According to Google’s Gemini AI, as of October 2nd the average 30-year fixed mortgage interest rate is no 5.92%. And Adjustable Rate Mortgages (ARM’s) are considerably lower than that for the first 7 to 10 years. Interest rates peaked near the end of the year in 2022 and stayed above 7% for a considerable period of time. Recently the Federal Reserve (FED) Chairman Powell has indicated there will be additional small cuts in the benchmark interest rates that they charge, assuming economic conditions stay consistent. Rate cuts are expected again this year and possibly again in early 2025.
One quick note; the FED rate does not immediately or directly affect mortgage interest rates. The greatest single predictor of mortgage interest rates is the 10-year bond yield which is affected by FED rates in part, as well as other economic conditions. As of 10/2; that sits at 3.78% and was 5.0% in October of 2023. Historically, the spread between the 10-year bond yield and the mortgage interest rates has been 1.5 to 2.0 percentage points; with mortgage rates following the movements of the 10-year bond yield.
Whether you are a potential buyer or seller, what does that mean to you? What will happen to prices?
Based on my experience and conversations that I have had, you can expect a significant change in activity, both buying and selling, but not a huge swing in prices; at least not in a fully developed market like Forest Hills.
From a seller’s perspective, yes, a drop in mortgage interest rates will allow buyers to obtain a larger mortgage with the same income. So prices could go up. However, prices (in Forest Hills) never really dropped when interest rates increased from around 3% to 7%. Prices of houses (excluding Coops) basically flattened out while the number of transitions dropped by nearly 50%. So there won’t be a rebound as there wasn’t a drop to bounce back from. But do expect sellers to be aggressive on prices.
Most importantly, there has been many potential sellers who simply chose not to list with the high rates. They didn’t expect to get what they had hoped for with the higher rates driving buyer’s price range down. Additionally, for the 80%+ of current mortgage holders have an interest rate of less than 4%, it simply didn’t make sense for them to sell. At the higher rates, they couldn’t afford to buy a more expensive house, or perhaps not even the house they currently own. Almost all sellers in the last couple of years have been estates, moving to assisted living, older couples downsizing, job loss or change, moving to a low tax state, etc. Almost none of the discretionary sales that we have historically had; such as buying a starter home, then a bigger home and then to their dream home. Potential sellers have been stuck at the level they are in, not necessarily the level they want to be in.
Buyers have been struggling with limited inventory for nearly 2 years; forcing many to abandon their searches out of frustration and exhaustion. Not many have rejoined the search yet, but I suspect many will, along with new buyers after interest rates drop to the mid 5%’s. There will likely be a sudden surge that may drive prices up somewhat. My best advice here; don’t join the herd late. It will likely be better to be in the front of the herd rather than try to time exactly when the interest rates bottom out. Many people have missed their opportunity by trying to predict perfect time to buy. If you do start looking now, you can take advantage if rates do continue to drop. When you lock in a rate, ask about a “float down” which allows your rate to drop with the market.
My final thoughts are the markets are all very local and in Forest Hills, there basically is nowhere left to add housing. It doesn’t have the housing elasticity that could grow to match demand and keep prices down. We are protected from significant price drops so long as the area is as desirable as it is now. The other key element in Forest Hills is that it is still significantly less expensive that some of nice neighborhoods in Brooklyn. Many of the incoming Brooklyn buyers see Forest Hills as a bargain while Forest Hills and Queens natives are more reluctant to pay higher prices based on the long-term pricing history. Overall, I expect to see some steady increases in Forest Hills houses.
Coops are a somewhat different story. Coop Boards never allow dramatic price reductions in their buildings and Coops look very attractive compared to the new Condos in the area that are 30-40% more expensive than Coops. As interest rates have dropped, we have already seen an upwards tick in prices. That could be blunted by the rising costs of insurance and other maintenance costs that have increased monthly expenses since Covid and substantial insurance payouts nationwide for natural disasters and climate change.
Bruce
