Powell Touts Possibility of Higher Duplex Interest Rates

Whether you’ve been thinking of buying, or selling a duplex in Minneapolis, St Paul and the surrounding suburbs, it may be time to get off the fence.

Why now? On Thursday, Federal Reserve Chair Jerome Powell cautioned persistent supply and commodity shocks are challenging for economies. This could make it difficult for the Federal Reserve to balance between policies supporting employment and tools used to control inflation.

Powell said tariffs may serve to slow growth and increase inflation. However, it is difficult to anticipate the degree of their impact, as the rates on imported goods change.

The tool the Federal Reserve has at its disposal to help reduce inflation is raising the overnight rate they charge to banks who borrow from them. That is essentially all banks. To offset these higher borrowing costs, the banks increase the interest rates they charge on short-term debt, like credit cards and car loans.

This economic volatility causes investors who might otherwise put their money in stocks for companies they see as profitable or growing into something much safer like treasury bills. To continue attracting investor money they can lend out, mortgage backed securities are forced to pay investors a higher rate of return. And it is that rate of return that most impacts mortgage interest rates.

In other words, Powell was warning us not to expect lower mortgage rates any time soon.

An increase of just .5% in mortgage interest on a $400,000 loan means a change in the monthly payment of $135.65. A 1% change increases a payment $273.86. To offset this, rent would need to go up nearly $137 per month on each unit. And if insurance rates continue to rise, it may double the necessary rent increase again.

So if you’re a duplex buyer, it may be best to find a property now. And if you’re a seller? Remember, the pool of prospective buyers is determined by the amount of monthly payment the bank says they can afford. If interest rates increase the amount of that payment, those buyers won’t be able to spend as much on principal, which is the amount most directly tied to how much they can pay for a property.

In other words, higher interest rates mean higher payments, which in turn, may lead to lower prices.

Of course, if things change and tariffs either go away or become less volatile, we may see mortgage rates remain roughly the same until such time the threat of inflation has dissipated.

Only time will tell.