Back in December, the Federal Reserve raised interest rates (by .25 percent) for just the second time since the 2008 financial crisis. And more increases are likely this year, experts say. At the moment, interest rates for a 30-year fixed mortage are hovering around 4 percent for a 30-year fixed mortgage, according to BankRate.com. If they were to go up by, say, a percentage point, that would translate to an extra $480 per month for someone with a mortgage on a $1.05 million apartment (the median in Manhattan according to Douglas Elliman).
So what does this mean for the New York City market? For now, one segment that's already slowed significantly is refinancing. "The refi market has totally dropped off," says Robbie Gendels of National Cooperative Bank (fyi, a Brick Underground sponsor). For starters, most people refinanced when rates were lower, though Gendels adds that she's still seeing clients buying investment units and combination units.
These days, she says her firm is now focusing on Home Equity Lines of Credit (HELOC). HELOC's are used to finance home renovations, implying that people are choosing to update rather than upgrade their homes amidst uncertainty.
Higher rates aside, there may be a major upside coming for perspective buyers: looser requirements to qualify for a mortgage.
"As interest rates rise, credit begins to normalize," explains Jonathan Miller, CEO of the appraisal firm Miller Samuel and author of the Douglas Elliman market reports. "Right now, with rates so low, there’s not much margin of error for lenders, so credit conditions are restrained," he says.
"While the knee-jerk reaction is that the higher the interest rate, the less house you can afford," the offset of that is easier access to credit, Miller says. In fact, he adds, if you look at the interest rates going up and down over the past 40 years, there isn't really a clear correlation between interest rates and the state of the market.
And he says, unless you see a massive jump over a short time (like, for example, if interest rates suddenly hit 10 or 15 percent), the sky won't fall, especially in New York City. In Manhattan, for example, 45 percent of puchases are paid in cash without any financing at all (nationally, that number is more like 25 to 30 percent), says Miller.
"Small interest rate increases are a good thing, they show consumer confidence," says Ace Watanasuparp of Citizens Bank. "Here we still have the issue of low inventory, so we expect a robust market." There still is, for instance, he says, a lot of demand for apartments $3 million and below, which he describes as "still a very agressive market."
Now that we're sort of in an in-between stage, where rates have gone up slightly, but are predicted to go up even more in 2017, first-time buyers may be feeling the heat to finally bite the bullet—and soon. "I have a feeling the people who were going to buy are pulling the trigger; it's created a little bit of panic," says Julie Teitel of EverBank.
But in terms of judging how the market will go as a whole, "I think we’re all waiting to see what’s going to happen with the new president," says Gendels.