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Manhattan Houses Sales Are Tumbling Amid Fears About Interest Rate Hikes

Real estate sales in Manhattan appear to be on the way down. Are increased interest rates to blame?

By Jeff Vasishta January 25, 2017

It had to happen eventually, didn’t it? Interest rates going up. We’d all become a little too comfortable with factoring in mortgage payments with a 3.5 percent interest rate, give or take a little.

Last month’s increase by the Fed of 0.25 percent was a warning shot across the bow. Now with a new president in office and the Fed warning to expect further hikes in 2017, the perfect storm of a saturated housing market in NYC, higher rates and demands for increased transparency with foreign investors, could mean New York’s traditionally resilient housing market could be heading for a fall. Certainly, recent data would appear to support this. The New York Times recently reported that we could be at the beginning of a buyer’s market in Manhattan. Said the Times: “In the last quarter of 2016, the median resale price of homes in Manhattan saw its most precipitous drop in four years. The 6.3 percent decline, to $900,000, was recorded by Douglas Elliman in its most recent sales report.”

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How do interest rates play into this? If you’re thinking of buying, now would still be a good time, according to experts, as rates, in the big scheme of things, are very low. As of January 24th, a 30-year fixed-rate mortgage was at 4.18 percent and a 30-year jumbo was at 4.24 percent (loans of $625,500 or higher in NYC).

Here’s the good news for buyers of properties in New York—one of the priciest markets in the U.S. If you’re contemplating buying a condo for a million or so, and you are fretting about an increase of a couple of percentage points, you really shouldn’t be considering buying a place right now. It would be far wiser to hold on to your cash, save for a greater down payment, and think about possibly buying down the rate. Most New Yorkers can manage the flux in rates if it is small. If it starts to tick over five percent for a thirty year fixed, though, the effect on the market will be noticeable. An increase of 4-5 percent would mean a $500 increase in monthly payments on a million dollar home with 20 percent down. It’s a number most middle class New York families would feel.

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“Because homes in Manhattan are so expensive, interest rate increases can have a huge impact on monthly payments,” Krishna Rao, a StreetEasy economist told DNA Info. “These higher monthly payments would also increase the ‘tipping point,’ or number of years it takes for buying to make more financial sense than renting, making a home purchase even more unattainable for the average New Yorker with prices and rents unlikely to adjust quickly.”

New York became well known recently for all cash offers, which, of course, circumvents the issue of mortgages. If rates continue to rise, then  prices may further drop. This would perfectly suit the all-cash buyer, many of whom are overseas investors, who could bid lower with the promise of a fast closing and no financing contingencies. At the higher end of the market, where mortgages aren’t an issue, it may not effect the price and sales too much. Hedge Funders or Chinese millionaires looking to park their cash aren’t sweating their mortgage broker to see if they are approved. However, in outlying boroughs, if you’re in the market for a frame single-family or duplex in Jamaica, Queens then a being able to offer an all cash offer may make a big difference.

Despite a buoyant real estate market, credit is generally still pretty tight. Low interest rates, coupled with decent credit scores and down payments, have helped many buyers qualify for houses they wouldn’t have otherwise been approved for had the rates been higher. The new president has promised to do away with the reforms such as the Dodd-Frank law and open up the doors to greater flexibility in lending. If interest rates go up, sales could be helped by banks asking for less money down lower credit score requirements. It’s worth remembering that in 2008 around the time of the financial crash, interest rates were over 5 percent and prices were lower .

“It’s better to lock in 4 percent today than be stuck at 5 percent if you’re a buyer that needs 70 to 80 percent financing,” Zach Ehrlich, of Mdrn. Residential said. “But there’s some benefit to waiting. If you can put down 40 to 50 percent two years from now, then you should wait. If you are cash rich, you’ll have far more opportunities in 2 or 3 years.”

Jeff Vasishta

ABOUT THE AUTHOR Jeff Vasishta

ABOUT THE AUTHOR Jeff Vasishta

Jeff is a writer, husband and father but not necessarily in that order. As a music journalist he counts Prince, Beyonce and Quincy Jones amongst those he’s interviewed. He's also owned and flipped homes in Brooklyn, NJ, CT and PA.

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