In Wednesday’s meeting, the Fed voted to hold interest rates steady, but indicated that there will be another increase this year and that they expected only two rate cuts in 2024 instead of the four that were previously forecast.
“This is not good news for the luxury real estate market, or any real estate market,” said Melissa Cohn, regional vice president of William Raveis Mortgage.
Luxury property buyers may seem immune from such things, but even they are impacted by the central bank’s decisions, which will prompt some to act now and others to wait on the sidelines for the time being, according to real estate experts.
“The stereotypical description is that wealthy people pay cash, so they don’t care [about rates], but that is patently untrue. What they care about, and what Fed policy impacts, is the financial markets,” said Jonathan Miller, president and CEO of the appraisal company Miller Samuel.
While many wealthy people don’t take traditional mortgages on their homes, “they do borrow against their securities, and the cost of that borrowing is also high and expected to go higher when the Fed raises interest rates again this year. Nor do they want to sell stocks in a declining market,” Cohn said.
Armed with the knowledge that rates will remain higher for longer, some potential buyers may choose to remain in the wings until rates begin to slide next year, Cohn added. Though others may see an opportunity to buy now before prices rise higher.
“Buying today is still a good move even if you take a new mortgage at today’s high rates,” she said. “If the price of homes appreciates by 5% when rates decline next year, and the additional cost of a mortgage is 2%, then it is cheaper to buy now—and refinance when rates decline. The math works in favor of buying today.”
The 30-year fixed-rate stood at 7.19% as of Thursday, close to August’s recent high of 7.23%, according to lending giant Freddie Mac. In September 2021, the rate stood at 2.33%.
“Falling rates don’t mean 3% or 4%,” Miller said, recalling the lower rates of the last few years. “It probably means low 6%, high 5% being optimistic.”
Not even cash buyers, who don’t have to contend with mortgage rates, will be unscathed by the knock-on effects of the Fed’s decision, according to Hannah Jones, economic data analyst at Realtor.com.
“Even all-cash buyers are faced with scarce inventory and high prices, making a luxury home purchase more challenging,” Jones said. “High-end buyers will likely continue to face tight inventory as prolonged elevated mortgage rates discourage homeowners from listing their homes for sale. Limited inventory will keep prices afloat, which will continue to discourage buyers from participating in the market.”
Some wealthy home buyers may be more optimistic about Wednesday’s announcement, though, taking the paused rate as a reassuring sign.
“With mortgage application numbers up the week prior to the Fed’s decision, I believe that luxury market consumers will embrace the optimism and resilience of the current market,” said agent David Harris of Coldwell Banker Warburg. “Buyers were settling into the higher interest rate so the Fed holding fast for the time being I believe will encourage them to move forward.”
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