Janet Yellen, chairwoman of the Federal Reserve, stated at the Fed’s last meeting a couple of weeks ago that the Fed’s recommended .25% rate hike was “…a simple message that the economy is doing well.” “Doing well” means that the number of jobs across the country is growing and that wages are increasing. Due to where the economy is today as opposed to where it was during the depths of the financial crisis in 2008, forecasters are predicting two additional rate hikes in 2017 and three in 2018. Yellen added that “…we have confidence in the robustness of the economy and its resilience to absorb shocks…” both domestically and globally.
So how do federal interest rate increases (anticipate rates between 3.5 – 4.5) affect the New York city housing and apartment market? Jonathan Miller, an appraiser in NYC who has been tracking the market for over 30 years, says that the short answer is not much. “For rate hikes to make a real difference, the rates would have to be much higher.” Miller points out that mortgage lending in NY is less relevant than in other markets due to the fact that cash transactions are much more ubiquitous in NY than in other markets. For example, in Q4, 2016, 48% of all transactions in NYC were cash transactions.
Douglas Elliman’s Q4, 2016 Manhattan Sales report backs up Miller’s thinking. Elliman reports that 34% of all co-op sales and 61% of all condominium sales were cash deals. 82% of higher priced properties, over $5M, were cash sales. Less than 35% of “medium” prices sales, or less than $500,000, were cash sales
Greg McBride, chief financial officer with BankRate.com, agrees with Miller and Elliman’s data. “When people are working and making more money, they’ll buy houses…” regardless of the interest rates. They may buy a different sized house, but the underlying fundamentals for why people buy houses is on the rise.”
Zillow compares how rising interest rates affect different locations around the country. In typical home mortgages in “mainstream” locations, higher rates will increase mortgage payments by $18.00/monthly. In San Francisco, higher rates will increase mortgage payments by $77.00/monthly. And in NYC, higher rates will increase mortgage payments by $44.00/monthly.
One leveler to rising interest rates, even in pricey NYC, may be anticipated tax cuts to those within the highest tax brackets. Trump campaigned on cutting current individual tax rates of 33-39.6% to 7% for those earning more than $200,000 annually. Such a reduction “…puts substantial money back into the pockets of discretionary income to high net worth individuals,” says Frances Katzen of the Elliman brokerage agency. Though lower earners entering the market for the first time will have “…less to spend and more to lose…” says Katzen, “they will still buy if they feel there is value to buy…everyone is driven by the same impetus of getting the most amount for the least to spend.”