October 10, 2022

Navigating Rising Interest Rates

We’ve all seen it in the news – the Federal Reserve keeps raising interest rates in a bid to curb inflation and the soaring housing prices. But is any of this working? What do rising interest rates mean for home buyers and sellers in today’s market? Does it have a real effect on sales taking place in a market that is as in demand as New York City? We did a deep dive on these questions and more to help you better navigate the market as you prepare for your next move.


Forbes notes that The Federal Reserve “was holding the federal funds rate at around zero as recently as the first quarter of 2022” but started raising rates in March of 2022.


“Once the Fed decided it was time to do something about inflation, it moved forcefully and raised the fed funds rate by three percentage points in about six months. The goal: to reduce red-hot inflation rates that are eating into the purchasing power of everyday Americans without sparking a recession.”


As a result of the Fed raising interest rates, mortgage rates have started to climb. Kiplinger noted that if you “(l)ook at a loan of $400,000 as an example of this increase…(a) few months ago, the payment on that loan would have been around $1,700 per month. Today, however, the payment has increased by almost $800. With this dramatic increase and rising prices for houses, mortgage applications are down nearly 15% from this time last year."


A recent article from Bloomberg covered the impact of the rising interest rates, which they point tocut(ting) into buyers’ purchasing power and sidelined some potential consumers”.


One real effect of the rising interest rates in addition to fewer mortgage applications is that housing prices are starting to slowly creep down. After being in a red-hot housing market for a couple of years, the tide is shifting and we’re starting to see housing prices drop and asking prices reduced. Make no mistake, properties are still selling and will continue to do so. It’s important to remember that in 1981, interest rates hit 18.45% for a mortgage, so even the 6-7% interest rates of today are still a comparatively excellent deal.


But we agree with the assessment from Kiplinger that “(w)ith inflation continuing to grow, the Federal Reserve’s battle against it isn’t ending anytime soon. This means higher interest rates making it harder for families and businesses to borrow money. Balancing inflation and interest rates is a complex issue, and it has a big influence on your wallet."


One impact that can be seen in the real estate market is Vornado selling an office building in the Financial District at a discount as a result of the higher interest rates. Vornado purchased 40 Fulton Street in 1998 for $46M, finished a $15M renovation in 2019 and has added tenants to the building. In May of 2022, Vornado anticipated selling the property between $130M-$140M but it ended up selling in September of 2022 for $110M.


With all of this being taken into consideration, it’s important to remember that there are still great strategies that exist to buy real estate even in a rising rate environment. If you’re able to lock in a low enough purchase price even with a higher mortgage rate, you could always refinance in the future when rates start to drop again.


Another option is to buy down interest rate points, and this is something a buyer, a seller or a third party could do to help facilitate a deal. This option gives sellers the opportunity to get their desired sale price that they anticipated when rates were 2-3% points less, and gets a buyer into a property that they’re able to afford because of points being purchased.


We expect that mortgage rates will continue to be elevated for some time, but our agents are experts in navigating all types of markets and have been through these cycles before. If you’re ready to buy or sell, make sure you reach out to us to set up a meeting to talk about different options to maximize your cash as you make your next move.