This week's talk, besides the Olympics, has been about the Fed's plan to lower interest rates in September. There is misplaced hope that this will be the silver bullet to help move the residential market. When rates come down, what you pay decreases, and what you can afford increases. So this will be awesome, right? Rates drop, and the housing market will shoot like a rocket - except it won't.
This might be how it works in an Econ 101 class, but it doesn’t play out like this in real life. Current data shows that this residential real estate market is still strong. In NYC alone, prices are up over 9% over last year. People are buying and still very much want to buy.
So, I'm calling your bluff for all those sitting on the sidelines, using interest rates as an excuse or a reason not to buy or sell an apartment. This is not the reason you're not buying or selling. And for all my real estate agent friends out there who have clients giving them this as a reason for not transacting now, I advise you to put these clients on the back burner and see if the slight reduction in interest rates changes their minds come September - my guess is it won't.
While interest rates temper inflation and impact the larger economy, they have a less direct effect on residential real estate transactions. The more significant factors that affect the residential real estate market are consumer confidence, supply and demand, and market sentiment.
A reduction in rates doesn't solve the underlying problems. In fact, it might exacerbate them. As rates come down, prices go up.
Here is what will really jolt the market and get even more people buying:
Build more homes. That will help the market.
Build better homes. That will help the market.
Build based on current demographic data. That will help the market.
Build an economy based on optimism and consumer confidence. That will help the market.
Yes, lower rates might help, but these things will ultimately change the game.
In fact, one of the more significant impacts rates have on our market is giving non-serious buyers and sellers a reason not to transact. I have been through this cycle more times than I care to say. And I know when rates do come down, these same buyers and sellers find another excuse to hold out, and then you hear, "Oh, I wish I had bought that apartment; it was our dream home." Or, "I wish I had sold when I had that good offer."
So, what can we as agents and/or developers do - educate, educate, educate our clients, and work with the development community to build the right product for the right people. If we are relying on interest rates to save the day, we are all screwed.
In the meantime, the market will continue to move, and those who live and die by the Fed will join a long list of clients who are a part of the "I Wish I Had Of" Club.
Side Bar:
Thanks for the great response to last week's Side Bar. I'm glad some of you have had the experience and appreciate Mike Stern's music. It might be just me, but I feel a change in the air. People (in New York) are feeling more optimistic and inspired. It could have something to do with the USA women's 7's rugby team for making history at the Olympics and shining a light on one of the best sports ever played—a game that exemplifies great sportsmanship, discipline, grit, determination, and for all the right reasons or Simone Biles, being the absolute personification of resilience. And so much for the bullshit about people not being interested in women's sports.
As always, I love your feedback, so please keep it coming. If you enjoy reading Padkos, please share it with your friends and colleagues.
Let's do this.
Shaun