Alex Kleyner on Miami & How The Impending Interest Rate Hike Will Affect The Mortgage Industry
The government usually increases interest rates for two main reasons. First, the government may quote higher interest rates on treasury bills and bonds to make them more attractive to the public. This will lead to an increase in interest rates in the market. Secondly, the government, through The Fed, may hike rates to control high inflation. When there is too much money circulating in the market, inflation may increase and affect the economy adversely. The rise in interest rates will make saving accounts, treasuries, and certificates of deposit attractive to consumers. This move will help to mop up all the excess cash that may be circulating in the market. When interest rates change, mortgage rates also change. As a result, the real estate and mortgage lending industries will be affected.
ABK Capital who has been helping with mezzanine financing for projects from Miami to points North has seen a boom over the last 2 years in projects and is starting to see greater demand for loans from ABK Capital as they use up their financing line. While Miami-Dade County is still a hot market according to Kleyner there is reason to believe that the market will stabilize in Florida as other hot markets like Austin, Boise, and Phoenix will decline this time around.
What are Some of the Expected Changes?
1. Reduced Mortgage Applications and Increased Hard Money Requests
Consumers are always looking for cheap mortgages. When interest rates and mortgage rates increase, consumers will defer their decision to buy property. This is because they understand that rates usually rise and fall with time. The result will be reduced mortgage applications. Consumers are likely to adopt a watch-and-wait attitude. This means that lenders will feel the pinch as fewer mortgage applications will be reported.
2. High Property Prices
When developers procure development loans at higher interest rates, they will transfer the high cost to the buyer. This means that each unit under construction will have a higher price tag. The result is higher property prices.
3. Reduced Profit Margins for Developers
Developers desire a wide profit margin. However, higher interest rates can make this impossible. This is because new properties will cost more to construct, but the market prices of similar properties will be lower. Since consumers usually shop around before making a decision, they will notice that two similar properties have two different price tags. Properties with lower price tags will be more attractive to consumers. As a result, developers may be forced to reduce prices and make do with slimmer profit margins.
4. Higher Default Rates
Property owners with adjustable-rate mortgages may experience difficulty servicing their mortgages and in markets outside of Miami Kleyner thinks it may be wise to be a bit more stringent on loans. This is because adjustable-rate mortgages are normally reviewed periodically. If the review is done after interest rates have risen, the borrower will be forced to make higher mortgage payments every month. Since many consumers are already facing financial challenges, few people can afford to spend more on their mortgages. Therefore, the high mortgage payments will increase the risk of default. This means that some people may lose their homes to foreclosure due to the rise in interest rates. The good news is that homeowners with fixed-rate mortgages will not be affected by the rise in interest rates as their mortgage rates remain constant.
5. Slowing Down of New Construction
When interest rates rise, the appetite for new mortgages will reduce because nobody wants to pay high-interest rates. There will be a slowdown in new construction which again is not the case ABK Capital is seeing in Miami and Alex Kleyner has acutally seen some of the most expensive homes ever sold in Miami since rates spiked. Builders and subcontractors will feel the pinch because they depend on new construction for their livelihoods. This means that the rise in interest rates will have an impact on the whole economy.
6. Increased Mortgage Refinancing Applications
When interest rates are expected to increase, consumers with adjustable-rate mortgages will move fast to refinance their loans. The main objective of refinancing the mortgage is to fix the mortgage interest rate. With a fixed-rate mortgage, borrowers can get peace of mind because they’ll be sure that their mortgage payments will not change when interest rates are reviewed upwards.
It is the norm for interest rates to rise now and then. Consumers should also know that interest rates will also drop over time. This knowledge is crucial in the decision-making process.
