Interest Rate Analysis By The Experts

One of the hot topics on Wall Street right now is the future of interest rates and what impact any rate change may have on Hamptons real estate.

Many economists argue that interest rates are the single most important “economic numbers,” or economic predictors. When rates are high, on a historic basis, they tend to stifle economic activity. Conversely, lower rates make it more efficient to borrow and tend to increase economic activity.

The United States has had relatively low interest rates for several years. And the rates, for the time being, appear to be going lower. But, at this point in time, obtaining a mortgage has been harder than ever before. As a result, even though the rates are low, economic activity has not increased by as much as it has historically during periods of low rates.

“While money is cheap to borrow, it is tougher than ever to qualify for a loan,” said Kevin A. Luss, of The Luss Group, Inc. in Southampton, during a recent interview.

The average interest rate on an outstanding mortgage at the beginning of 2010 was 5.979 percent, according to the Bureau of Economic Analysis. However, today it’s possible to find a rate well below that. According to BankRate.com, the rate for a 30-year fixed mortgage has dropped to 4.35 percent, from 4.53 percent, a very competitive level by historic standards.

Experts are divided about whether the rates will stay this low for the immediate future.

“Rates may start to rise in 2012,” predicted private wealth adviser Rocco Carriero of Ameriprise Financial in Southampton during a recent interview. “The biggest factor keeping rates low is the unemployment picture, which needs to get better, but small businesses need access to credit in order for that to happen. Rates will go higher but not much in the short term.”

“Rates will stay low for the foreseeable future,” said Stephen Curry, senior vice president at Gilford Securities, Inc. in Westhampton Beach. “If the economy starts a new phase of strong growth, rates will be lifted. Under the current financial woes of the national economy and high unemployment rate, the odds are rates will stay at these levels.”

If rates rise, however, even minimally, what impact will such a phenomenon have on the Hamptons real estate market?

“This (an interest rate rise) won’t have any effect on the local market,” said Mr. Luss. “Normal market forces of supply and demand etcetera, do not impact our market as in other regions. What is having some effect is that credit underwriting has returned to the days when it was very rigorous.”

For those thinking of buying a home or refinancing their existing mortgages, the interest rate is not the only factor.

Nationwide, the average origination and title fees on a $200,000 mortgage totaled $4,070, according to Bankrate’s annual survey of closing costs. That’s an 8.8-percent jump compared to 2010 when the average closing costs totaled $3,741. For the second consecutive year, the state with the highest closing costs is New York, averaging $6,183.

Origination fees have increased largely because lenders need to deal with the stricter mortgage regulations that the government has implemented in the last two years. Since the recession began in 2007, the Federal Reserve has been creatively trying to keep the economy moving by selling or managing failing institutions, keeping banks flush with cash and buying assets in addition to keeping rates low.

When it comes to the longer term, none of the experts interviewed said they think rates can stay this low indefinitely.

“It depends on how much rates rise,” said Mr. Carriero. “If the 30-year lending rate breaks into the mid-6 range, that will surely have a negative impact on certain sectors of our local real estate market, specifically the $2 million or below market.”

The result of a 6.5 percent rate means that people will be able to afford less on a monthly basis and prices will come down to reflect that.

“If you know someone with a rate which begins with a ‘4,’ “count them as very lucky,” said Mr. Luss. “You won’t see that for a while. At this point it is simply inevitable that rates increase. They aren’t going lower.”

For interest-rate watchers, the impact any movement will have on the East End real estate market is not clear. Buyers have kept the Hamptons market percolating but with the idea that the country has entered a second dip in the recession, it’s impossible to determine what the future interest rate market will be.

“People will always buy homes here,” said Mr. Luss. “This is not a double-dip recession in here but more of a soft patch. It is not higher interest rates that will cause people to hesitate before buying, it’s the utter and absolute uncertainty in the economy from a macro-standpoint. The interest rate is only one component of the math at play, the price of the home still needs to be realistic and folks need to feel positive about their outlook in terms of consistent income.”

Low interest rates, in buyers’ minds, may have taken a backseat to other concerns, such as employment stability. This will almost definitely hurt national real estate sales but the local market will probably just move a bit slower, those interviewed said.

However, should a sufficient number of potential buyers decide to wait, an inventory backlog is possible. This will result in favorable prices for buyers, especially for those with lots of equity at their disposal and a good credit rating.