30 January
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2016 Financing Implications | By Erik Lien

The Fed finally raised rates at their December meeting – as most everyone knows, it was the first time they had done so in nine years. For at least the last two years, pundits and real estate agents have opined that a rate increase could quickly soften hot housing markets. In Boston, there are few, if any, signals that would suggest a softening in the pricing of the upper tier condo supply. With no shortage of cash rich buyers trying to find their way into the downtown housing market, Boston, at worst, would experience a nearly imperceptible slow down in the growth rate in the coming year or two. In other words, dropping from 7-8 percent increases per year in 2013-2015 to 5 or 6 percent increases per year in 2016-2017.

Consider the impact of a 0.5% increase in rate on a mortgage balance of $1,000,000:

  • Loan balance of $1M with a rate of 4% = $4,774 monthly mortgage payment
  • Loan balance of $1M with a rate of 4.5% = $5,066 monthly mortgage payment
  • 12 month difference = $3,514
  • 60 month difference = $17,571

If a buyer is considering a purchase of approximately $1.25 – 1.5M in such a case, the five year difference in mortgage payment ($17,571) is 1 to 1.5% of the purchased property value. And that’s in an extreme case where the fed raises rates double what the analysts expect in 2016. Notably, by all standards, a fed rate increase is a signal to the market that the economy is performing – job growth, wage inflation, etc. So, paying a few more bucks in interest may well be balanced out or exceeded by wage earners with increasing salaries and bonuses.

To summarize, the lifestyle impact felt by high earning professionals via a relatively modest interest rate hike is minimal and therefore we do not expect housing prices to be slowed in earnest in Boston proper during 2016.