I would certainly describe the first half of 2020 as tumultuous, especially for real estate professionals. There’s a lot of uncertainty about where the current reserve rate sits, and what it means for businesses and homeowners.
The good news? The housing market adapted. Many buyers are turning to virtual walk-throughs, or even FaceTiming realtors as they explore a property’s potential.
The Federal Reserve rate is playing a significant role in stimulating the economy. Lower rates can do quite a bit to get money moving in the market.
Here’s how I see the FED’s drop in rates rolling out for commercial and residential property owners in New York City.
Interest Rates Have Always Been In Flux
Until recently, it was challenging to determine which way rates would fluctuate. The interest rates rose steadily for several years as the country recovered from the market crash 2008.
Now, due to the COVID pandemic crisis of 2020, the rates locked down. They usually linger between .05% and .25%. Now, they have set the standard at nearly zero.
These lower rates result in an increased number of refinances. Why are these refinances essential to the market? People cash out their home equity to make large purchases that stimulate the economy.
The Federal Reserve isn’t going to put the market at risk by raising rates until the economy stabilizes. So for now, buyers and homeowners can remain comfortable with the low rates for the next few months, minium.
Hope for Buyers
Unemployment saw a fever pitch in the middle of April 2020. It hit a staggering 14.7%. This number is the highest the unemployment rate has been since 1948. Understandably, that would mean fewer people can afford a home or mortgage.
The fallback means that we could see a trend in property prices. Cost needs to decrease to convince people to buy. Lower interest rates can help encourage these purchases. In short, we will likely be in a buyer’s market for the remainder of 2020.
The low-interest-rate may seem like good news. However, there are a couple of things that I see as negatives–depending on your situation.
Although they’re not directly linked, when the Federal Reserve changes its rate, savings accounts are affected. For those of you potential buyers saving money to buy a home, you’ll be losing the money you may have assumed would end up in your account from interest.
When the Federal Reserve interest rate changes, banks will take steps to make sure their rate matches this change. Your savings accounts won’t show much of a difference unless there is a large amount in them. However, this disproportionally affects those of you saving for homeownership.
The low rate may also help people make risky buys. Buyers who have an adjustable-rate mortgage (ARM) can easily overlook how homeownership’s cost will affect them when the interest goes back up. If a buyer chooses an ARM, their monthly fees will go up as the economy improves.
The Current Market
According to a recent report from the Mortgage Bankers Association, mortgage applications have risen by nearly ten percent in a week. Most signs point to the steadily low Federal Reserve rate. The reason? Many states are reopening, and there is a residual buying frenzy.
New York City has felt this fervor. For the last couple of years, the housing market has trended downwards from May into June. In 2020, however, this hasn’t been the case. Prices are staying steady. We won’t know the full scope of how many properties are getting sold, or for how much, until November. However, the numbers we see so far are promising.
Benefits For Current Property Owners
For most property owners with an adjustable-rate mortgage, the current Federal Reserve interest rate is great news. Your monthly costs are down, and your property isn’t losing any value. So should you choose to sell; you are in a good position.
If your rate isn’t adjustable, refinancing so that your interest rate is lower is a great option. Keep in mind that refinancing isn’t entirely free. You could be staring down credit fees, appraisal fees, and several other fees. It can make you feel like you’re paying closing costs again. Calculate all of this before making any decision to refinance your real estate.
For Commercial Owners
Commercial owners are the section of real estate owners that will see the most benefits. Lower interest rates mean owners of New York City commercial real estate have access to low-cost capital. They can refinance their property on a low-cost basis. Refinancing can save large sums of money that can be reinvested in more real estate.
For Residential Owners
New York City residential real estate owners will have most of the same benefits as commercial owners. An added perk, though, is people are more likely to buy a home than they are to buy a commercial or retail space–especially on the heels of COVID. Businesses are moving to remote work as the state begins to reopen, and commercial real estate owners will likely pay the price for the shift.
What To Expect Down The Line
It’s impossible to predict what the next year will bring. The year 2020 made sure to prove that much to us. Fortunately, the Federal Reserve rate is more predictable than ever. These low rates should stay for most of the remainder of the year. Changes will come when the economy shifts to its pre-COVID state. Just keep this in mind: buying property this year, with the lower interest rates, will undoubtedly save you a lot of money in the long term.
The FED is doing its job by using interest rates to regulate the market. As rates continue to hover at record lows, investors have the opportunity to buy while keeping costs down.
I would suggest taking your time and thinking through each investment you might be considering. We don’t know where the COVID virus will send the economy when the winter months come. We already see spikes in some states that are open.
My final words of wisdom, investment is always a risk. So, proceed with caution and do your research.