August 4, 2016. We’re past the year’s halfway mark and well into the 3rd quarter of a year in transition. For most of 2016, buyers gained the negotiating edge, but while prices are holding, transaction volume and velocity are down. Interest rates have hovered at historic lows for the better part of 8 years, and as of this writing, we’re at an all time average low of 3.44% on a 30-year fixed product. Rates are expected to inch up nominally in December after the US presidential election, though the change, at least initially, is unlikely to make much of a difference in residential real estate.


Bob Knakal, Chairman of Cushman and Wakefield, categorized the current commercial climate as the most confusing he’s witnessed in twenty years. Knakal points to the extended period of low interest rates as the drug-like impetus that has been moving transactions. He observes, “Interest rates are like a drug….being so low for such a long period of time is terrible…for our economy, but it’s a great fix for real estate.” 


That’s the conundrum of prolonged low rates: they are great if you are buying or refinancing, but low returns on savings are not very good at all for the general populace. When the economy takes from savers to give to borrowers for extended time periods, nothing really is gained.


In some markets around the world, namely Canada, Sweden and Australia, where property prices have accelerated in the last 12 months reportedly by as much as 32% in Vancouver, 16% in Stockholm and 11.3% in Sydney, there’s talk of unsustainable price gains, heavy debt and threatening housing bubbles. This week The Reserve Bank of Australia cut its benchmark interest rate by 25 basis points to a new record low for the Aussies of 1.5%.


In New York City, all segments of real estate—commercial, residential, investment and retail—entered a correction period that began last fall. If the Fed had plans to raise rates this summer, we can thank a disappointing May jobs report and England’s referendum voters for keeping the lid on any U.S. hikes. The vote on June 23rd to exit the EU clearly left Europe fractured, and Brexit’s damaging consequences have yet to be played out in global markets. However for New York City real estate, near term effects have been positive in keeping interest rates down and redirecting international buyers away from London to Manhattan. Against a backdrop of weakening foreign economies, the dollar has strengthened. Wall Street’s move from stumbling losses to all-time highs though confounding helps to boost confidence.

Last month Freddie Mac Chief Economist Sean Becketti observed: “With the U.K.’s decision to exit from the European Union, global risks increased substantially leading us to revise our views for the remainder of 2016 and all of 2017.” Predictions for this year hold that the 30-year rate will top out at 3.6% and will be about 4% by mid 2017. That’s in sharp contrast to my banker friend who shared with me his recent triumph of securing a 30 year fixed mortgage for 2.875%.


Curiously although mortgage rates have never been more attractive, the reality is that 44.3% of our market’s buyers from January through June chose to close with cash, a trend if not a strategy that began several years ago. Many buyers who find themselves in competitive bid situations are going to contract with all cash and are financing after closing, a strategy that is supported more anecdotally than with real statistics. Cash deals remove the risk from the seller’s side, eliminate the reams of required paper intensive documentation, and also avoid procedural delays.

Last week Jonathan Miller, President of Miller Samuel Real Estate Appraisers, in his blog published a chart showing cash purchases for the first six months of 2016. His intel maintains that two-thirds more condominiums than co-ops were bought for all cash; the higher the price, the more likely the buyer paid all cash—more than 80% of purchases over $5M were all cash.

A similar inverse relationship exists between interest rates and budget—the larger the spending purse, the less impactful are rising rates. Clearly there’s never been a better time to consider refinancing. It’s doubtful rates will go lower. The time is also ideal to negotiate with sellers hungry for offers. Increased rates may sting first time buyers a bit, but in most cases, they a non-issue for Manhattan real estate. Now is an ideal time to face the challenges and uncover the opportunities of the current marketplace.