Rising Rates & Your Power to Purchase in NYC

Over the Holiday I was enthralled by a classic work of cinematic art- It’s a Wonderful Life by Frank Capra This 1946 classic tells the story of protagonist George Bailey, played by James Stewart, a dreamer pulled into being a realist when his father suddenly dies and he is moved to assume his position at Bailey Brothers Building and Loan, a financial institution in the fictional town of Bedford Falls NY.  Inspired and driven to uphold his father’s legacy as an honest banker, George sacrifices his plans of exploring the world ( ironically enough he was  “exclusively” accepted into the National Geographic Magazine “club”... a marketing stunt the magazine pulled to connect with their young readers) and enters into the world of the Bailey family business.  The antagonist of this story is longtime competitor to a ruthlessly financial shark Mr. Henry F. Potter. As anther local banker, Potter is the richest man in town, ruthlessly lending for high returns at the cost of the working class trying to afford their dreams of building a home.

The movie does a good job of portraying the downsides of what it means to be both a “good” bank (one that lends to people who need it, but is likely over-leveraged) and a “bad” bank (a more profitable one that loans at high interest rates and only provides credit to people who already have money). [3] Viewers always seem to conjure up a sense of camaraderie for George because of what he stands for- the spirit of free market capitalism.  The story gets really juicy when $8,000 goes mysteriously missing from the banks funds, and George along with the Bailey Brother’ Building and Loan institution are on verge of getting audited and closing. No bank bailouts back in the 1940s!

The movie’s plot also touches on some still-relevant financial topics, including the nature of banking, the philosophical calculus behind issuing loans, and the way American families’ financial fates are intertwined. [3]

A shocking comparison to today’s banking system, George Bailey often personally knew the loan recipients, offers the working middle class a fair interest rate, and rarely sought out to profit in excess of a high yielding return. Not much of a business man in today’s world-George Bailey would never make it on Wall Street. A long gone era in American both in social customs, and home loan rates. According to It’s a Wonderful Life, George Bailey was giving out loans to build a brand new house was and the amount? - $5,000!

Rates have risen, Banks may not give us $1M+ loans solely on a handshake but nonetheless this month, I decided to outline what today’s market means for investors, buyers, and homeowners in New York. 

In applying for a loan, lenders/banks often qualify buyers using an Income to Debt ratio. You’re debt such as credit cards, student loans, ious, collectively cannot exceed over 45% of your income. The bank needs to insure you’re worth more in terms of cash flow then draining debt.

FUN FACT: Did you know Co-Op Buildings look for a 20%-30% DTI in buyers, whereas Condo Buildings look for a 40%-45% in approving a purchaser.

 

To determine DTI, add your total monthly debt obligations including the following items.

  • Car loans

  • Student loans

  • Alimony or child support

  • Credit card minimum payments

  • Projected house payment including taxes and insurance

Then divide that number by your monthly gross income. [1] As an agent, we assist in evaluating your DTI, Debt to Income, so that together we can search properties that make financial sense.

 

FUN FACT: Did you know, for every 1% the interest rates increase, a buyer loses $180,000 in purchasing power?

 

We’re predicting Millennials and Baby Boomers to be the two most influential generations when it comes to new home purchasing, selling, or investing. With Trump being elected as president, interest rates have increased, inflation will decrease, and the purchasing power for buyers in NYC’s market will be subject to the amount of cash buyers have available and the inventory on the market.  In December, Corcoran reported 6, 152 active apartments in all of Manhattan, and equilibrium of supply but I’m sure a buyer is strategically devoting their time towards searching what would be a smart investment.

How to adjust your buying strategy in 2017:

  • Liquidate assets to but more money as a down payment

  • Liquidate assets to become an all cash buyer

  • Bring a non-occupant, co-purchaser, into the loan to reduce your debt to income ratio

  • Shop around for the best rate and lock it in at a fixed rate

  • Work with an experienced agent in researching a building’s required down payment in purchasing a unit.

What saved the Manhattan real estate market in 2008 was the isolated cooperation that each condo and co-op building are comprised of. 75% of Manhattan residential real estate is secured under  corporations which act as private entities in connection to cooperatives or condominium buildings. All relevant parties involved are united by their living quarters, want to ensure their property values remain or increase, and have a say in screening who moves into their building based on their financial critique of each applicant.

With a plethora of industry resources and connections to inform and assist our buyers, we welcome the shift in the market and prepare to guide our clients in making a lifestyle and financial decision that’s right for them. To learn more or to have a copy of the quarterly Corcoran Report sent to you, email  Teresa.Alessandro@corcoran.com.

 

FUN FACT: ARM 5/7 stands for 5/7 year Adjustable Rate Mortgage. This is a locked in lower rate and payment plan for the first 5-7 years of your mortgage.  It’s better to lock in a current low rate than risk that rates will stay low in the near future.

 

SOURCES:

[1]. http://themortgagereports.com/21682/how-mortgage-rates-affect-buying-power

[2]. http://www.realtor.com/news/trends/top-real-estate-trends-2017/

[3]. https://www.theatlantic.com/business/archive/2016/12/its-a-wonderful-life-banking/511592/

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