The party is over.
After enjoying a few years of historically low interest rates that fueled a boom in real estate investments, those working in the residential and commercial sectors are dealing with a new reality, where the highest rates in more than a decade begin to slow sales, affect trades and shave yields.
On the residential side, mortgage rates now exceed 5.4 percent for a 30-year fixed rate loan and are sure to head higher, after the Fed raised rates another half a percent last week. Rapidly increasing mortgage rates, now the highest in 13 years, are adding hundreds of dollars to home buyers’ monthly payments, potentially shrinking the current pool of home hunters.
Home sales on Long Island have slowed over the past several months, compared to a year ago. There were 2,858 homes contracted for sale in Nassau and Suffolk counties last month, down 14.7 percent from 3,342 homes contracted for sale in April 2021 and 6.4 percent down from March 2022, when there were 3,044 homes contracted for sale, according to For numbers from OneKey MLS.
And although some attribute the drop in sales to the continued dearth of homes available for sale, listing inventory has risen more than 17.6 percent in the past three months, while sales have continued to decline over the same period.
The combination of bid wars and price hikes is causing some potential homebuyers to come up with other ideas, says Andrew Russell, owner and founder of RCG Mortgage in Hauppauge.
“Rates in November were at their highest, and now they’re five,” Russell said. “You know that a $500,000 mortgage over the past few months has been increasing the cost of $500 a month, and with these things together, a lot of people are giving up buying and choosing to rent for a year or two instead.”
The speed of rising prices forced mortgage brokers and lenders to scramble. Besides putting a fork in loan refinancing, some clients no longer qualify for mortgages they were pre-approved just a few months ago.
“People you approved five or six months ago, we now have to reassess everything because maybe they were approved at a very low price and we are no longer there, so it makes things more difficult with some of the buyers,” said Dan Jacoby, chief loan officer at Embrace Home. Loans in Melville. “There are people who qualified months ago, but may not qualify for that level now. Sometimes we need to lower their expectations and reduce the amount they will qualify for to make it work.”
On the trading side, rapidly rising prices are causing investors and sellers to recalculate pending deals and rethink their strategies going forward.
Mark Walsh, principal at Select Real Equity Advisors at Huntington Station, says the rapid rise rate environment is already having a chilling effect.
“We felt the impact on the deals we already had in the contracts and the deals that were to be contracted, as people used the brakes to see ‘Does this still make sense for me as an investment with a different return due to the price increase? This varies from deal to deal and from investor to investor.
Walsh added that an adjustment would have to be made by both buyers and sellers to overcome the additional costs that higher interest rates would introduce.
“Sellers will have to become more realistic in the market, and buyers, while still aggressive, will certainly be more cautious, because their returns will be significantly affected by higher prices,” Walsh said.
While there will be a lot of adjustment to higher prices, the new reality is more like a return to normal, said Austin Walker, vice president of assets at Uniondale-based Arbor Realty Trust.
“A lot in the industry is used to being in a very low spread and indices environment because of the COVID-related federal stimulus and low interest rate policies put in place to support the economy,” Walker said. It is not normal for interest rates to be in the high 2 per cent and low 3 per cent range. So while rates are going up, in reality, rates are simply normalizing.”
Walker says the biggest victims amid rising interest rates are discretionary refinancing, where property owners refinance to lower their rates to extend terms or withdraw cash. In addition, he said, loan-to-value ratios will be lower in order to close loans and borrowers will have to invest more shares to buy an asset today than they had just three months ago, reducing expected returns for commercial investors.
The new price environment has not fully reverberated through the system, said Jonathan Schwartz, senior managing director and co-chair of New York Capital Markets at Manhattan-based Walker & Dunlop.
“We’re starting to see positions that historically traded at the 3 per cent cap and may now be trading at the 4 caps, depending on how high interest rates are, because borrowing money when you pay the 3 per cent cap against the 4 cap is a completely different equation,” Schwartz said. The higher the interest rate, the less money can be borrowed on the same investment,” he said, adding that there are a lot of deals still being traded, people respect contracts, but there is also some apprehension.
“There are definitely investors who have gone back to their deals and said, ‘I’m not paying the rate that I agreed to before the Fed increase because the rate has changed.'”
Of course, the motive behind the Fed’s rate hike is to cool inflation, which means either lowering rates or preventing them from escalating too quickly. But interest rates, while consequential, aren’t the only market conditions keeping property prices high, as strong demand continues to drive values.
The median price of closed-home sales in Suffolk reached a new high in April, rising to $540,000. That’s 12.6 percent higher than the $479,450 average set in April 2021 and $10,000 more than the previous record of $530,000 set in August 2021.
In Nassau, the median closed-home sales price last month was $663,500, up 5.3 percent year on year and close to the record average high of $670,000 from August 2021.
However, industry watchers say rising mortgage rates should eventually act to curb rates.
“I haven’t seen price hikes really affect prices yet, but I think it’s only a matter of time before it happens,” Jacoby said. “You have a market here where values have gone up a little bit, rates have gone up a little bit, so at some point we have to give something back. I think at some point we will start to see the level of the market stop.”
Russell agrees and says housing demand should subside somewhat.
“Over the next several months, if not years, the values could either remain the same or even decrease slightly,” he said. “I don’t think there will be a crash…but I think we definitely saw the peak in home valuations on Long Island. It’s definitely going to go down.”
In the commercial sector, prices are likely to remain strong for high-demand asset classes, such as industrial, multi-family and medical offices.
Commercial real estate in general is still thriving, said Ron Koenigsberg, director of American Investment Properties in Garden City.
“I expect it to do well, especially in the short term, as the market generally follows the macroeconomy,” Koenigsberg said. “Even though interest rates are going up, commercial real estate will stay high, prices will go up and cap rates will go down. I understand that higher interest rates will increase mortgage costs, creating downward pressure on real estate prices, but other factors continue to drive prices up and thus lower Maximum rates.
Schwartz said real estate is still seen as a safe haven and there is still a huge demand for commercial real estate assets.
“You look at the industrial and multi-family sectors, the most favored asset classes, and this is where the big institutional investors are making and putting money and where you see massive rental growth. We believe this trend will continue for the foreseeable future,” he said, adding that there is no shortage of Capital for well-located properties. “Higher rates will of course have an impact, but I think high-quality assets will continue to be preserved and will increase in value. I think lower-quality assets will feel the impact. There are haves and have-nots, and that’s what we’re seeing now.”
Walker said that while the industry is in the early stages of the Fed’s tightening cycle, there is still plenty of capital chasing after commercial real estate assets.
“The reality is that there is a ton of dry powder that is looking to be used in the market,” he said. “Even though we haven’t seen cap rates adjust as quickly as many thought with such an increase in interest rates, we still see people doing deals and the market becoming more comfortable with the fact that they’re just going to have to take advantage of deals with more capital than it has traditionally been over the years. the last few.”