Luxury Living Interest-rate hike creates immediate, urgent opportunity
In September, the Federal Reserve formally announced an increase to the benchmark interest rate, and mortgage rates followed suit. Tim Lucas, a contributor to the finance publication, “The Mortgage Reports,” wrote about 2018 interest rate hikes in his Oct. 25 article, “November 2018 Mortgage Rates Forecast.”
“As we head toward 2019, the 5-percent mortgage is imminent and is indeed already a reality for many applicants,” Lucas predicted, but noted that the difference for “average mortgage size” between 4.87 percent and 5 percent can be less than $20 per month.
Few would describe the Greenwich housing market as “average,” so it’s important to offer some context to local real estate when considering what it may mean to buyers and sellers across Greenwich’s neighborhoods and hamlets.
“Higher interest rates have serious impact — both positive and negative — on the Greenwich real estate market,” according to Realtor Alison Leigh of Halstead Real Estate’s Greenwich office. “It can be a motivator for buyers to move forward with offers. It can also affect the prices properties will trade at. To some degree, prices will rise from more activity. That said, in some cases, it will create more ‘low ball’ offers.
“Take, for example, a first-time buyer who is likely currently renting their current residence with a fixed monthly rate,” Leigh explained. “They have been working with a budget that allows for a certain monthly cash flow and applied this to their ability to finance a purchase. They are not willing to lower their standards, so [they] are expecting the sellers to adjust rather than looking at lower-priced properties. The active part of the market most impacted by the higher interest rates [are] sales in the range of $1 million to $2.5 million.”
Considering cash flow
“The biggest impact that the interest-rate hike has on buyers is cash flow,” according to Michael DeRosa, executive mortgage banker with William Raveis Mortgage. “That’s an important piece that buyers look at when they are trying to figure out if they can qualify for, afford or feel comfortable with a monthly payment.”
Regardless of a property’s asking price or market value, buyers always consider monthly obligation when considering lenders and loans.
“What sellers need to recognize is that, with rates going up, it decreases the cash flow, so a buyer who may have felt comfortable with the $1.5 million mortgage may feel less comfortable with it, because the payment is now higher, and they may need to max out at a $1.3 million mortgage, instead.”
DeRosa has crunched the numbers to compare loans at different rates, and discovered a noteworthy metric: “For each 1-percent increase in interest rates, it negatively affects purchasing power by 10-percent. It has a big impact. … So if someone can afford a $1 million loan at 3-percent, that same payment would equate to a $900,000 loan at 4-percent.”
And interest rates haven’t yet peaked.
“The Fed has already put in place a path that they’re going to be increasing interest rates for the future. They’re talking about a December rate hike, three to four [increases] next year, and potentially more rate hikes in 2020,” DeRosa said. “Each time the Fed hikes those interest rates, it effects the cash flow of the buyer. If a seller is thinking, ’Maybe I should wait until springtime to list, because I’m going to get more for my house, that might not be the case, because the buyer may be in an even worse position months from now, as rates continue to go up.”
Halstead’s Alison Leigh had some advice for buyers and sellers, too: “My advice would be if a buyer has been considering and lingering over a property, now would be the time to make an offer. Sellers need to be priced fairly in this market. The interest rate hike will drive up the activity, but not necessarily the prices. We are seeing offers on the rise.”