It’s conventional wisdom that low interest rates stimulate home sales, but in today’s roller-coaster economy, conventional wisdom does not seem to apply.
Despite the optimism of real estate and mortgage brokers, analysts say low rates, as a symptom of wider economic malaise, may actually hinder home sales in New York.
“Brokers may use low rates as a reason to [convince clients to] buy, but the flaw with that argument is that you can’t just look at rates and dismiss investors’ confidence,” said Noah Rosenblatt, the founder of Manhattan-based UrbanDigs, a property consulting and analytics firm.
The industry headed into autumn with mortgage rates at all-time lows: Freddie Mac reported early last month that 30-year and 15-year fixed-rate mortgages were at historically low levels of 4.12 percent and 3.33 percent, respectively.
And, rates show no signs of going up, experts say.
That’s partly because on Aug. 9, in an effort to keep borrowing costs down in a weaker-than-expected economy, the Federal Reserve announced that it would not raise its target rate, or the rate at which banks lend to each other, above 0.25 percent. The Fed also pledged to keep rates “exceptionally low” until at least mid-2013 — a move the Mortgage Bankers Association, the main industry trade group, called “unprecedented.”
Typically, real estate insiders interpret low interest rates as a catalyst for sales. Indeed, since Fed chairman Ben Bernanke and the central bank started lowering rates in earnest to counteract the downturn in 2008, brokers in New York have been touting the fact that it’s an unparalleled time to lock in low rates.
“Anything that can be done to help make real estate cheaper will help sales, especially in New York, where we have all walks of life that want to live here,” said Rolan Shnayder, director of new development lending at Manhattan-based Home Owners Mortgage.
This time around, however, it’s unclear whether less expensive mortgages will have the same effect that they’ve had in the past. That is partly due to the reluctance of buyers to step into the market right now, and partly tied to the difficulty in obtaining mortgages, analysts said.
The city is already seeing some evidence of that — New York buyers did not jump into the market in force after the Fed’s August interest-rate announcement.
In the month after the news broke, the 30-day pace of signed new contracts in Manhattan dropped 24 percent compared to the number of deals signed in March through June, according to Rosenblatt.
Far from a rush to lock in low rates, the numbers coincide with seasonal trends, he said.
Nationally, even with rates skimming rock bottom, the volume of mortgage applications dropped for the third straight month in July (marking the lowest level since February), with steeper declines in August, according to the MBA. By Labor Day weekend, the volume had flatlined at “extremely low levels” not seen in 15 years, the association said.
Still, Rosenblatt said, “Manhattan real estate is doing its own thing, regardless of plunging rates.” But he added: “I personally do not think, for Manhattan, that low yields are going to all of a sudden spur demand.”
Rather, real estate developers and brokers should look to overall investor confidence — not rates — as a predictor of Manhattan residential sales, he said. That’s because the rates themselves matter less than the reason they’re low — namely, anxious investors worrying less about turning a profit and more about keeping their capital investments intact.
Jonathan Miller, the CEO of Miller Samuel Real Estate Appraisers, took it a step further. He said low interest rates are not only failing to encourage home purchases, but are actually stalling sales. Negligible interest rates provide little incentive for banks to lend to homebuyers, leading to ever-stiffer borrowing requirements, Miller said.
“How do [banks] make the lending to John and Mary Homebuyer similar to borrowing from the Fed virtually risk-free?” he said. “It’s by making the borrowing requirements Draconian, so that there is no shadow of a doubt that the buyer who’s borrowing the money will ever default.
“Until that changes, there can’t be a housing recovery.”
Brokers, however, maintain that low rates push those on the sidelines into the game, and allow buyers to get more property for their dollar.
“For a long time, I heard from a lot of buyers that they were skeptical of buying because they felt that if interest rates go up, pricing would either stay stagnant or decrease,” said Andrew Barrocas, CEO of the brokerage MNS, adding that the prolonged low rates were “definitely a consumer confidence boost.”
But analysts said that the continued depression of rates has undermined their effectiveness. Brokers may insist that buyers act now to lock in low rates, but that sense of urgency is a “media effect,” Rosenblatt said.
“The way I look at it is, the benefit [of low rates] has played itself out,” Miller said.