Happy October! Hope you’re finding some fun in the cooler weather with leaf-peeping, apple picking and all that! In addition to the change of seasons, October has seen the continued rise of mortgage interest rates up to an eye popping 7% on a fixed 30-year mortgage, or over double the rate from the start of the year. When mortgage rates go up, affordability goes down because the amount of money required to carry a property increases. For example, take this $519,000 Junior 1 br co-op in Brooklyn Heights going for $519k. With 20% down and $1,106 monthly maintenance costs, the total carrying cost of this property is $3946 a month all in, or just shy of $4k with interest rates at 6.92%. Compare that to a 3.22% rate from just January of this year and that same exact property would have cost $3,006 all in, or almost $1000 less.
You might be thinking why would this have changed so dramatically so quickly? The answer is that this is by design. While the Fed raising interest rates doesn’t directly affect mortgage rates technically, it certainly does indirectly. The Fed raises rates to slow things down when the economy is overheating, or what we know as “inflation.” The cost of housing – both rental and purchase prices have skyrocketed over the last few years, fueling inflation. Want to bring down housing costs? Raise interest rates. That might seem counterintuitive because raising interest rates makes housing more expensive, but that’s exactly the point. More expensive costs for home buying means people drop out of the housing search and sellers must lower prices to find qualified buyers.
I expect to see a dip in housing prices as the highest mortgage rates since 2002 work their way through the system from lenders with higher rates sidelining borrowers, to sellers dropping prices in order to entice buyers at a lower all-in cost. Remember that due to New York being one of the few states in the country to require lawyers for real estate transactions, that the data is delayed by several months here. The time that passes between signed contracts and closing is often 60-90 days. The data coming out on sales today is based on contracts signed 60-90 days ago, which is already stale data in today’s interest rate environment. It takes a bit of time for all this to percolate. So stay calm, be patient and check out our 6 tips to get you closer to your dream home for some ideas on what you can do next.