Despite historic highs in American mortgage rates, real estate investing remains strong.
According to a new study examining all industries within the S&P 500 Index, real estate investment still sees excellent returns, with an overall ranking of sixth best.
Recent data released by the Federal Home Loan Mortgage Corporation, or Freddie Mac, reveals that an increase from 6.96% to 7.09% for 30-year fixed-rate mortgages has officially made it the highest rate for 21 years.
So, what does this mean for the real estate market? How well are property-related investments fairing, given these new historical records? According to InvestinGoal.com, the sector is fairing well.
Mortgage Rates Rise to 21-Year High
Freddie Mac’s recent data release showcases an average 30-year-fixed-rate mortgage of 7.09% for the week ending on August 17. This is the highest level seen in 21 years.
Climbing from 6.96% the week prior and 5.13% a year ago, Freddie Mac’s latest figures indicate that the spike seen during the Federal Reserve’s rate hiking campaign has made homebuying (and subsequent mortgage payments) more challenging than ever.
Individuals with a locked-in lower rate are reluctant to sell and face the market’s current rates when buying. The low inventory generated by this reluctance pairs with the higher costs to culminate in a 20% decrease in home sales compared to last year.
The last time rates were this high was in April of 2002 when buyers faced a rate of 7.13% on their 30-year-fixed-rate mortgages.
Real Estate Still Among Top Sectors to Invest In
InvestinGoal.com researchers assessed each sector’s consistency, reliability, and average returns between 2010 and 2022 represented in the companies within the S&P 500 Index. They ranked them from the most lucrative investment opportunities to the least.
The real estate sector landed neatly in the middle of the pack, ranking sixth out of 11 with an average return of 12.2%, indicating that the rising interest rates aren’t affecting the market as much as one may think.
In first place is the IT sector, with an average return of 18.1%. The fluctuation is notable, however, with the minimum return at -28.8% (seen in 2013) and the maximum return at 50.3% (which happened in 2019).
This sector comprises the S&P stocks related to the research, development, or distribution of technologically based goods and services. The year’s best-performing stocks within the IT category are Advanced Micro Devices, Lam Research, and KLA, with a growth of 153%, 117%, and 100%, respectively.
Following IT is the consumer discretionary sector, ranking second with an average return rate of 15.3%. The maximum return for this sector’s represented organizations is 43.1%, while the minimum swings low to -37% (which happened just recently in 2022).
The consumer discretionary sector comprises businesses that sell non-essential products and services. Consumers may avoid these expenses without any significant consequences to their well-being.
Third is the healthcare sector, boasting an average return of 13.4%. Healthcare includes all businesses that provide medical services, produce medical devices or medications, offer medical insurance, or aid overall healthcare delivery to individuals. You may recognize a few of these S&P organizations in the healthcare sector: Thermo Fisher Scientific Inc., UnitedHealth Group Incorporated, and Johnson & Johnson. With a conservative minimum return of -2.7%, healthcare is the sector that dips into the negative the least on the list.
Industrials claim fourth place, with the sector pulling an average return rate of 13.2% during the analyzed period. Companies whose primary focus is producing capital goods for use in manufacturing, resource extraction, and construction activities make up the industrial sector. A minimum return of -13.3% has been seen in this sector, along with a maximum return of 40.7%.
Financials completes the top five ranking sectors on the list, with an average return of 12.3%. Here, you’ll see many industries, including banks, investment companies, insurance companies, and real estate firms. At its maximum, financials have seen 35.6% return rates, while its minimum drops to -17.1%.
Communication Sector Ranks Lower and Has Limitations
The least lucrative investment sector on the S&P 500 index is communication services, which ranks 11th and last overall. Based on its returns between 2010 and 2022, communications’ average return has been a meager 8.4%. The maximum return for the sector is 32.7%, and the minimum is -39.9%.
As evidenced by its prominent placement in the rankings, the real estate sector is proving to be a reasonably lucrative investment despite today’s high-interest rates. That is, at least within the S&P Index of companies.
Taking a sample of a historically sustainable index like the S&P 500 showcases a collection of sectors that are doing well but may not be reflective of the market overall.
To learn more about popular investments or begin your investment journey, contact your financial planner to create a strategy that suits your needs and risk tolerance.
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Photo Credit Andrew Popov.