data on rent control has been mixed. The policy, according to an Urban Institute report, was found to have reduced rent on covered units in Cambridge, Massachusetts, San Francisco and New York but resulted in no significant decreases in New Jersey cities.

Some studies, however, have shown that rent control can reduce the number of housing units available and discourage landlords from maintaining them.

Opponents also say rent regulation can scare off developers. St. Paul’s original ordinance, for example, applied to almost all housing and mandated landlords stick to the 3% cap even with new tenants.

Within weeks, council members were hearing from developers who blamed the new law for scuttling housing projects because they lost funding. Building permits issued for new housing through August plummeted 31% from the four-year average.

In response, the City Council approved amendments in September to exempt low-income housing as well as new construction for 20 years. It also allows landlords to raise rents 8% plus the Consumer Price Index after a tenant moves out.

Orange County’s ballot measure is up in the air after an appeals court rejected the proposal last week and suggested it won’t be certified even if voters approve it.

The court, which acknowledged the state law “set an extremely high bar” for local governments to pass rent control ordinances, said a consultant hired by the county didn’t identify a housing emergency — a requirement under a 1977 state law preempting local rent control.

The county plans to file a motion for a rehearing and with ballots already out, the Orange County supervisor of elections said it has no plans to issue new ones. Supporters of the measure said they will keep campaigning.

For tenants like Jessy Correa, the setback means she faces a 20% rent increase on her three-bedroom apartment in Orlando come January. The 44-year-old mother of six is already struggling to afford the current rent of $2,300.

A recruiter at a faith-based nonprofit, she was hoping the ballot initiative would “bring stability, give us a moment to breathe.” Instead, she is now forced to make difficult choices, like getting another job.

“Where is the American dream of being able to live, to enjoy?” she asked tearfully after learning of the court ruling. “What are we doing? It’s frustrating.”

A recession is a normal (some might argue), inevitable part of the economic cycle. Many factors influence the dynamics of one, such as decreased consumer spending, a rise in unemployment rates, lower wages, and declining GDP.  

With the economic instability and uncertainty that comes with a recession, one may question whether or not investing during such a time is a good idea. It is fair to assume that holding on to every dollar earned would be the wiser choice. However, with a well-measured and sensible approach, investing during an economic downturn can provide an excellent opportunity for long-term gains.

If you’re interested in keeping your portfolio alive amid a recession, here are a few things to consider before investing and some of the best assets to protect your money.

What to Consider Before Investing During a Recession

When facing a declining economy, investors should act cautiously but also remain vigilant by monitoring the marketplace for potential opportunities. There are a few key questions that you should ask yourself before deciding to invest. 

What is your current financial position? 

Don’t compromise your current financial security for long-term gain. In other words, only invest what you can comfortably afford.

Are you able to take a long-term approach to investing? 

Investing during a recession does come with more challenges and risks. Be prepared to let your investments sit for at least 5-10 years before selling them. 

What is your risk tolerance? 

During a recession, frequent fluctuations in a portfolio are common. When the market takes a nose dive, will you be able to keep your cool and wait it out? 

The Best Investment Options During a Recession

Deciding what to invest in during a recession depends on your goals. What do you wish to accomplish with your investments? Whether you want to minimize the risk of loss, create a fixed income, capitalize on low-cost stock options, or maximize long-term returns—a clear understanding of your goals will help you choose an optimal investment option.

If real estate is your preferred investment vehicle, you’ll need to know how to play safe during a recession. The real estate market has been considered an attractive investment during past recessions, but it can be tricky to navigate. The pandemic greatly impacted the real estate market, causing supply issues, rising home values, and super-high buyer demand. Now, interest rate hikes have started to lower the price of homes but increase the cost of borrowing. This turn of events has had a negative impact on affordability, which has made many buyers pause on purchasing at this time. With the seller’s market ending, it is an ideal time for real estate investors to pick up properties as prices and competition come down. Here are a few of the best options to invest in during a recession.

Commercial real estate

While some industries are highly susceptible to economic cycles, other industries fare well regardless of the economy’s performance. Investing in commercial real estate using strategies such as triple net leases (NNN) is an excellent way to decrease the chance of taking a loss. Although no industry is entirely recession-proof, these commercial properties tend to maintain success even during economic downturns. 

Grocery Stores and Discount Retailers – People will always need to buy staple household items such as toothpaste, toilet paper & soap, even during a recession. Grocery stores and supermarkets such as Walmart, Costco, and Kroger are dependable investment options, especially when using a NNN lease. 

Healthcare – There will always be a need for health services. People with chronic conditions will still need their medication, and people will still get sick. Properties that are a good bet in a recession are medical offices (doctor’s offices, dentists, etc.) and pharmacies such as CVS Health and Walgreens.  

Death and Funeral Services – Death is an unavoidable part of life. As the popular saying goes, only two things are certain in life: death and taxes. Funeral homes, companies that provide caskets, and funeral-related services are relatively safe recession-proof investment properties.

Manufacturing – Industrial properties such as alcohol manufacturing, wholesale distribution, construction, etc., are another recession-proof investment. Companies such as Anheuser Busch InBev SA, Heineken, and SouthernCarlson are all examples of single-tenant flex industrial properties. 

Residential real estate

In general, residential properties will begin to fall, and as sellers become more worried about not being able to sell their properties, the more leverage you have to negotiate. Single-family, multifamily, and other pieces of property will all be opportunities for you to take advantage of during a recession. However, it’s still best to keep these assets in the long term, as it’s likely you’ll need to ride out the recession. Therefore, flipping might not be your best bet.

Stocks/bonds

In most recessions, you can buy stocks at a lower price. Generally, the best way to approach stocks is with a buy-and-hold strategy and then dollar-cost average over time. Recessions offer the opportunity to lower your dollar-cost average and acquire more shares for less.

Bonds, on the other hand, are considered the safest investments in the world because the U.S. Treasury guarantees them. You need to be careful with bonds since the best ones have maturity dates that tend to be long-term, such as 10-30 years, but will offer predictable returns. You also need to be aware of the inflationary pressures that can affect the strength of your bond yields. During recessions, bond yields rise, so be sure to take advantage of them.

Investment Strategies to Avoid During a Recession

While picking the right opportunities to invest during a recession is important, avoiding certain behaviors can be just as important.  

Timing dips in the market 

Trying to time the lowest dip in the market is like trying to predict tomorrow’s lottery numbers. It’s important to keep an eye on the market, but don’t wait around hoping prices will substantially drop before you make a move, or you may miss out on prime real estate.

Don’t try to do a quick, cheap flip

Flipping houses as an investment strategy is risky, especially if you don’t have the cash flow to flip the house properly. Cutting corners won’t get you as much ROI as you think, especially during a recession. Investing long-term is a much more reliable way to earn a greater return. 

Ditching assets too soon 

The market typically becomes volatile during a recession. Unloading your investments when the market dips could ultimately hurt your long-term growth by selling at a loss instead of waiting for the market to recover. 

Not focusing on business trends 

It is common to see a few business closures during a recession, especially with smaller companies that were struggling beforehand. However, even prominent brand names and anchor corporations can face bankruptcy and closures. Make sure to keep an eye on business trends when investing in property. If you see a company struggling, it would be wise to hold off until they are in a more stable place. 

Failing to diversify

We’ve all heard the term, “don’t put all your eggs in one basket,” and this is especially true in the case of a recession. Diversifying your portfolio can help increase your ROI or at least mitigate losses in your portfolio. If you’ve previously stuck with single-family homes, branch out to multifamily and commercial properties. If you take a loss in one area, you still have the others to help keep your cash flow afloat. 

Don’t Let a Recession Scare You From Investing

Recessions can be nerve-racking because we’ve all heard the horror stories. However, understanding your options and making wise decisions during a recession can help you avoid major losses and potentially lead to significant gains.

Prepare for a market shift

Modify your investing tactics—not only to survive an economic downturn, but to also thrive! Take any recession in stride and never be intimidated by a market shift again with Recession-Proof Real Estate Investing.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

There is no doubt that the real estate market has been a wild ride since the pandemic changed the normal course of our lives over two years ago. Lending did not escape the effects of Covid-19, and many active investors have learned more about the loan process than they ever did before the pandemic.  

In the spring of 2020, some lenders left active investors in a bind, closing their doors or halting lending while they evaluated the new risks in the marketplace. Over two years later, the market is changing again, and investors need to know how to pivot to keep their pipeline flowing. While everyone is watching rates increase, they are taking their eyes off the real question right now: Can they close this loan?

Realizing a preapproval and rate and term sheet are not set in stone will go a long way in the current lending environment. Lenders are changing underwriting criteria, not making as many or any exceptions to lending guidelines, and lowering loan-to-value midstream in the escrow process. Most investors never thought about the source of their capital before March 2020. The most concerning part of the lending process was getting through underwriting and receiving the message that you were approved and cleared to close. Whatever happened behind the scenes inside the lending machine wasn’t a concern to an active investor. As long as money made it to the closing table, they were happy. This strategy worked until the capital never made it to the closing table. 

When lenders suddenly turned off the spigot to cheap capital, investors scrambled to save deals any way they could. This pushed private lenders with their own capital to lend to the forefront in the hunt for leverage. Active investors scrambled to find funding or negotiate contract extensions to restart the lending process.

Private lenders who lend their own capital have more control. Large nationwide or even regional lenders have significant strings attached to the capital they lend out, and those strings are pulled by forces outside the lender’s control. 

For example, large institutional lenders are often funded by lines of credit from banks or even selling their loans on the secondary market. In both of those cases, there is another entity establishing what they can lend out, where they can lend it, and the pricing of those loans. These lenders require the line of credit to stay open or the capital markets to continue purchasing loans so they have enough liquidity to keep new loans coming into the pipeline. 

What does that mean for you as a borrower? It means that the rates and terms you are quoted may suddenly change, or funding, in general, may be halted at a moment’s notice. So how can you protect your real estate investing business in this period of turbulence? 

Start asking questions about how the lender acquires their capital and diversify lending sources based on where they get their capital.

Need a lender for your next deal? Find one here!

The Four Types of Lenders

For the sake of simplicity, you can think of capital in one of four buckets for alternative lending: national lenders, regional lenders, local lenders, and private loans from a lender who lends their own capital, including seller financing. While there are many flavors and options within each bucket, knowing the general purpose of each can help you decide what type of financing to use for which project. 

Alternative lending automatically means it is not going to be the conforming conventional loans you may have used to purchase your own home. Since they are non-conforming loans, the variables offered are numerous and vary greatly. Having a conversation with your lender about the types of projects they fund and general guidelines for their loan products can go a long way to choosing the right lender for the right project. 

National Lenders

National lenders are pretty easy to locate. Their brand and names are spoken widely across online platforms, forums, and even REI meetings. Their business model has the borrower and decision maker for the loan the furthest removed from each other. To these lenders, every application and, ultimately, file on their desk is a series of numbers and check marks. A business model like this shows up to the active investor (borrower) with high single-digit interest rates and lower fees, but those come at the cost of higher documentation requirements, full third-party appraisals, and a longer closing time. This group of lenders is often very sensitive to changes in the capital markets or economic outlooks. If you need a deal to close super quickly with minimal documentation, this may not be the best tool to use. On the other hand, if you have time for the closing such as a refinance into permanent debt, this may be a great option to pursue.

Regional Lenders

Regional lenders may not have the brand recognition of “the big guys,” but within their markets, they can be relatively well known. Their mid-range interest rates and somewhat higher fees often come with lower requirements for documentation and longer financing timeframes than national lenders. Depending on the lender, they may require a full appraisal or may opt to do an online valuation through a third party. These regional lenders can be a great option for borrowers that have some unique borrowing challenges, such as new employment or acquiring financing as a new business entity. 

Local Lenders

Local lenders tend to be smaller asset-backed lenders or smaller bank/credit unions in the market. They tend to lend in just a certain area of a state or the entire state if it’s small enough (such as Delaware or Rhode Island). These local lenders usually have higher rates, especially if they are asset-backed, but also usually have low or no documentation requirements. This translates through to a borrower with higher rates and usually higher fees. These asset-based lenders can often close quicker and use some sort of in-house valuation methods for the real estate securing the loan. Credit unions may also use the same valuation tools but often want a higher level of documentation to understand the lending opportunity. For investors operating in one particular market, this classification of lender tends to be the most helpful since they are local. This class of lenders understands the market they are lending in and has experience with other lending opportunities in the same area.

Individuals

Lastly, we will look at loans that come from individuals, or what we term “private lenders .”These loans come from capital that an individual or their business entity has. These individuals are often seeking to have passive income or put their retirement funds to work in real estate versus the stock market. Depending on the amount of capital they have available to them, they may not always have the liquidity to fund a loan when the capital is needed. Many of these lenders work with established networks of borrowers, sometimes rolling capital from one deal to the next with the same borrower. These lenders may have very low documentation requirements, flexibility on the type of properties they are willing to lend on, and vary in terms of interest rates, fees, and length of the loan. They also can generally close very quickly, sometimes within a few days if needed. While they won’t be the cheapest or longest-term loan out there, the flexibility this type of lender offers more than makes up for it. 

The Type of Lender Determines the Variables

As you can see, there is somewhat of a correlation between the documentation and underwriting guidelines and the rate being charged. When you, as a borrower, can show the standards a lender believes are lower risk, you can then be rewarded with a lower rate. In addition, other value-add components can also increase annualized interest rates and fees being charged. If a lender can get a deal closed in three days with minimal documentation, that can be a more expensive loan because the borrower needs to move quickly or is unable or unwilling to go through a more thorough vetting process for the loan. 

Conclusion

Understanding what your needs are for financing each property really allows you to find not just a lender but the right lender for the job. The lender’s ability to close the loan is more important than rates and terms right now. Ask questions about the lender’s access to capital and if that access is likely to change in the next several weeks. Depending on the size of the lender you are speaking with, they may not be able to answer that question, but thinking about this as a borrower can never hurt to consider. Keeping another lender in your back pocket that may be able to close quickly, even if it is a higher rate, may be the difference between closing or not.

Find a Lender in Minutes

A great deal doesn’t just sit around. Quickly find a lender who specializes in investor-friendly loans that are right for you and your investment strategy.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

M. Ryan Gorman, Coldwell Banker CEO, joins ‘The Exchange’ to discuss the housing market as sales slow amidst rising mortgage rates.

Buck Horne, director of equity research, homebuilding, and residential REITS at Raymond James, joins ‘Power Lunch’ to discuss opportunity in the home building space, cost-to-own and cost-to-buy spread differentials and dramatic drops in lumber prices.

The Sunshine State is hot, both in temperature and in its housing market. Siesta Key Beach on Florida’s west coast is consistently ranked one of the best beaches in the world. The area has an obvious draw that brings new residents in droves—it’s been one of the fastest growing parts of the country over the last decade—along with travelers willing to pay an average of $248/night in popular destinations like Sarasota. But Hurricane Ian is estimated to have caused $67 billion in privately insured losses and an additional $10 billion in losses from the National Flood Insurance Program (NFIP), according to risk modeling company RMS. 

What will happen to the area’s real estate, rental, and insurance costs after this catastrophic event? That remains to be seen, but Florida’s coastal homes may become even more out of reach for everyday homebuyers, shifting the market into the hands of wealthy investors who can still make a killing on vacation rentals. 

What Happens to Real Estate Prices After Hurricanes?

After each of the most expensive hurricanes over the last 32 years, the areas impacted saw greater home value appreciation in the year following the event than the year before. For example, Miami’s appreciation before Hurricane Andrew was 3.5%, but it grew to 8.7% in the year following. The trend was the same even when the appreciation was taken as a percentage of overall appreciation for the nation, which helped to remove other factors affecting home values. 

A separate study looking at zip code-level data found a temporary dip in home values in the immediate areas directly hit by a hurricane but a strong recovery in the long run. Eventually, growth in areas hit by a hurricane outpaced growth in similar unaffected areas. That’s consistent with the Federal Housing Finance Agency’s data, which found that the hardest-hit area of Florida after Hurricane Andrew experienced a decline in transactions and stable appreciation immediately following the hurricane, with accelerated growth later on. 

A National Association of Realtors case study looked at hurricanes that made landfall in Florida in 2004 and 2005 and found that even five months after the 2005 hurricanes hit, affected regions were seeing a reduction in home sales, which the authors attributed to rising insurance costs. But the area eventually rebounded as well. 

Supply and demand explain the phenomenon. When homes are destroyed, people seek new places to live. The shortage of homes and increased building costs raise the prices of available homes in the surrounding areas. What’s surprising is that people are increasingly moving into hurricane-prone areas. It’s not just the locals relocating.

Will Florida’s real estate market accelerate as historical data suggests? Or will this be a different crisis? To answer this, it’s important to understand what was happening with homebuilding and insurance rates before the storm struck. 

Development and Insurance Before Ian

When the demand for housing in a coastal state is high, real estate developers will build. Even if it means building on top of a natural wetland marsh that would leave inland areas even more vulnerable to a storm surge. The dredge-and-fill technique, which involves piling up land taken from underwater, was used to increase the availability of waterfront housing in Florida through much of the 20th century, despite the environmental fallout. 

Then, in 2011, Florida’s former governor, Rick Scott, eliminated the state agency responsible for evaluating the risk of development and limiting new construction in vulnerable areas. Rampant development went unchecked, potentially causing more destruction when Ian made landfall and angering reinsurers. 

After Hurricane Andrew devastated Miami in 1992, most major national property insurance companies stopped doing business in Florida or began writing fewer policies. All that was left were smaller insurance providers that heavily relied on reinsurance companies, along with Citizens, a state-mandated insurer that is designed to provide last resort coverage to homeowners who lack options for private insurance. It’s a nonprofit funded mainly by homeowner premiums and special assessments. 

Before Ian, reinsurers were already raising their prices for coverage, and Citizens could only get half of what the company needed in reinsurance. Overall, Florida’s property insurers have been losing money for the past five years. Insurance costs in the state were already becoming unaffordable before Ian struck. 

What Will Happen to Florida’s Real Estate Market as a Result?

For many real estate agents selling homes near Ian’s path, demand hasn’t slowed. Some housing experts predict a temporary downturn followed by a return to the pre-hurricane, overheated market. But others say the rising cost of insurance premiums and building materials coupled with high-interest rates will eventually cause home values to decline in the area, putting an end to southwest Florida’s real estate boom. Analysts say real estate recovery from Ian may look different from past disasters because the effect of weather events is typically transient, but Florida homeowners are looking at ongoing high costs of ownership due to unaffordable insurance premiums.

More insurers in Florida may face bankruptcy. Those that stick around will raise premiums significantly. People were already paying $20,000 per year or more for modest homes, and Ian will only make costs more dramatic, says a Miami agent. Some people may not be able to get property insurance at all—and without insurance, financial institutions will not issue a mortgage. Most prospective homebuyers rely on financing, so this would greatly reduce the number of buyers, causing the value of homes in the area to fall. 

Investors may see this as an opportunity. After all, Florida’s coast won’t cease to be a beautiful place to live and vacation. Historically, homebuyers haven’t seemed deterred by disasters—the dream of owning oceanfront property remains for many. If the insurance market collapses, some experts say hurricane-prone areas of Florida could become neighborhoods for homeowners wealthy enough to buy and rebuild with cash, along with rental buildings owned by companies with plenty of reserves. The home affordability crisis will mean those building owners can charge high rents. 

But natural disasters are getting more costly and more destructive, leading some experts to wonder if we should be moving away from these vulnerable places—and whether the availability of flood insurance through the NFIP is hurting more than it’s helping. 

The Problem With Subsidized Insurance and Climate Change

Most flood insurance is provided to homeowners through NFIP policies, which are underwritten by FEMA. The program is funded by insurance premiums and by money from Congress. But after each natural disaster, the NFIP borrows from the Treasury. And the program’s borrowing authority keeps increasing as storms get more severe. 

The premiums homeowners pay for flood insurance from the NFIP reflect less than half the level of risk. The median value of properties in the program is about double the value of a typical home, so the benefits of the subsidies are going to more affluent homeowners. Some say the program incentivizes development in flood-prone areas: People choose to live in places they know are at risk of flooding because they know they can get flood insurance. When their homes are eventually destroyed, the burden falls on taxpayers. If coastal homeowners were forced to deal with the cost of their risky decisions, we might see a different migration trend. At the very least, builders might be encouraged to use more weather-resistant construction materials. 

FEMA’s new Risk Rating 2.0 is designed to make pricing for premiums more transparent and equitable, reflecting the actual risk of a specific home to flooding. But the fact remains that affordable flood insurance premiums won’t cover the damage from new hurricanes. Stronger building codes could lessen the cost next time around. But some experts say we should rethink rebuilding in dangerous areas altogether and that policy decisions going forward should discourage people from living in flood zones, not the reverse. 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.