Monday, July 19, 2004

More Would-Be Sellers Finally List Their Homes

Dow Jones Newswires

July 19, 2004 -- Higher mortgage rates may not have tempered prices in the red-hot real-estate market yet, but the reversal of a two-decade trend toward lower borrowing costs has nudged some would-be sellers to finally list their homes.

That's good news for buyers who are anxious to either join the growing ranks of homeowners or trade-up to a bigger and better home.

A recovery in the U.S. economy and the lead up to the well advertised Federal Reserve interest rate increase on June 30 -- the first in more than four years -- has dragged 30-year mortgage rates up more than 1.5 percentage points from their low point in March to 6.01%, (the 30-year rate hit a historic bottom last June of 5.21%)

This may not seem like a huge increase at first glance, given the historically low financing homeowners have enjoyed over the last few years, but it can make a big difference in monthly mortgage payments, which most borrowers use to gauge affordability.

On a loan totaling $333,700, the maximum size that mortgage financing giants Fannie Mae and Freddie Mac will guarantee, the rate increases mean a homeowner would pay roughly $127 more now than a few months ago. On a $800,000 loan, the average price of a Manhattan apartment minus a 20% down payment, the borrower would have to pay over $300 more per month.

Though mortgage rates have actually fallen a bit since the Fed raised rates, economists expect the central bank to keep tightening monetary policy into next year, as it lifts interest rates from historic lows, meaning the cost of financing a home can only get more expensive.

Some sellers already have seen the writing on the wall. Barbara Corcoran, chairman of the Corcoran Group, one of the leading residential real-estate firms in New York, said "the rising rates have more of an effect on the sellers than the buyers. Sellers start thinking that the party might be over so to speak, and if they toyed with selling their house in the past, they are now bringing their houses onto the market."

Tight inventories in New York and other regional housing hot spots has helped accelerate the run-up in home prices this year, although anecdotal evidence suggests higher rates have indeed encouraged some to list their homes for sale.

According to a report from realtor Prudential Douglas Elliman, a scarcity of apartments in the beginning of the second quarter helped push the average price of a Manhattan apartment above the $1 million mark for the first time ever to $1.05 million from $998,905 seen in the previous three-month period. Compared with the April-June period a year ago, the price of an average apartment is up 20.9%.

While a paltry number of listings in April set the tone for prices, the realtor noted that the number of apartments for sale at the end of the three-month period jumped by 21.2% to 5,211, in line with the three-year quarterly average.

Bubble Trouble

And as anyone familiar with the New York City real estate is acutely aware, Manhattan isn't the only New York City borough where interest rates and home values are shaping homeowners decision to sell.

Terry Decaro of Staten Island, New York, recently sold her two-family house -- that her parents bought back in 1968 for just $33,500 -- for a handsome profit. When asked why she decided to leave New York for the warmer pastures of Florida, she said "because rates are low and we could get a good price for the house."

As interest rates started to climb, Ms. Decaro said she felt it was time to move. She closed the sale in June, getting $610,000 for her family home, a substantial sum, especially considering the $287,000 price tag of the 2,600 square foot house she bought in University Park, FL.

While Federal Reserve officials and most economists are adamant cheap financing hasn't inadvertently created a national housing bubble, they're quick to point out that regional markets do look frothy.

After all, a 20.9% increase in apartment prices in New York contrasts sharply with the average 7.7% rise in the rest of the country in the 12 months ending in March. The problem though is "you don't know you have a bubble until it bursts," noted John Lonski, chief economist at rating agency Moody's Investors Services.

If Federal Reserve officials are right and recent inflationary pressures prove temporary, the rise in interest rates and by association, mortgage rates should be gradual and not provoke major disruptions in housing, either regionally or nationally.

An external shock to the financial system, such as a sharp drop-off of foreign investment in U.S. government debt, is one of the few events that could cause some trouble, especially for homeowners who have adjustable-rate mortgages or weighty home equity loans.

But, "the market is so buoyant right now ... that I feel like rates could have a bit of run-up without it really impacting the market terribly," said Ms. Corcoran.


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