NATNews Blog > December 2015 > ​Brokers Ready for Long-awaited Interest Rate Increases

    ​Brokers Ready for Long-awaited Interest Rate Increases

    12/1/2015 10:30:40 AM
    By Andrew King
     
     
    After years of speculation about interest rates, it appears the Federal Reserve is finally poised to raise them in December. The move – which sets the cost of borrowing for banks and, consequently, the price of mortgages for homebuyers – has been one that brokers across the nation have been bracing for ever since the rates were lowered to near-zero levels during the financial crisis.
     
    With the move at hand, there is concern that more expensive mortgages will hamper the housing recovery, which is just starting to take hold in many real estate markets. David Fauquier, a broker with RE/MAX Preferred Professionals in New Jersey, notes that borrowers who now qualify for a $200,000 mortgage at 4 percent would see their borrowing power plunge more than 10 percent to $177,600 if their rate rises to 5 percent.
     
    While a full percentage point increase is unlikely to occur all at once, investment bank Goldman Sachs warned on Nov. 24 that next month’s increase could be the start of a series of increases – possibly four – that bring the rate up a full point by the end of 2016. That’s the type of forecast that has brokers concerned about the long-term impact of a series of increases.
     
    “If that happens, I don’t believe that’s good for the real estate market,” says Jon Paul Molfetta, a broker with Keller Williams in Rockland County, New York, and Bergen County, New Jersey. “Maybe somebody who was going to stretch their purchase might have to scale back on what they are going to buy because they are still worried about that monthly mortgage payment.”
     
    The psychological theory that has emerged among brokers is that potential homebuyers have been watching prices inch up slowly during the low rate period, and many of them do not feel any sense of urgency to buy. Due to the Fed’s unwillingness to raise rates after several years of headlines saying that an increase was imminent, the latest hype about rates is falling on deaf ears.
     
    “While we've been warning consumers about rates going up for years, the message has become stale while rates have remained relatively flat,” says Sam DeBord, managing broker at Seattle Homes Group, Coldwell Banker Danforth.
     
    However, once the first rate hikes are finally implemented – whether it be next month, next year or beyond – that will signal that the government is actually serious and force buyers into the market, driving prices up. Simply put: two 0.25 percent increases would be good, but anything beyond that could be bad.
     
    “Every expert has said they’re going up and you have to get in on it now. First-timers aren’t feeling the urgency because the market has been pretty level,” Molfetta says, adding that an increase in prices and rates at the same time could be the “perfect storm” to get this segment off the fence.
     
    Such a trend would mimic the activity seen in 2005 when interest rate hikes correlated with rising sale prices.

    “So many say when rates go up, prices go down,” Molfetta explains. “That trend has been completely the opposite for the past 10 years. Rate hikes often reflect what’s going on with the economy.”
     
    If someone is buying up, Molfetta said that brokers need to be cognizant of the math that affects them in a rising-price environment. For instance, if prices were to rise 10 percent a year and a client is buying up – selling a $300,000 house and buying a $500,000 house – they can’t wait a year for their house to sell for $330,000 because the house they want to buy would be $550,000 by then and they’d essentially lose $20,000.
     
    “If they’re downsizing, though, they just gained 20 grand on the reverse,” he adds. “You just have to know what they’re doing.”
     
    Of course, Molfetta points out, different regions will react differently and it really depends on each individual buyer; therefore, he’s using this time to communicate with clients to see how their specific goals would fare under different financial scenarios.
     
    “I ask my clients ‘what is your plan?’ If someone in the Northeast is planning to move to Florida, I know that the Florida market is appreciating faster than our market is appreciating,” he explains. “If they already have the vacation home in Florida, maybe they wait it out and don’t sell their primary residence in the Northeast right away, but if they are doing a sale and purchase, I feel they’re already six months late to the market.”
     
    Whenever the financial landscape changes, it becomes even more important for brokers to communicate with their clients.
     
    “A rate increase will give brokers a factual reference point to start the conversation about likely future increases,” DeBord says. “A significant rate increase can be developed into visual marketing and education materials that show what effect it had on buyers' mortgage expenses, and what a future likely increase would do to compound that effect on their buying power. It gives us a teaching tool that's based on tangible recent events that consumers will understand.”
     
    Another point that brokers might want to make is that the reason rates are going up is because the economy is improving. In its recent report, Goldman Sachs pointed to a healthy labor market, steady consumer spending, and stronger home sales and construction – all bullish indicators that suggest a flurry of deals could be beginning in the first quarter of 2016.
     
    Andrew King is an award-winning journalist with 15 years of experience with the Gannett newspaper company, appearing in The Journal News (Westchester, NY), Asbury Park Press and USA Today. He also contributes to The Real Deal, TheLadders.com and TechPageOne.com.

    Reprinted with permission from RISMedia. ©2015. All rights reserved.