NATNews Blog > July 2015 > Brokers Strategize for Inevitable Rate Hikes

    Brokers Strategize for Inevitable Rate Hikes

    7/15/2015 12:12:40 PM
    By Andrew King
     
    As a real estate broker, you have a lot of control: control over the marketing of the property; control over your team; and the ultimate power to bring buyers and sellers together at a price that is right for both, while bringing a fair commission back to you.
     
    But, for all their power, brokers can’t control external forces such as a broad economic dip in their market or a bank’s refusal to approve a potential buyer’s mortgage. And real estate brokers certainly cannot control what the Federal Reserve is going to do with our nation’s interest rates—the standard price of lending that banks and mortgage lenders use as a basis to calculate how much interest it should charge certain homebuyers based on their financial health and likelihood to back the loan.
     
    Since the bottom fell out of the market in the late 2000s, interest rates have been kept severely low (almost zero) by the Federal Reserve, aka The Fed, in an attempt to resuscitate lending and stimulate the economy. While it might have taken too long for some people, the plan did work eventually, and now most regions around the nation are reporting major flurries of real estate activity.
     
    “The market has been hot as a pistol,” says broker Bruce Taylor, president of ERA Key in central Massachusetts, a market dominated by borrowers unlike the super hot cities that soar on all-cash transactions. “May 2015 was the best month we’ve ever had, and I’ve been looking at the past 25 years of data. June looks like it might be even better. We’re finally getting a break in the inventory. Homes aren’t sitting around a lot, but there’s a good flow. More and more people are able to sell. They’re above water and they can make their move.”
     
    But now that things are finally going well again, there’s no more need for economic stimulus and many fear that The Fed will increase the rates as early as this fall. Others think there is no real need to bring it up now because there is no concern of inflation, yet, and the American dollar is looking very strong relative to European central bank’s euro. For real estate brokers, there is a general fear that a rate hike will be detrimental to the market because it would shrink the buyer pool.
     
    “If interest rates rise to any degree – even 1 percent – it will certainly affect that recovery in a negative way. Housing becomes less affordable,” says David Fauquier, a broker with RE/MAX Preferred Professionals in New Jersey. “Applicants who would qualify one day for a $200,000 mortgage at 4 percent would see that drop to $177,600 with an interest rate rise to 5 percent. Home prices would fall over time to compensate and equity gained back from the recession recovery would be lost.”
     
    Another concern of Fauquier’s is that a rate increase of any size will slow down the refinancing market and have a further negative impact on housing and the broader economy.
     
    “Refinances used for home improvements would slow down as well, resulting in a negative affect on other services, home improvements, etc.,” he explains. “From my point of view, there is nothing to be gained and a lot to lose if interest rates rise in the middle of this recovery.”
     
    Susan Giacchi, broker/owner of RE/MAX Dreams in New Jersey, agrees that rate hikes would be harmful, but she doesn’t think it would be a complete disaster, considering how far the economy has come in the past eight years. The negative impact of an increase might be temporary as prospective buyers adjust to the new borrowing costs.
     
    “In my experience, low interest rates have really helped with keeping the buyer pool stimulated over the past few years. If interest rates increase, like with any change in the real estate market, it could have a negative effect on the buyer pool until those rates become the new norm,” Giacchi says. “I also believe that where there is a need to purchase, an increased rate will not prevent those from moving forward.”
     
    However, where there is a problem, Taylor sees opportunity. In Massachusetts, as with many markets around the country, buyers have been patiently waiting for everything to be perfect before pulling the trigger on a purchase. Everything has to be right – the location, the amenities and, of course, the price. Buyers have been able to take this wait-and-see approach because the prices have been consistently low, the inventory has been huge and the cost of borrowing has never been lower.
     
    However, now buyers are acting faster because inventory and prices are picking up – and they don’t want to be left out. A rate hike or two, Taylor said, would likely just add fuel to a buyer’s motivation.
     
    “People are thinking I better buy now,” Taylor says. “The first increase will do nothing but help, and the second would do the same.”
     
    Taylor’s strategy is to have his team keep their clients informed of The Fed’s actions and increase the sense of urgency once the rates go up, whenever that may be. Since these policies always get phased in gradually, there will likely be plenty of time for the market to adjust without significantly slowing down.
     
    “The rates are so low that the first increase would be modest, probably in the range of a quarter of a point – that won’t affect affordability. It’s not going to affect 99 percent of the buyers,” explains Taylor. “Everybody wants to buy at the bottom and they already missed the bottom of the prices. Now they’re going to miss the bottom of the rates and they’d better start taking advantage the best they can.”
     
    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.