Behind the Hedges: All Eyes on Interest Rates

 

What goes up, must come down — and sooner than later is certainly the hope when it comes to skyrocketing mortgage interest rates. While rates were at historic lows during most of the pandemic, current home buyers aren’t enjoying that luxury. Historically high inflation and recent Federal Reserve decisions have driven up interest rates to the highest level since 2019. Low inventory and high demand mean home prices aren’t coming down, either, and it all puts tremendous pressure on potential buyers. As interest rates continue to climb, we asked those in the know: How has this affected the Hamptons real estate market? And what do they predict for the rest of 2022?

 

 

“Groundhog Day has come and gone but it feels that the Hamptons’ market is stuck in the same lather, rinse and repeat. In financial services, they say ‘the trend is your friend.’ There are five factors in my mind that will keep prices trending higher in 2022. The first is that there are just simply more buyers than sellers still. The second is that the Hamptons remains one of the very few markets in America where you can purchase a home, rent it out and be cash-flow positive at all ends of the market. Interest rates are trending higher, but we are still just above historical lows. One hundred miles east of Manhattan are some of the most beautiful beaches in the world. Lastly, Wall Street just paid a record $43 billion in bonuses. It’s hard to stand in front of a slow-moving locomotive. The outlier in my mind is the current situation in Eastern Europe. The atrocities in Ukraine should give us all pause. As the war drags on and Russia continues to stumble, I worry that history could repeat itself.” Hara Kang, The Atlantic Team, Douglas Elliman

 

“Currently, we’re seeing that our typical clients are financing 50% of their purchase price, but buyers in the lower end of the price range are financing from 50 to 75% percent. One effect of the rising interest rates we’ve seen in the Hamptons is that buyers are now holding off on land acquisition, whereas in 2021, preconstruction deals were all the rage, with buyers willing to wait a year to have a newly built home. We’re also seeing even more cash buyers in the Hamptons than ever before. These buyers see an opportunity in this market, as an all-cash offer puts them in a better position than competing offers. Supply is still very low, and we don’t see inventory outpacing demand any time soon. While prices are at record highs, I think we can expect to see them level off in the rest of 2022.”

 

 

 “While mortgage rates are indeed increasing, it is important to remember that these rates are still currently low, just not as low as we have been accustomed to in the past two years. Let us not forget the incredibly high rates of the ‘80s. The average historical rate clocks in at 8% over the past 50 years. While many secondary home buyers have taken a recent reprieve waiting for home prices to cool down (which doesn’t seem to be happening), I predict rate increases will apply some real pressure on buyers, requiring a little more compromise in wish lists before rates go too much higher and opportunities are missed. Secondary homes will continue to be purchased (as long as we have inventory) perhaps now without mortgages especially as we approach summer. Investing in home buying seems more likely compared to the volatile stock market. I fear primary home buyers may be more challenged as rates increase in tandem with high inflation rates. I suspect many of these buyers may over-buy, or even settle on home selection rather than miss a buying opportunity…or choose to rent for longer until something gives.”

 

 

“As of now, rates have only gone up 75-100 basis points versus what they have been over much of the period (one of my customers was quoted 3.4% for a 10-year jumbo fixed loan yesterday). So while up a bit, rates are still at historic lows. Technically, they would be even if they continued to rise another 75-100 basis points, which seems a certainty. While several of our buyers pushed up closings to lock in rates this month, none have noted it as a reason not to buy. Unless we see a real hike in rates to the 5-8% range, I’m hesitant to forecast lower pricing for three reasons. First, there simply is far more demand than possible supply. Available land is at an all-time low, and they aren’t making any more, plus construction/ replacement costs are through the roof. Second, inflation means the value of our clients’ bank, bond, and often stock accounts diminish if they sit on assets….Housing and other hard assets have been the best hedges against inflation and, third, every year, the Hamptons experience a new crop of buyers — customers reaching certain financial benchmarks, expanding families, converted tenants. Yet there isn’t the same outflow of owners, the way there is in some cities. Many owners continue to own for decades, or if anything trade ‘up,’ but not necessarily ‘out.'”

 

 

“The last two quarters were very busy but global anxiety and the push higher in rates have kept the phone from ringing as intensely the last few weeks. With fewer than 60 days to go ‘til Memorial Day, most people have already secured their immediate needs for this season, whether buying or renting. Now that they have the time to take a step back and watch the market for the next 6 to 9 months, the urgency is gone in many cases. With inventory still at lows, the overall volume of sales is down but median prices are up across the board. Another cycle of new construction is coming up for completion mid-summer, and off-market activity has steadily increased… though bids have to match the seller’s expectations to make the deal happen.”

 

 

“Excellent questions! While the stars seem to be working against us, the market remains fairly on course. That means the frenetic panic buying is behind us. So while the demand and supply scale still favors the seller, that too is shifting. Buyers are looking at all the news regarding interest rates, inflation, geopolitics etc. and assessing their next move… all while the city comes back and the virus is somewhat at bay. After all, nothing lasts forever!”