Mortgage Interest Rates are Rising. What Does that Mean for an NYC Home Buyer?
Bohemia Blog by Agent Jessica Wagner
I’ve recently had a very humbling experience which put me in the shoes of countless clients I've worked with in the past. In my many years in real estate, I've become very good at strategically maneuvering those 'oh sh#&%t moments' during a real estate transaction and coming up with quick and efficient solutions. In fact, I recently had my very own 'oh sh#&%t moment.' My partner and I are currently in contract to purchase a home. Prior to submitting an offer in early 2018, we admittedly didn't realize how quickly interest rates were rising. A few weeks ago we received a phone call from our lender which left us scrambling to lock in our rate before it was raised even higher (and now have to close earlier than anticipated). We had to lock into a rate that is more than a half a point higher than we originally anticipated. This grounded me, and I find myself acting with more empathy than ever with clients in similar stressful situations. That's the fact - interest rates are rising across the country. I'm going to share some insight with you about why interest rates are rising and how rising rates can affect the real estate market.
Let's start with the why.
Think: inflation, higher wages, tax cuts, increased government spending (and by spending, I really mean borrowing). The Federal Reserve has to offset these costs by increasing rates to incentivize investors to continue to buy bonds. Bonds back mortgage loans.
As we entered 2018, the 30 year fixed rates had held just below 4%. Just a couple months after the start of the year, 4% was completely unattainable - even for the most qualified buyers. The national average is now hovering close to 4.5% and is predicted to increase from there. There is some silver lining in all this talk about rising rates. Current rates are only high compared to some of the lowest rates ever recorded. Mortgage interest rates are still historically low. It's hard to imagine now, but in the early 1980s, the fixed 30-year mortgage rate was about 18%. It's been steadily falling ever since, but we are now on an upswing. This provides continued opportunity to lock in low rates, even if it feels heightened right now.
What does that mean for the NYC real estate market in 2018?
When considering purchasing a home, affordability comes down to your monthly payments - which means that rising mortgage interest rates can have a profound effect on home ownership. For some prospective homebuyers, rising rates might put some urgency on finding a home (sooner rather than later, as rates aren't going to be going down anytime soon). Do you have extra cash on hand, an investment that can be liquidated, a family trust or inheritance? Now is an excellent time to considering putting down a larger down payment to offset mortgage rate increases. Are you currently renting and considering the pros and cons of first time homeownership? Your net monthly payments may be comparable or even less than what you'd pay for a similar rental. Remember, interest payments on a loan are up $750,000 and property taxes are up to $10,000 are tax deductible. Hint: Upper Manhattan is flooded with properties that would qualify home buyers for maximum tax deductions!
Higher rates aside, there may be a major bonus for prospective buyers - looser requirements to qualify for a mortgage. Interest rates have been so low, so there hasn't been much margin of error for lenders, and only the strongest buyers could qualify for a mortgage. The offset of higher rates could mean more flexible qualification requirements.
Since we're a couple of months into 2018, the NYC housing market is currently facing some uncertainty due to the new tax reform and rising interest rates. Small interest rate increases aren't necessarily a bad thing - they symbolize consumer confidence. There are certainly some predictions for an overall market softening, but with low inventory and high demand, the NYC housing market is likely only going to be marginally affected. A softer market might very well mean lower prices across the board which will spark purchase activity. As we head into the busy spring season, there will likely be more leverage for sellers to accept lower offers due to the current conditions. When all is said and done, everything evens out. What are you waiting for? Start your search! Our experienced team of agents at Bohemia Realty Group are here to help navigate the complexities of the ever-changing NYC real estate market whether you're a first time buyer, a seasoned investor or anywhere in between.
If you need further clarification, reach out to a trusted lender. Some of the above information was sourced by Richard Barenblatt (NMLS #52951) of GuardHill Financial Corp.