Industry keeps eyes on climbing interest rates

Real Estate Weekly, Nov 30, 1994 by Lois Weiss

The recent jumps in Federal interest rates, particularly the last one of three-quarters of a point, has the real estate industry jittery. Executives agree commercial deals at any cost are scarce and will probably not be affected one way or the other by the higher interest rates, but the residential market is concerned overall.

While some deals are still going through as buyers try to lock-in rates before they go up even further, other residential buyers are backing off or rethinking their needs. There is agreement that first-time buyers will be the group that is most likely to be affected, and indeed, sales have slowed considerably around the country.

Dexter Guerrieri, president of Vandenberg Real Estate, believes there are two sides to the interest rate story. On the one hand "what we will see is buyers realizing interest rates have gone up and might go up again, and so people might want to lock in lower rate."

On the other side, for example, the company is holding together a $1 million townhouse deal since the buyer is realizing it will cost them "real dollars more" on the price that was just negotiated. "The contract is out and we think we've held the deal together because it's hard to find a nice brownstone on the West Side," he explain.

"Our activity has remained constant so far and it's a little too early to tell how or if it will be affected," he said. Most of the buyers are seeking fixed rates that are under 9.5 percent, while there are still some ARMS that are just above 6 percent. "People still realize at 9.5 it is a very good interest rate compared to what it could be," he added.

The highest mortgage rates were in October of 1981, recalled Austin K. Haldenstein, senior vice president of Vandenberg. "They hit 18.3 percent on a 30-year fixed rate," he said.

A rise in interest rates always affect sales, observed Hall F. Willkie, director of sales for Brown Harris Stevens. "They were a lot lower than they have been for many years and even at this higher rate they are a bargain," he said. "In our market, which is higher end, it has less of an effect than on first-time buyers."

Pat Goldwater, director of field operations for Property Resources Corp., which manages buildings and also has a sales division, said "I have more sales than I've had in a long time. The last 3/4 was a killer," she added of the last interest rate jump. "I still think lots of people remember what was going on when things were near 20. People are taking losses, but the [apartments] are moving."

Some brokers are finding that buyers are becoming discouraged. Linda Platzer, whose eponymous brokerage firm handles residential sales and the leasing of commercial office space, said she is finding things have slowed with the interest rates higher. "I was working with a few people who have put their search on hold," she sighed. "It didn't have to do with the season," she added of the typical Thanksgiving to New Year's slowdown.

Arthur J. Mirante II, president and CEO of Cushman & Wakefield, believes the rise in interest rates will not affect commercial development because that is so minimal right now due to the oversupply. In Hong Kong, he said investors were concerned that the rise would slow the purchase of apartments.

From the consumer point of view, there will be an immediate stop in activity, believes Paulette Bonanno, vice president National Cooperative Bank, that provides financial services to cooperatives nationally.

As for underlying loans, Bonanno said the interest rise is "killing or suspending major loans that are very interest rate sensitive."

Many co-ops have existing loans at 9 percent and they want to refinance now, she said, often borrowing extra money to do renovation work. "They want to borrow at 9.25, but rates are at 9.5," said Bonanno. "I have two rather large loans like that."

Ironically, she said, some of the loans taken with certain banks like J.P. Morgan have pre-payment provisions based on yield maintenance, and for those buildings, the higher rates would make it beneficial to refinance at this time.

If a building wants to pay off a 9 percent loan and the rates had now dropped to 5 percent, they would have to pay the difference over the life of the loan as a pre-payment penalty. "Because yield maintenance penalties are declining, many buildings are now going to prepay the loan and not get hit with the prepayment penalty," she explained. "It makes sense and they will get their money somewhere else."

Appraisers have also felt the affects of the rise in interest rates. Alan J. Greenstein, R.M., S.R.A., who heads the New York State Association of Realtors said, "The appraisers that I talk to have very little to do. The glut of business that resulted from the refinancing is long gone." He noted that the rise in interest rates over the last year has slowed the market down and affected prices. "The rates have really shot up. Within the year, the Federal discount rate went from 3 to 4.75," he said.

"One of the big lobbies [the National Association of Realtors! has is to maintain the status quo on mortgages," Greenstein noted. "That's a very big thrust of our lobbying efforts."