Dec. 19, 2015
The Federal Reserve's 1/4 point interest rate hike was the big economic news around the planet, affecting bonds, currencies, commodities and stocks immediately.
How will it affect real estate? The most likely consequence is the opposite of what most people expect: the rate hike will actually driveup property prices.
You may be thinking: wait a minute, higher interest rates mean higher costs, which drive down the price people can afford to pay. This is correct -- in the long run, and only with all other things being equal.
However, in the short run, there is likely to be a bit of a buyer's panic. People who have been "thinking about" buying a home realize that their window of opportunity is closing. While their monthly loan cost is slightly higher now than it would have been a few months ago, it will likely be a lot higher if they wait another year.
Thus, a large pool of prospective buyers becomes active, committed buyers. More demand leads to faster turnover and higher prices. So, even before rates have started to bite into buyers purchasing power, they may also have to pay more for their property.
This is a general analysis, and the real question is what happens specifically in Paradise Valley real estate?
First a bit of background. Interest rates affect luxury properties less than the average property, since there are more cash buyers. Since Paradise Valley has the most expensive real estate in the state, interest rates are not quite as impactful of this market.
However, certain market segments within Paradise Valley rely on loans more than others. For example, many buyers at the $1.5 million price point require a loan to make their purchase. However, many buyers at $3 million+ do not require financing, and have been using loans only because rates have been so favorable.
Consequently, expect to see the following in Paradise Valley:
1. Q1 2016 should be a blockbuster quarter.We always get a boost from seasonal visitors, but this year may be even more intense as any who planned to use a loan see their window of opportunity closing. Expect to see quality properties selling even faster, and new listings of quality homes to sell very close to asking price.
2. Competition in the under $2 million segment will be especially intense, as those buyers realize they may be priced out of the market the longer they wait.
3. If rates rise 1% over the next 12 months as anticipated, it won't be enough of a headwind to take the real estate market off course. This last cycle has been driven by lack of supply, far more than credit. We will see the market gradually adjust and become more balanced, but a significant retreat is unlikely. Even at higher price levels, real estate remains very attractive relative to bonds and stocks.
4. A large segment of buyers who had been insistent upon "move in ready" homes will reconsider their position, and start looking for fixer uppers. Simply put: if the banks are squeezing them on their loan, and competition is red hot for turn-key homes, then the only way to get into PV economically is a handyman special.
My crystal ball is no better than anyone else's, but I have been through a few cycles and have the scars to prove it. The financial markets appear to be much more volatile, and vulnerable, than real estate.
It's worth noting that despite the incredible array of changes we've seen in the tax code in recent years, that many of the biggest tax "goodies" for real estate remain unscathed.
However, many financial assets appear to be in the sights of both Republicans and Democrats. Perhaps the only thing that Donald Trump and Hillary Clinton agree upon is they hate Wall Street, and want to see more taxes and regulation there.
Given the privileged tax status of real estate, and the bipartisan distaste for Wall Street, my investment dollars will continue to go toward real estate. If you feel the same, please click here for access to unlisted cash flowing real estate.