The Case Selling your NYC Property!

Would You Have Wished You Sold if?

I used to write a blog on trading the stock and options markets a while back ( http://thetradersjacket.blogspot.com/ ) and I don't think I've ever felt such consternation about writing a post. So much of what I see point to higher prices in NYC real estate, most notably the lack of inventory. What's not to like, the trend is up strongly, inventory is scarce, foreign investment in the U.S. is very, very strong. The economy while not going gangbusters has stabilized, and suppose it did get stronger. NYC seems to have found a replacement for the Wall St money that used to drive real estate in the new high tech startup arena. And lastly there is interest rates, right at all time lows!. It basically has never been cheaper to borrow money for a mortgage loan. Right now with rates around 3.5%, you can borrow money at what amounts to $450 monthly for every $100K you borrow (30 years fixed). That, my friends is cheap money. And with Ben Bernanke at the helm of the Federal Reserve, it doesn't look like it is going to change. Things couldn't be better!

The wise old man and his protege...  

 Ahh man, I said it, I didn't want to say it but I did.... "Things couldn't be better"..... What's so bad about that? Well there used to be a story on Wall St. about a very successful older investor who took his son with him to the company meeting of their families largest investment. The son had just graduated college and was being groomed for the day when he would become the decision maker of the family's portfolio. The company having the annual meeting had been on a roll, recording record profits for a couple of years in a row, and the CEO was beaming as he took the stage. He went on about the fantastic sales numbers, the revenues, the factories working at capacity and how profits were increasing daily. Lastly he ended with, "folks in the final analysis, business just couldn't be better". The wise old man leaned over to his son and said "Call our broker, tell him to sell all of our shares" "What", the son exclaimed, they just said business couldn't be better. To which the father replied "That's the point, if it couldn't be better, it most likely will get worse"

Interest Rates

And that's the point about rates. The chart below shows interest rates going back to 1971. The trend since 1981 has been decidedly down and that trend remains in effect. Currently 30 year mortgage money can be had for around 3 1/2%. Pretty amazing when you consider that they were almost 18% back in 1981.  Trends that are in effect remain in effect until something, usually an event causes a major change, either in perception or reality. Paul Volker, Chairman of the Federal Reserve made monetary policy changes 30 years ago, that effectively changed the trend in rates from up to down in 1981. 1981, that's 32 years? Yep interest rates have been falling for 32 years. As interest rates peaked, Joan Collins and Dynasty were premiering (Wasn't she an older woman then?), the Raidrs won the Super Bowl and two guys were singing about Ebony and Ivory... That's the last time that rates reallty trended higher. That's the thing about interest rates, the trends last far longer than they do in any other markets like stocks. Now rates may be going to 3%, or 2.5%, or 2%. I'm not smart enough to know that. But I do know this, that trends do NOT last forever and when that trend change occurs, it most likely will create a low in rates that will not be matched in our lifetimes. It could be next week, next month, next year. But it is coming as interest rates cannot continue to go down forever. (well some would argue that you could have negative, below zero rates, again that's another blog post).

Now markets typically move slower in the direction of good things and much faster in their direction of bad things. Fear obviously is an even stronger emotion than greed. Stocks grind up slowly, but crash quickly when things go bad (see 1987 and 2008). Rates go down slowly but rise much faster.  Look at the chart below, the rise in rates from 7.5% to about 18% took about 7 years, from 1974 to 1981, whereas it took about 12 to get back down to 7.5%, almost twice as long. So, if rates start to go up, and that final low is complete, they very conceivably should go upward faster than they came down.

But what does that mean for real estate prices. Many people buy the notion that if rates start to rise, you had better buy quickly as you want to borrow before borrowing costs increase....makes sense, especially when rates are in a downtrend and the tick upwards is a temporary one. But at some point that won't be the case, rates will rise, and keep going. And when they go up for an extended period of time, the value of the asset they are used to buy will decrease. I think the first ratchet upwards in rates may cause that initial rise in prices, but if the rate rise continues, it will choke off demand, and prices will be negatively affected....Here's why:

Long Term Mortgage Rates

Right now, the average apartment in Manhattan is approximately $1,400,000. Let's look at 635 West 42nd St. Apt 29A. That's priced at $1,250,000. Using this apartment makes the calculation easier (and the average sale in Manhattan is skewed upwards by the really high price sales). You can find it on StreetEasy if you like and there you can play with the mortgage calculator to check out your own scenarios. http://streeteasy.com/nyc/sale/555204-condo-635-west-42nd-street-clinton-new-york So, a 20% down payment would be $250K, leaving a mortgage loan of $1,000,000 The monthly mortgage payment for the loan will be $4490.00. Or $449 for every $100K you borrow.That's a great deal. Rates are so low that it seems you would have to be nuts not to borrow it if you have good enough credit. But lets take another look... Suppose interest rates went back up.... Not to 18%, not 10%, not even 8%. Let's just look at the same loan if rates just went back to where they were in July of 2008. That's where they were before the Fed started doing all of this funny business with these things called "Quantitative Easings", basically lowering rates. Where were rates then? 6.5%. Yep about 3 points higher, nowhere near the 18% seen in 81, or the 8.5% seen in 2000, or the 9.17 in 1994. Just 6.5%. So the same borrower (and lets assume he has the same job making the same money) now goes to a bank and tries to get a mortgage loan. At 6.5% a $1,000,000 loan will cost the same borrower $6321 a month, a payment he likely can't afford. In fact, it's likely that the monthly payment at 3.5% of $4449 was near the limit of his financial capability. So if all he can qualify for is a payment of $4449, how much can he borrow with rates at 6.5%? Are you ready? $541,192. Now this same scenario isn't just happening to this one borrower, it's happening to every borrower in the U.S, and likely the world as interest rates generally move together. So how much is that $1.250,000 apartment worth now with rates at 6.5%? Wel, if he still were willing to put down $250K and he could now only borrow $541K, that makes $791,000 of course he may not wish to put down $250K on an apt priced under $800K...... If you were the owner, maybe an owner who never listed their apartment when rates were back at 3.5%, or or tried to sell late, as prices started falling, that is a real big ouch! Now there are a lot of variables that go into the equation, maybe the economy has revved it's engines and purchasers makes more money......hopefully a lot more and therefore he could afford higher payments! But if he can't, then he can't pay $1,250,000 for that apartment, and neither can anyone else with the same income. That apartment is simply worth less, a lot less virtue of the rise in interest rates alone.
So how do we use this info? We can't do anything about interest rates..... It's true you can't but you can be aware of possibilities and base your own actions on what are probabilities, there are no guarantees.The simple fact is, if rates increase, it is not going to be a good thing for real estate. Right now is a perfect opportunity to sell your home, if you have had or may need or desire to sell it. Are you retiring soon? Have you had regrets for not selling prior to the gut wrenching decline in 2008-2009? Considering downsizing and moving to the south? Did you buy near the peak 5 years ago and have agonized ever since? The point is, if you have had any thought about it, there could not be a better time. This is not a call to sell your home if you plan on staying in it or the city. This is a call to take a look if you are a price sensitive owner. You can name your price and as long as it's not outrageous you just may get it. You may have time, and some more price increases may lay ahead, but maybe not. If and when rates do start to climb you won't be hearing about lack of inventory, you will be seeing a glut of it, as anyone who bought near the peak will want their money back. And then as a seller you will have competition, and likely few buyers too......