If higher rates aren't bad for prices, explain this WSJ article

are we going to see a lot of buyers buying now, bidding etc. thinking that rates will rise later in the year...i wonder

I guess it is a popular enough misconception that there are buyers who would be in a rush to buy before rates rise rather then allow them to rise and knock prices down. I will be more interested to see what happens to prices when its bought tougher to qualify and interest rates are higher. We re-achieved 1998 peak in 1998. I doubt it will only take 10 years this time.

No doubt that rising rates will impact prices, but we have that little thing called inflation to deal with as well.

inflation? maybe they will add fuel to the core just to get the numbers up. rents fell nationally by 3% this past year.

Real interest rates is nothing more than how society values savers vs. Spenders. It's been 0 for 10 yrs.

"No doubt that rising rates will impact prices, but we have that little thing called inflation to deal with as well"

How does the Fed stopping its support of the mortgage market cause inflation and/or why does it necessarily need to be accompanied by inflation? This is basic economics that you don't seem to understand. The Fed is supporting the mortgage market. Removing that support has nothing to do with inflation. Further, higher rates to attract buyers to the US treasury market, again it has nothing to do with inflation.

JM: inflation is but one part of interest rates. The market is pricing inflation at being flatish and in the 2% range for the next 10 years. Simultaneously, it's pricing increasing interest rates for the next 10 years. Add to that the removal of government's extraordinary support for the mortgage market, it's quite easy to imagine a 1-3% increase in mortgage rates without any change in inflation expectations. Beyond that though, inflation is very likely to play a significant role.

Would it be preferable to have a lower price than lower interest rates? I'm assuming so because you can refinance when rates come down later, yes?

A 1-3% increase in mortgage rates without any rent inflation would trash this market.

Yes higher rates mean lower price, all things being equal. This said, higher rates can also mean stronger economy, and more demand. Yes, you can refinance. However, the bigger deal is you can enjoy when the price inflates when interest rates fall...whereas if you buy at rock bottom interest rates, you can never enjoy that potential upside. The time to buy any asset is generally during the periods of highest rates.

Next question - if interest rises and there is inflation, wouldn't that drive people into buying real assets?

The only type of inflation that drives people to buy real estate is the inflation of rents. Notice, oil and gold are up a lot in the last 10 years...Manhattan rents are not. If one of the bulls on the board wants to make the bull case on Manhattan rents, I'd love to hear it. None have tried. Vacancy and unemployment are high. This city is built for a bigger finance industry than exists any longer...and may never exist again.

If you have a high inflation (as many predict), your income (assuming you have a job) will also go up as well. In this situation, if you have cash it is best to put it into hard assets such as real estate. The benefit is your asset would go up with inflation, however your mortgage payment is fixed. Rent would go up or down mostly by demand and supply. However, it can also go up just because your dollar is worth less.

I am assuming that it is low employment that is driving high vacancies, so landlords can only increase rents in a rising interest environment when there is a large supply of renters that are employed and can afford to pay. Is that correct?

stagflation anyone?

Incorrect, rent does not go up just because your dollar is worth less. Oil goes up because your dollar is worth less because its a global good. Local rental apartments are not a global good. You had it right the first time, rent goes by local supply and demand. Just because the dollar collapses, dont expect people who live in Manhattan and pay for things in dollars to notice other than when they are buying imports or global commodities.

Wad, that is what I believe yes. If you think rents are going to go up because the dollar falls against the Euro and the Canadian dollar, then I'd love to hear how that works....anyone...anyone...Younessi?

Rhino86,
Are you saying given the same exact demand and supply situation, the rent will be the same whether you have inflation or not?

What do you mean by 'inflation'? We had inflation in crude; we didn't have inflation in rents. We have seen the value of the US dollar decline...but we did not see Manhattan rents rise. What is it that you are talking about?

Do not use 'inflation' and rising rents interchangeably.

That is because we had no inflation last year. But that was not my question.

"If you have a high inflation (as many predict), your income (assuming you have a job) will also go up as well."
Partially and slowly. If the pace is fast, you will be well behind trying to catch up. In a high rate of unemployment scenario, what boss will deal with an employee asking for a raise every four months?

"In this situation, if you have cash it is best to put it into hard assets such as real estate. The benefit is your asset would go up with inflation, however your mortgage payment is fixed."
Real estate CAN be a good venue,but as an investment if it's not a positive cash flow situation, it could be worse. You could be hit with more taxes, higher fuel costs, and many other expenses going up with inflation as you are locked into one year or multi year leases, too broad a statement anyway.
And your mortgage payment is fixed if you have a fixed mortgage, not if it's variable. Variable has been quiter seductive the last couple of years, I think you'll find more people variable than fixed these days.

Rent would go up or down mostly by demand and supply. However, it can also go up just because your dollar is worth less."
Yes but again, this is slow crawl with min 1 year leases. Not to mention the non paying rent scenarios.

What is your question, younessi, if rents rise will rents rise? Yes. If your question is if we see inflation of global goods due to dollar deflation, do we necessarily need to higher Manhattan rents? My answer to that is no.

Alas, I don't think the rental situation is quite as b&w as you might like to believe.

Yes, Manhattan rental vacancies edged up to 2.89% in December.

But the rest of the country has an average rental vacancy rate north of 11%.

Manhattan rents have come down - but vacancy rates are hardly highly elevated. Just relative to its historical very low rates.

I googled, because that's what I do and came across these. I guess it really comes down to whether you believe that renters can actually afford to pay more. Assuming they are unemployed or that their salary increases lag behind interest rates, that may not be the case.

http://whiskeyandgunpowder.com/is-real-estate-a-good-hedge-against-hyperinflation/
http://piggington.com/real_estate_as_an_inflation_hedge_or_more_to_the_point_not
http://news.morningstar.com/articlenet/article.aspx?id=168086

If your dollar is worth less in gold, oil or stock market terms, why is it necessarily worth less in Manhattan rental value? That's what seems to be the confusion here. Sure we had no inflation last year...but we have had inflation in the last 10 years...and Manhattan rents are stagnant.

Wad, we are not talking about higher rates due to economic strength...which would drive rents up...We are talking about higher rates from the removal of stimulus and lack of demand for US treasuries...neither of those latter two things will do anything to help residential rental values in Manhattan.

By the way, I am on the market for a rental and I have found that prices have been reduced. A lot of what's been reduced is in buildings I think only fools would have been willing to pay so much for. Or maybe I'm a fool for not making as much because I can't imagine how I would shell out that level of cash every month. But there are still a lot of units that I look at, try to make an offer even, and get a flat out "No". It still hasn't sunk into the landlord's head. And while all this is anecdotal on my part, I really do believe that rents will continue to fall (at least through the first half of this year). Of course this is my experience looking in the off season for rentals so I have no idea how it is for people that look in June.

Like sales, rentals fell to a point and stopped. Call it 20% on rentals. I think landlords are seeing more interest lately and feel emboldened.

I am getting $1950 for an apt that was rented 10 years ago at $1300. I call that rent inflation. The reason rents went down in past few years was due to higher supply and lower demand. The re-zoning under bloomberg allowed more square footage for the same amount of land. There was a massive building of new projects (some are now empty lands). In addition most townhouses were able to add two floors. Rent regulations were relaxed, allowing for more apartments to be deregulated; adding to supply side.

The demand was down as result of job loss and lower income. These factors can change with time.

The Rental market is the wild west for the last year. I suspect it's "recovery" will be hotly contested as well as it's decline as it will be hard to pin down.
Let's say you have a rental for 5K. But your getting 1 months free and the landlord is paying the broker. You can't find that in a Miller report.
But to be fair to, the converse will be true. IF, big IF there is a major recovery in the rental market, that will be slow in the reports as well.
Because now that apartment is still 5K but landlord not paying broker fee or offering months free or both. That won't show in the reoprt either.

And BTW, inflation figures are so manipulated, I confess I have no idea what has been true or real inflation over the last ten years.

What you do know is that rentals are barely higher than they were in 2000...the dollar is lower, oil is higher and the stock market is lower....so all this business that inflation (whatever that means) is good for coops values in Manhattan is basically bullshit.

wad, this coming summer will be interesting. many units turn over in the summer. this year landlords didn't do so well, and that's when we saw major concessions. i wonder what type of recruiting banks have done for the class of 2010. i know law firms have reduced the numbers even more than for 2009.

aboutready
I seem to recall a thread from a couple months ago claiming a serious uptick in hirings for accountants and lawyers.
But my view was different.
I saw it as a preperation for handling and dealing with the soon to come wave of foreclosures and bankruptcies. ;)

I wonder what Millers plan to buy convert condos to rentals will do for the rental market.

"Rates on 30-year fixed-rate mortgage have risen by a quarter of a percentage point in the past month to around 5.2%"

But Rhino, you've been saying conforming mortgage rates are 6.5% for the past 6-9 months. What's the disconnect?

I've been saying something about conforming mortgage rates? Sorry but WTF are you talking about?

"The only type of inflation that drives people to buy real estate is the inflation of rents"

Excellent point.

I don't have the time/inclination to sort back through old threads, but from memory your rent vs. buy analysis and carrying cost analysis has been premised on 6% to 6.5% mortgage rates.

In one recent example, you said a 4% cap rate was too low because the mortgage rate for that particular property would be "at least 200bps higer".

To the larger point, I think you are correct that rising rates will be bad for prices all else equal. But I also don't think we should ignore the reality of where rates are today for qualified borrowers, and 5.2% is still awfully low for the time being. If we are in the 7% - 8% range in a year, I think you'll likely be proven right.

Now I know what you mean. I used that as a place taker... I am not a mortgage market maker. Please do not rely on me for your rate data. My only point those times was that cap rates remain lower than mortgage rates, which to me seems a bad time to buy.