In January, a flood of buyers descended on what was already a hypercompetitive housing market. At the time, the Federal Reserve was signaling its first interest rate hike in more than three years, and more.
“Once the Fed said, ‘We’re going to start raising interest rates in March,’ we saw everyone running for the exit, and people were just putting [in] offers left and right,” said Kobi Lahav, sales manager at Living NY. “It was super busy.”
Interest rates and therefore mortgage rates have indeed increased. From their historic lows at the start of the year, mortgage rates have now risen almost 1.5 percentage points, the fastest increase since 1994. More than half of that rise took place in March, with rate having gone from 4.09% to 4.8%.
Officers spoke with The real deal on how rapid change is affecting the market and their customer base.
Some try to offer some perspective to shocked shoppers.
“We’ve had low interest rates for so long, we’re really spoiled. And even though they’re at historic lows, people are talking about them like they’re so high,” said Compass broker Diana Sutherlin, who works in the downtown Jersey City and Hoboken markets. “I remember when they were in double digits years and years ago.”
Interest rates peaked in 1981 when the annual average was 16.63%, then ended the decade at around 10%. It then fell slowly, falling below 7% in 1998.
Mortgage rates fell steadily from 8.05% in 2000 to 5% in 2003, which helped fuel the housing bubble. After its burst, triggering a recession at the end of 2007, the Federal Reserve spent years helping the recovery by lowering interest rates. Mortgage rates started the 2010s at 4.69% and hovered around 3% in 2012 before rising later in the decade.
High rates usually deter homebuyers or cause them to lower their target price. But rising rates may prompt buyers to quickly secure homes before they soar even higher. This year has been a classic example.
“The fear and acceptance of rate increases has been a windfall residential transaction accelerator,” said Nikki Field of Sotheby’s International Realty.
First-time buyers are the most sensitive to rate hikes, especially since the rise in rents has simultaneously pushed them to buy. Manhattan’s median rent broke records in February, hitting $3,700, up from the previous high of $3,450 in April 2020, according to a report by appraisal firm Miller Samuel for Douglas Elliman.
“When you go from paying a fixed amount of rent to getting your first mortgage and that mortgage goes up $600, $700 in a few months, that gives buyers less buying power,” said Gino Bello, an agent for Houlihan Lawrence in Westchester. . “They could have bought a more expensive house in December with the same amount of money they are spending now.”
While some buyers raised their bids, others concluded they missed the mark. Anna Tchorbadjiev, an agent at Keller Willams, dropped two millennial buyers due to rising mortgage rates and competition from cash buyers.
“They were scared,” Tchorbadjiev said. “They’ve been pushed back to renting instead of buying because they’re being outbid and driven out of the market by more experienced and wealthy buyers.”
Melissa Cohn, senior executive at William Raveis Mortgage, said with listings still sparse, the loss of discouraged buyers is unlikely to kill market momentum.
“As long as inventory levels stay this low, the real estate market will continue to thrive,” Cohn said. “In fact, many believe that prices in areas where supplies are low will continue to rise for at least the rest of the year.”
Richard Grossman, chairman of brokerage at Avenue 8, agreed, though he thinks the Federal Reserve acted in part to cool the housing market.
“The reality is that our markets will mostly be able to tolerate some of these increases,” Grossman said.
Bianca D’Alessio of Nest Seekers International called the impact of rising rates a “recalibration” of the market. Rather than give up, buyers will downsize, seeking one-bedroom apartments and studios instead of the larger, more luxurious apartments that have grown in popularity over the past year.
“It’s almost a ripple effect across the board,” D’Alessio said.
Rising inflation – which has motivated the Fed to seek higher interest rates – is prompting some buyers to buy real estate as a hedge.
“People want to protect their money because they see where the whole world is at right now. It’s a very precarious situation, to say the least,” Tchorbadjiev said. “So a lot of people are just putting their money into real estate because real estate appreciates over time and they just want to get in there while they can.”
Although cash buyers are not subject to rising mortgage rates, some have backed off rather than try to win bidding wars with buyers desperate to lock in a low mortgage rate.
“I see some of my cash buyers a little hesitant to play in this playground because they don’t have to,” said Lindsay Barton Barrett, a broker at Douglas Elliman.