Increased government borrowing=interest rates up?

10y rate is already up 45bps this year but still lower than early 2014 level of 3 percent. ECB and Japanese central bank are still buying bonds. It remains to be seen what happens to rates. Inflation is likely to dictate the fate from here in my opinion.

From the 1960's through 2000 mortgage rates were above 7% and the world went on, we'll survive.

http://www.mortgagenewsdaily.com/mortgage_rates/charts.asp

http://airforcehomebuyer.info/articles/history_of_mortgage_interest_rates.htm

realestateny...not only did the world go on with high interest rates but real estate values soared.

I think the current valuations based on effective cap rates are very high. Manhattan Multi-family (closest proxy to Manhattan coop/condo resi market), is trading at below 4% cap rate which is historical low. Condo instead of $150-250 per sq ft are trading at $1500 per sq ft average some of which is clearly inflation and higher desirability of Manhattan. If the 10y rates go up by more than 50bps from here (call it 3.5%), it is clearly a big negative for Manhattan real estate (and almost all other asset classes) in my opinion.

300_mercer u have to understand that if interest rates go up it's because the economy and wages are accelerating. Wage growth always more than offsets interest rate increases when it comes to real estate values.

I agree with that. However, there is currently an element of interest rates being artificially depressed relative to the economy (growth/Inflation) by global central bank buying of treasury securities which many estimate to be between 50-150bps (just look at German bund yield of 75bps even after the recent increase). The normalization of this component as central bank stop buying and stop reinvesting (as Fed is starting to do) will increase rates more than warranted by the factors you mention. E-commerce is likely to keep a lid on inflation. That is why I am not alarmed but interest rates are clearly a factor.

I read that if the yield on the 10 year note passes 3%, that is not good for equities, it's also not good for the real estate market.

We have a kind of dilemma going on; on the one hand tax cuts to stimulate the economy, but then raising rates to essentially do the opposite to counter inflation.

I liked Larry Summers article in today's Washington Post.

Powell's (Feds eternal challenge) is to keep pace with a economy that looks like its getting back on the race track. Fed is a pace car, it needs to stay steady , not fall behind or accelerate too much. Of course easier said then done . Imho, we will be fine. It is an exciting time..a potential for real economic growth vs 8 past years of moribund growth with the Fed acting as a nurse maid adjusting the life support keeping the patient alive. Animal spirits can be scary, but both equities and RE s/b fine. Eventually markets correct, but buying during a correction and being able to hold while others panic , has always been a winner.

30 year mortgage is still under 5% historically that's very good. the problem isn't borrowing rates but high real estate prices

I think the problem with rates today is that many people rely on these lower rates to max out their borrowing capacity. Not sure how many people did this, certainly not most rich people. Higher rates worked decades ago when housing affordability was much higher based on income and purchase price. Prices have risen faster than wages so the math no longer works at high interest rates, at least not in Manhattan.

I think Manhattan residential of all places is more immune to rising rates as people are much richer. The real issue in Manhattan continues to be ultra high-end supply and I keep seeing articles that not every thing is on the market yet. People buying $2mm coop can easily absorb a $300-500 extra in mortgage rates or they can put 5% extra down from their well-performing equity portfolios to keep the payments the same.

"People buying $2mm coop can easily absorb a $300-500 extra in mortgage rates or they can put 5% extra down from their well-performing equity portfolios to keep the payments the same."

Some people, yes. All people, no. How many people would it need to affect to cause a ripple in the market?

And I still submit that any softness in the upper tiers may trickle down to the lower tiers. What is preventing this?

In my opinion it if fallacious to think that Manhattan is a market unto itself any more. If rising interest rates caused a significant drop in prices in Brooklyn, then I think that in the mid market many would find it a too attractive alternative.

I should have qualified my statement. When I say $300-500 extra per month on $2m coop ($1100-1500 per sq ft in a decent school district), I am thinking $1.3 to $1.5mm mortgage. 25-50bps ($300-$500 in payments) up from current levels, which have recently gone up appx 50bps, would not make much of a difference with the equity market and economy booming. Essentially I am talking about 10y treasury in 3 percent plus minus 25 bps. We saw these levels in early 2014 and market kept going up. If the rate increase is 100bps from here (10y at 3.75-4%; guessing Fed will stop raising rates if we get close to that level) in 2018/19, the market will obviously be impacted even with the economy staying strong.

30, well said. But Brooklyn is already preferred address for many especially the millennial generation that will drive this economy going forward.

300, I don't argue with your math although you may be over-optimistic about our continued economic expansion. But I do not have a crystal ball. I simply feel that at some time soon, there may be a tipping point at which buyers may feel current prices are simply too high. We have seen this before. You may be right about 2018/19 which is only one year away. In fact, that is my best guess as well.

Ximon, If you do not think economy will continue to expand, forget about the rates going up (they may be lower as Fed will certainly stop raising rates beyond say 2-3 more hikes) and get short equities or at least reduce you exposure significantly once the equities bounce back a bit more. Much better and cleaner way to express your views and fears than Manhattan real estate as a large percentage of people live in their homes and not over-leveraged.

As anonbk said in a different post, if you can time the market well, you will be very rich and can then easily afford Manhattan real estate.

Yes, 300. A large % of homeowners in Manhattan can ride out a recession. But some cannot and that is the concern I have. Very few can time markets well enough to be immune to a downturn.

As I have said, over-optimism has caused every downturn I can remember. The Fed has a better handle on economic concerns than I I but they also do not have a crystal ball. Downturns are inevitable and 2008 proved that we are not immune in spite of the opinion of most economists at the time.

At what point do we transition from rational exuberance to the irrational? I suppose it's when we ignore the negative signs and only see the positive. Household debt is near an all-time high and savings rates are at their lowest since the Great Depression. If wages do not keep up with inflation, things could get bad fast.

Maybe I am a naysayer but I would rather be wrong while at the same time preserving the capital that I have. I am willing to leave a few dollars on the table.

Peace out.