All Things Come to an End (including historically low interest rates)

Historical U.S. Prime Rates

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All things come to an end (Chaucer) and so it goes for the historically low mortgage interest rates that we have seen over the preceding eighteen months. The yield on ten year U.S. Treasury bonds has been rising since QE2 began about seven weeks ago. But it’s not just U.S. bonds; European (even German – generally considered the safest), Japanese, and U.K. bonds are moving up as well. To understand why this is significant to us, you need to know that home loan rates are tied to mortgage backed securities which are essentially a type of bond. The equities markets are also rallying (stocks rose to their highest level in two years today). As yields in the sovereign debt market rise (generally considered the lowest risk investments), and the equity markets produce increasing profits for shareholders, investors will insist upon an even higher rate of return in the mortgage backed securities market. Additionally, the recent tax cuts in the U.S., which are in effect another stimulus plan, make investors increasingly wary of holding long-term debt (like mortgages) at low, fixed rates of return. And thus, home interest rates at the consumer level rise in order to offer investors the increased return they demand.

Over time, it is likely that home loan rates will continue to rise. The Fed has suggested that all further stimulus options remain on the table should the economy require it. Existing and future stimulus will result in inflation, as already evidenced by last week’s Producer Price Index and Consumer Price Index. Inflation erodes the value of the fixed rate of return offered by bonds. Anticipation of future inflation will be built in to current bond prices, thus driving up mortgage interest rates even before the inflation occurs. However, current interest rates are still at historic lows (see graph at this link:

As interest rates rise, there will be downward pressure on home prices. This is because consumer capacity to pay increased monthly debt service will not rise along with interest rates. Let’s look at an example of how this plays out:
• The monthly payment on a loan of $1mil on a 30 year fixed rate note with an APR of 5% is $5,368. If the APR increases to 6%, the monthly payment for the exact same loan increases to $5,995 (a $637 per month increase). If the APR increases to 7% (i.e. 2002 levels), the monthly payment increases to $6,653 (a $1,285 per month increase).

The consumer has three options; 1) make a larger down payment so that they can borrow less and keep their monthly payment the same; or 2) pay more per month on their mortgage payment; or 3) purchase a less expensive property so that they can maintain their down payment amount and monthly debt service. Most purchasers will be unable to do 1) or 2) and reluctant to do 3). This could result in decreased velocity in the markets as potential buyers postpone purchasing decisions. Sellers who need to sell will likely respond with another round of price decreases to encourage buyers into option 3). Of course, the purchaser’s monthly payment will be unlikely to decrease below today’s levels – they will buy the same property at a lower basis but with a loan at a higher rate of interest. The seller will likely suffer the greatest loss in the form of decreasing sales price spawned by the increased cost of capital in the marketplace.

So where does that leave us today? Now may be an ideal time to lock in historically low prices that can be fixed for the next thirty years or as long as you keep your property. Sellers may wish to take advantage of this sentiment among purchasers by listing their property after the New Year rather than hoping for the capital markets to reverse course, which may turn out to be a risky bet.


About Akerly Real Estate

Mike Akerly grew up in Orange County, CA and lived in Irvine until he left to attend the University of Southern California. After graduating with a BA in Political Science, he worked in talent and literary representation at agencies and management firms such as ICM in Beverly Hills and Media Talent Group in West Hollywood. While there, he had the opportunity to work on behalf of artists such as Angelina Jolie, Billy Bob Thornton, Mira Sorvino, Forest Whitaker, Robert Rodriguez, Danny Boyle, and Baz Luhrmann. While in Los Angeles, Mr. Akerly began his career in real estate as a landlord in Orange County before moving on to New York City to attend law school at the Benjamin N. Cardozo School of Law. There, he completed his Juris Doctor with concentrations in real property law and corporate law while he continued his real estate investments with acquisitions in Manhattan. Today he is licensed in California, New York, and Massachusetts. Kate Akerly was born in New Jersey and raised in California. She attended college in Los Angeles where she received her BS in sociology from Mt. Saint Mary’s College. After college, Kate was introduced to real estate as a landlord in Orange County, California. She later moved to New York City where she worked for a city agency that handles civil complaints of alleged misconduct on the part of the New York Police Department. After being promoted to Senior Investigator, she decided to move on to begin her career in real estate brokerage. Kate is now a licensed real estate salesperson who has handled more than one hundred New York City real estate transactions. Mike and Kate now work together from their TriBeCa office in New York City. Together they service clients in residential and commercial brokerage throughout the boroughs. The team also considers investment opportunities in multi-family properties, mortgages, and trust deeds, nationwide. During their free time the two enjoy travel, good wine, great food, and friends. They have advanced certifications in deep water scuba diving and are avid skiers and snowboarders. They reside in Greenwich Village in New York City. If you are interested in purchasing, selling, or leasing residential or multi-family property in New York, California, or Massachusetts, please contact the Akerly Real Estate Team at (212) 400-4838 or via e-mail at
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