Frenetic Construction on New York’s Billionaires Row Is a Disaster Waiting to Happen

From my office, I am perched in a position where I can see all of the construction in midtown Manhattan.   I saw the crane blow over on top of the Park Hyatt in September 2012 two days before we were struck by Superstorm Sandy.

I think that that may pale in comparison with what is going on now.

There are three major building sites that are each already extending well over 1400 feet into the sky and not topped out.   If you look at the picture above, you will see cranes high into the sky and these are from left-to-right:

111 West 57th Street

53 West 53rd Street (the Jean Nouvel Moma Tower)

The Park Hyatt (completed in 2013)

Central Park Tower (255 West 57th Street)

There are many more high-rise projects throughout Manhattan that aren’t even visible here.

As we head through the summer, we are seeing a perfect storm - rising interest rates, an overbought New York property market at its highest levels, and more-and-more very high-end inventory properties flooding the market (with fewer and fewer non-US buyers).   Developers are eager to close to maintain (avoid losing) the contracts they have and to try to battle upon completion for the last remaining bits.

I see all these cranes working at a frenetic pace every morning, lifting extraordinarily heavily machinery.

While construction in New York is very tightly regulated, the pace is unparalleled and I am afraid we could see one or more very serious accidents here very soon.

What to Consider as Rates Rise: Fixed-Rate Mortgages vs. ARMs

Buying a home means more than just committing to raising a family or living out one’s golden years in a particular house. It usually comes with financial obligations in the form of a mortgage. It is therefore important to prepare for the possibility that mortgage interest rates that have been at records lows for years may be rising soon.  In particular, this could affect how a new homebuyer approaches whether to consider adjustable rate mortgages (ARMs) in addition to fixed-rate mortgages

Fixed-rate mortgages

A fixed-rate mortgage is the most traditional form of a mortgage, locking in both the interest rate and monthly payments for the life of the loan.   These mortgages can vary in length.  The standard is the 30-year mortgage, but a 15-year fixed mortgage offers purchasers a quicker amortization schedule and ownership timeline.

Regardless of the length, many prefer a fixed rate mortgage because the repayment obligations are clear from the amortization table.  They do not change the course of the loan, offering borrowers predictability —offering the peace of mind that comes with stability and avoiding interest rate fluctuations. 

To be clear, fixed rate mortgages can be appealing if you think rates are lower now than they will be in the future. With rates near historical lows and seemingly poised to rise, locking in a rate could make sense for many borrowers now.

Adjustable-rate mortgages (ARMs)

An adjustable-rate mortgage (ARM), unlike a fixed rate mortgage, has a fixed interest rate for a few years with the 5-year ARM being the most popular (3, 7 and 10-year ARMs are also common) with the amortization ordinarily extending over 30 years.   Once this initial fixed rate period ends, the monthly payments will vary as market rates change.  While many ARMs offer limits on how much your rate might increase in a given adjustment period or over the life of the loan, a purchaser selecting an ARM should understand that if rates rise from these levels there interest obligations (i.e., monthly payments) may reset at much higher levels.

For those planning to stay in their home beyond the fixed period at the beginning of an ARM, the risk to rising rates at this point in the interest rate cycle may offset any advantage to reducing near term interest payments.   Even if you might have been more likely to take on the benefits of an ARM mortgage, a fixed rate at this point may just offer you more safety, security and flexibility. 

Start exploring rates where you live here.

Are Higher Mortgage Rates on the Way?

When the Federal Reserve acted to raise the Fed Funds rate in June 2017, it set the new Fed Funds target rate at 1.00 to 1.25%.   While, this marked the fourth rate increase since the beginning of 2016 (and since the Fed had lowered rates to zero during the financial crisis), mortgage rates have remained at or near their all-time lows.  Therefore, the news continues to be good news for potential homebuyers and those who may be looking to refinance.

Mortgage rates have not yet risen because they are tied to 30-year US Treasury Notes.   US Treasuries remain below 3% as central bankers worldwide continue to engage in monetary and fiscal policy designed to stimulate their economies (and to keep their currencies from appreciating).

The Federal Reserve however continues to guide towards one more increase in the Fed Funds rate at the end 2017, 3 more in 2018, and a Fed Funds target rate of 3% by 2019.   Some economists and analysts believe that a 30-Year US Treasury rate over 4% before the end of 2017 is possible.  The US Treasury rate could reach 5 to 5.50% by 2019.

Moreover, it is important to note that the Federal Reserve now holds over $1.7 billion in mortgage-backed securities (MBS).  The Federal Reserve began purchasing these securities in 1998 and purchased them in earnest during the financial crisis of 2009.   The Fed has been the longest lasting purchaser in MBS markets and has provided its largest source of funds.  It is now ending its purchases, but in its June statement, the Fed indicated that it will be a net seller of MBS securities for the foreseeable future.      

If you have been postponing refinancing, this could be your final chance to get in before rates begin to really rise to normalized post-crisis levels.

If you are a potential first-time homebuyer or someone considering a second home, you should also be mindful of current rates and the risk of a real rise in the coming months.  However, the caveat here is that if rates rise, we will see home prices fall, making them more affordable. 

Some economists, in fact, fear that a rise of the 30-Year US Treasury to 5.50% will derail the US homebuilding industry and have severe implications for the US economy in 2019. 

It is my prediction, however, that the Fed may not raise as aggressively as it is currently targeting if Janet Yellen resigns as Chairman of the Federal Reserve and is replaced by Gary Cohn who is actively lobbying Trump for the position.  In addition, Minneapolis Fed President Neel Kashkari is also in the mix and has turned very dovish, having now dissented on the last two Fed moves.  To boot, inflation expectations are contained.

Whatever happens, we are certainly in for some interesting times in the mortgage industry. Be sure to check rates frequently here to know where things are heading.