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June 13, 2007

The Impact of Rising Rates?

intrategraph0607.jpgThe business headlines this morning are trumpeting the fact that 10-year Treasury rates hit a five-year high yesterday and where the 10-Year goes, mortgage rates tend to follow. So it's no surprise that the average rate on a 30-year fixed mortgage ticked up and 1/8 of a point on Monday and another 1/8 of a point yesterday to land at 7.125 percent, the highest it's been since July 2006. (These moves come after a 6.6% rise in mortgage applications last week.) The big question on everyone's mind is at what point do the higher rates start to negatively impact the New York City real estate market. This could just be another chance for brokers to start making the crazy argument that people should rush to buy now before rates go up. That one's always blown our mind.
10-Year Treasury Yields Hit 5-Year High [NY Times]
US Mortgage Rates at Peak Since July 2006 [Reuters]
Mortgage Applications Index Rose 6.6% Last Week [Bloomberg]




Posted by Brownstoner at 8:58 AM | Comments (43)
Categories: Market

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7.5% or above on 30 yr and you will see a decline and price and volume. Even wall street bonus can't support RE at that level...

Posted by: Anonymous at June 13, 2007 9:27 AM

7.125 is like free money compared to when my parents bought their house in 1985 at 14%. It's really not a big deal.

Wall Street bonuses aren't the only thing that supports NY real estate prices -- the city is just too underbuilt and too in-demand, given the amount of wealth produced here.

Posted by: Jeremy at June 13, 2007 9:33 AM

I agree with the first poster - even though 7.5% is not TERRIBLE historically, it's pretty awful when you consider that affordability is already at an all time low.

I contributed to last week's rise - I locked my rate in and applied for my mortgage because I knew the market was taking a massive a--kicking and that rates were rising. I consider my 6.5% rate a blessing at this point.

Posted by: Anon at June 13, 2007 9:34 AM

(7.125 is like free money compared to when my parents bought their house in 1985 at 14%. It's really not a big deal.)

Agreed -- the problem is insane prices relative affordability. If you need interest rates this low, not to mention backloaded mortgages no one can actually afford, to support prices, then prices are too high. So when they go down, don't blame the interest rates. And if the downturn happens to coincide with a downturn on Wall Street, don't blame the economy (cause and effect may work the other way). The issue is a speculative run-up to insane and unsupportable levels.

Posted by: WT Economist at June 13, 2007 9:38 AM

WT once again you're spot on.

Posted by: Anonymous at June 13, 2007 9:50 AM

Nothing will affect NYC market. It's all sweet sweet candy from here on out.

Posted by: Anonymous at June 13, 2007 9:54 AM

I would take 14% interest rate at 1985 prices over 6% at today's prices any day

Posted by: Anonymous at June 13, 2007 9:59 AM

Yep 9:59 Jeremy forgot about the other side of the equation.

Posted by: Anonymous at June 13, 2007 10:03 AM

8% will still be low. I think once you tick above that you'll see a reaction

Posted by: Anonymous at June 13, 2007 10:12 AM

I expect this to screw with open houses and bids, starting now. People are looking at places with the mindset that mortgage rates are 6-something. It doesn't help that all those stupid mortgage calculators and broker hand-outs under-state the cost of the mortgage.

So someone sees a place that is a stretch, bids at their top range, gets excited, goes home and pulls out the calculator, calls their mortgage broker and has a talk, then thinks.. wow.. thats a monthly nut I didn't expect. The difference between assuming 6.5 and getting 7.2 is 10% higher monthly payments! Thats a huge jump in a short time.

bid gets pulled, house goes back on the market. Other buyers notice this, and start to wonder that perhaps this isn't the sellers market that the brokers keep saying it is.

Posted by: Anonymous at June 13, 2007 10:36 AM

10:36, why do you assume that buyers are so ill-informed about interest rates? i certainly knew what the prevailing rates were when i was shopping for a home, and i imagine most others do as well. the nyc market is not driven by the type of people who make bids without knowing what their monthly cost will be.

Posted by: z at June 13, 2007 11:16 AM

because the last leap was literally in the last 5 days, people tend to have conversations with their mortgage broker once every few weeks?

Either way, you can't deny the psychology. The ansonia court condo-of-the-day featured here a week ago just went up by over $600 a month due to the last pop in rates.

And what do you know, today, corcoran has slashed the price on it by $50k, it is now at 899k list.

Posted by: Anonymous at June 13, 2007 11:26 AM

I locked on my rate on Monday at 6.875%..

I wish I locked in 1 week earlier I would of gotten 6.7% .

Not a big difference but every little bit counts when homes costing this much...

Posted by: AL at June 13, 2007 11:38 AM

11:16, I'm sure that many buyers are very well-informed about mortgage rates and mortgages in general. But I know that many others aren't - take a look on this site's forum and you'll find many people asking very basic questions about loans. Which is a good thing, by the way. But many people have only a vague idea of how this works when they begin the process.

Posted by: Anonymous at June 13, 2007 11:42 AM

The forces driving demand for the Brooklyn brownstone market are much bigger than a few basis points on a mortgage. Rates are a factor, no doubt, they facilitate this market. But really, mega-trends such as reverse migration by younger families, relative crime rates, comparable housing opportunities that require 3hr daily commutes, consumer preferences for urban living, these factors truly drive demand and force prices up. Rates are back where they were one year ago, access to credit is no impediment. Just because foreign institutional investors moved cash out of equity into government debt doesn't mean the bottom will drop of Brooklyn brownstone real estate.

Posted by: Anonymous at June 13, 2007 11:44 AM

Anon at 9:34 wrote:

"I agree with the first poster - even though 7.5% is not TERRIBLE historically, it's pretty awful when you consider that affordability is already at an all time low."

???Affordability is already at an all time LOW???

Is that why there's a building boom underway in NYC?

Posted by: Free Money at June 13, 2007 11:44 AM

I don't know how much this affects the high ends of the market. Many of these buyers are all cash transactions.

Posted by: Anonymous at June 13, 2007 11:48 AM

I agree with 11:42, I followed mortgage rates and when my offer was accepted rates where pretty much steady as they had been for weeks on end. So I said let's wait to lock in, because I though I was doing the right thing.

But what I did not get was the application process and having multi ones opened, this way you lock in now then keep others floating.

It's a very confusing process and a very scary process. $100 a moths more adds up..

Posted by: Anonymous at June 13, 2007 11:49 AM

Anonymous at 11:44 wrote:

"Just because foreign institutional investors moved cash out of equity into government debt doesn't mean the bottom will drop of Brooklyn brownstone real estate."

Your statement isn't clear. But you appear to say that money has moved out of equities into government debt.

If that were true, rates on Treasury bonds would decline. Not rise. Thus, the benchmarks for rates on mortgage debt would also decline.

But that's not happening. Fixed-income rates are rising. Thus, holders of US Treasury securities are selling. Not buying.

Posted by: Free Money at June 13, 2007 11:50 AM

"I don't know how much this affects the high ends of the market. Many of these buyers are all cash transactions."

I have 7 figures sitting in the bank, I rent, and i've been looking. But now I can stick it in triple tax free munis and earn almost 4% after tax .. will the price of a $1m+ co-op rise more than 4% over the next 6 months? dunno, but I think now I'd like to see how the market digests 7%, how much slashing goes on. See? it takes me from being in the market to the sidelines, even though I don't need a mortgage.

Posted by: Anonymous at June 13, 2007 12:57 PM

Higher rates might not kill the market, as some seem to thing, but it has to have an impact.
If you were paying 6-1/2 earlier and you're paying 6-3/4 today and maybe 7 next month, it will soften the market, especially at the higher end of things.
How could it not?
Some people might rush to buy before things get even higher but others will take a breather and see if things ease up in a year or two.

Posted by: tripster at June 13, 2007 1:18 PM

"Is that why there's a building boom underway in NYC?"

Not sure how that means things are affordable - it just means builders are greedy, lending standards have been low, interest rates have been low and our dollar sucks, so some foreigners have bought in.

Keep your head in the clouds if you want to think that all of the people buying in NYC are millionaires. Sure there are rich folks, but many people buying are taking on vicious debt that they can afford only because interest rates have been low. It won't take 18% interest rates to cut a lot of buyers from the market. The only way to bring them back is for interest rates to go down, or prices to get back in line with wages.

Posted by: Anon at June 13, 2007 1:24 PM

9:59, 10:03: No, I didn't forget about the other side of the equation -- in today's dollars, my parents' house on the edge of the Everglades was about 120K (the same house doesn't sell for more than 200 even now, because it's a craphole neighborhood, but that's beside the point). The price of real estate today is not just because of relatively easy money, it stems from a whole host of reasons working in concert, not the least of which is that there are simply not enough homes being built fast enough in the most in-demand markets. If there were, prices would be lower -- that's an indisputable fact. That's, conversely, why a house in Saginaw, Michigan costs $5000 -- nobody except those with the bad luck to be stuck there wants to live there, and there is a huge glut of housing.

Posted by: Jeremy at June 13, 2007 1:25 PM

"The forces driving demand for the Brooklyn brownstone market are much bigger than a few basis points on a mortgage. Rates are a factor, no doubt, they facilitate this market. But really, mega-trends such as reverse migration by younger families, relative crime rates, comparable housing opportunities that require 3hr daily commutes, consumer preferences for urban living, these factors truly drive demand and force prices up."


this is spot on. thank you for some much needed sanity on this thread.

people who don't realize the above are the primary factors keeping the new york city real estate market chugging along are the ones with their heads in the clouds sadly.

keep waiting it out. 100K brownstones are just around the corner.

Posted by: anon at June 13, 2007 2:50 PM

A little hyperbole there anon 2:50? Why do people get so angry when someone says the market is going up anymore? And no that doesn't mean I think brownstones are going to crash to 100k.

Posted by: Anonymous at June 13, 2007 2:57 PM

Sorry should be "is not".

Posted by: Anonymous at June 13, 2007 2:58 PM

I just refinanced my coop into a 6.25%. I feel good. The problem is, that was all based on a plan to sell it in a year and hopefully get a house. I think I'm out of luck now, because the prices on my coop sale will go down, and the houses will stay more stable, and the interest will be too high to squeeze out a two family payment even with a renter.

Thank goodness i like my 1.5 bedroom with deck top floor walkup.

Posted by: Anonymous at June 13, 2007 3:03 PM

i suppose i didn't realize the market was going down in nyc 2:57.

thanks for letting me know though. i appreciate it.

maybe you can tell the folks (3 of them) that bid over ask on my place in park slope 2 weeks ago??

awesome, thanks.

Posted by: anon at June 13, 2007 3:09 PM

"mega-trends such as reverse migration by younger families" - this in not accurate. It is anecdotal at best.
Growth in NYC population is due to immigration. Moving to suburbs is still very much the norm. Don't kid yourselves just because there is a definite subset of the demographic that prefers city life.

Posted by: Anonymous at June 13, 2007 3:28 PM

ya anon 3:09 and I'm sure whoever bought your place will see the same appreciation that you did, no probably even more. Get a clue.

Posted by: Anonymous at June 13, 2007 3:35 PM

Has anybody actually spoken to their mortgage broker lately? Higher rates are only part of the story - you'll also find tighter lending terms all around. It's not just a question of what you might feel comfortable paying monthly - as an earlier post suggests - but would-be borrowers are going to find their maximum loan amounts have also come down a good amount. This isn't solely because of the higher monthly payments but also reflects a tightening of the loose credit terms which have fueled the recent valuation surge across many asset classes - Brooklyn real estate included.

Sellers should be prepared to see bids fall apart once buyers figure out they aren't as rich as they thought. And for those who argue that cash buyers mean financing is irrelevant - who do you think the cash buyers are bidding against?

Posted by: Anonymous at June 13, 2007 3:56 PM

Didn't we go through this RATES GOING UP conversation about 2 years ago. What was the net effect of that activity.

NYC real estate keeps on moving along, with an occasional bump, but unlike the rest of the country it has not gone down the tube. Obviously we all understand that we can't expect the growth of the early 2000s, but it's still a strong market.

Posted by: Anonymous at June 13, 2007 4:56 PM

11:44 get your facts straight foreign investors have moved their capital out of the bond market that explains the cause of the rising yield in the 10 year bond market. These investors are afraid of the i word ( inflation) and have chosen to invest money in overseas market in addition to the currently weak status of the american dollar. I believe that due to the recent poor performance of the subprime sector many banks who feasted on providing loans to that segment of the market will eventually fizzle out. Those that are able to survice under the current economic environment will tighten lending standards, which will eliminate many people from the market. This I believe will lead to a decline of prices.

Posted by: anon at June 13, 2007 5:00 PM

everyone needs to calm the eff down.

even in the rest of the country where the market has stumbled, it's not a disaster. things are still fine. the world is not coming to an end.

some of the worse markets like phoenix are in fact starting to pick up again a little bit.

chill out. the market goes up and down. if it only went one way, it wouldn't be a MARKET.

people are in love with new york. and with good reason. it's become an incredibly desirable place to live. i love it and will continue to speak highly of it instead of those that seem to live here and predict and wish the worst of it and its citizens.

Posted by: anon at June 13, 2007 5:12 PM

"currently weak status of the american dollar"

It is weak historically but actually the current news is that is is rising fast (from a low base) against yen and euro.. 10 week+ highs.. probably on the back of expected higher interest rates.

dollar appreciation due to higher rates I suppose drives away euro buyers.

Posted by: Anonymous at June 13, 2007 5:13 PM

12:57 - keep on waiting to see how things turn out. Hope you like your rental and you've got your 7 figure savings working for you, because you've missed out on a lot of fun over the last 7 years.

Posted by: Anonymous at June 13, 2007 5:21 PM

"too shay' but i would counter that all those that are hoping for a reduction in rates from the fed are in for a rude awakening. Federal banks globally are all weary of the inflation monster and have all pledged (i.e england and japan) to raises rates to combat it. This will force the feds hand in America to raise the rates or risk losing foreign investors (strengthen the dollar)see China committment to purchase a 10% stake in Black Rock hence reducing their expenditures in U.S treasuries. however this process will further sink the American housing market even further.

Posted by: anon at June 13, 2007 5:26 PM

seriously 5:21....if i had anywhere near 7 figures saved up over the past 7 years, i coulda turned that into 8 figures, no doubt.

but it's a lot more fun to sit on a pile of cash in a bank than have a beautiful home to live in, fix up, share memories in, have a sense of accomplishment in, no?

ha.

Posted by: anonymous at June 13, 2007 5:29 PM

5:21

I would like to counter that alot of the contributors to the boom in the re market are right here in ny. Many of whom have bit off more than they can consume( arms) I believe those that currently wait on the sideline can take short positions and purchase these houses of those who unfortunatley were not made aare of the volatility associated with arm mortgages.


- signed a homeowner

Posted by: anon at June 13, 2007 5:29 PM

foreclosures in new york account for less than 1 percent of homeowners, 5:29.

please don't be so ignorant.

Posted by: anonymous at June 13, 2007 5:34 PM

Lets wait for all those foreclosures!

Seriously - has anyone bought a decent NYC home at aucion. Has anyone bought a home at major reduction because the seller had to sell.

These are all myths in NYC. Sideline watchers will always be bench warmers. If you plan on staying in NYC for the long term, buying (if you can afford it) is always a good thing.

Posted by: Anonymous at June 13, 2007 6:28 PM

i dunno, the forced auction coming up for the four floor brownstone on pacific st in boerum hill looks interesting. starts at 1.5m. The boundary at which foreclosure world starts seems to be getting nearer every month. Obviously it isn't going to get anyone a bargain home any time, but these things are all linked. property is a ladder - you can't sell your smaller place unless the guy buying it can sell his smaller place, and so on down the line.

Posted by: Anonymous at June 13, 2007 8:55 PM

You forget that the money in New York is virtually unlimited, its world unto itself, I am talking Manhattan and Brownstone Brooklyn at this point. When the average joe on Wall Street pulls down at least 500k interest rates don't matter.

Price appreaction may slow in less desireabe areas where money is tight. But prime New York is never going down over the next 15 years barring a dirty bomb attack. Take that to the bank.

Posted by: The Player at June 13, 2007 11:05 PM

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