The Effect of Rising Interest Rates on the Playa Vista Market
This week the federal reserve raised the Fed Funds interest rate by a quarter point (.25%) for the sixth time since the financial crisis. They signaled that they expect to raise rates another two times this year and three times next year. The Fed Funds rate is the rate at which banks lend other banks on a short term basis. From this rate, most other rates follow and this effects, to some extent, mortgage rates. The increasing of interest rates is usually done to keep a strong economy in check or to cool inflation, which includes housing prices.
While six increases of .25% over under 2 years, a total of 1.5% seems like a lot, this will not translate directly in mortgage interest rates going from 4% to 5.5% by the end of 2019, although they will likely head up. There are many economic factors that determine mortgage rates, most importantly, the 10 year treasury bond. As yields on these treasuries go up, interest rates tend to loosely follow. A hot stock market will cause money to flow away from bonds, lowering prices of bonds to make them more attractive investments, and increasing the yield, thus increasing interest rates. I will save going into more detail for my upcoming economics textbook.
In the case of housing, particularly Playa Vista, take a $1,000,000 purchase price with 20% down payment for example. In this case, the monthly payment on a 30 year fixed $800,000 loan increases by $489/month when the rate goes from 4.5% (roughly current rate) to 5.5% (in my opinion, the worst case scenario by end of next year). Will this increased payment disqualify some people from higher purchase prices? Yes, of course. Will it disqualify enough people to keep homes from selling? Probably not due to the demand that exists in the area, the amount of existing equity and investment value of many buyers, as well as the number of all-cash buyers.
Most likely a significant increase in rates over a short time frame such as this will cool things somewhat, but people still need a place to live. The Playa Vista for sale market is only as strong as its next best alternative, which means renting or living elsewhere. When those alternatives are not attractive, leveraged investments will likely be reduced, but most buyers will still buy – they will just put down more money or unhappily accept with the higher payments. Other factors such as increasing supply will negatively impact the market more. This will happen sooner or later for reasons indicated in previous posts. I venture to say rising interests rates, by themselves, will have minimal impact on values in this area.