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Equity Now In The News - 2005

Dow Jones Newswires
November 01,2005

Rate Rise Not Hurting Real Estate, But Long Rates Are Eyed

NEW YORK -- The Federal Reserve's decision to raise rates for the 12th time since June 2004 shouldn't have a material impact on real estate and housing values - at least not yet - although higher rates are starting to have an impact on demand in certain segments.

Also, experts are watching closely to see if long rates start significantly moving up.

"We're not worried," said Gary Gabriel, an executive director at New York real estate brokerage firm Cushman & Wakefield. He still sees plenty of equity and debt capital chasing after real estate, although he said there has been some "heightened selectivity" by private investors in the latest quarter.

Gabriel said some of the "speculative froth" has started to come off the higher end of the market on properties that aren't in prime locations or that are facing leasing, rent rollover, or other problems. "We've seen some degree of slight repricing" in this segment, he said. Higher borrowing costs have led to a small "disconnect" between sellers' expectations and the amount buyers are willing to pay for these particular properties.

However, Gabriel doesn't expect this repricing to accelerate or become more widespread as a result of the latest rate increase which, he added, was expected.

The Fed's Federal Open Market Committee increased the key federal-funds rate by 25 basis points Tuesday. If the Fed suddenly boosted rates by 50 basis points, or half a point, the real estate markets could swoon.

"Anything that's off pace at this point - because everyone's been lulled into a sense of security - might be somewhat disturbing to market participants," said Gabriel. "Anything outside what has become customary might rattle the markets."

At the present time, though, the economy has shown great resilience in the wake of the hurricanes, rising energy costs, terrorist activity in Middle East, a drop in consumer confidence, and other "bad news" that has been making headlines, said Gabriel.

"We see GDP up 3.8% in the last period and see many signs of heightened activity," he said. "The consumer continues to spend even in the face of potentially not great news."

Mitch Hersh, chief executive of real estate investment trust Mack-Cali Realty Corp. (CLI), said the rate increase affects the leveraged borrower, the floating-rate borrower and homebuilders most - not investment-grade real estate companies whose debt is mostly fixed rate, he said.

However, when the long end starts to rise, real estate prices in general could correct, as there will be significantly fewer investors chasing after real estate, he said.

"If and when you see the 10-year [Treasury note's yield] cross the 5% hurdle, you're going to definitely see a change in psychology and it's going to impact cap rates [or returns on investment in real estate]," he said. If this happens, he believes the market could see a 10% correction in real estate values.

On the housing side, the latest rate rise could start to have an impact on the long-end rates, which would make mortgages less affordable and could potentially lead to a pricing correction.

Michael Moskowitz, president of lending company Equity Now, speculates that if the Fed continues to raise rates over the next few months, the yield on the 10-year note will top the 5% mark by April from its current level of 4.57% and the 30-year mortgage rate will approach 7%. If this happens, he predicts residential real estate "will come to a halt, and possibly roll back 10% to 20%" in the next 12 months.

If the Fed suddenly raised rates 50 basis points instead of 25 basis points, it "would accelerate the correction," Moskowitz said.

Fitch Ratings analyst Bob Curran said long-term rates have started to move up over the past six to eight weeks, and this latest rate could fuel this further. However, he noted that "moves [on the long end] have been far, far less than what we've seen with short rates."

Curran is already predicting home sales will decline 4% to 5% in 2006, and he isn't changing that forecast as a result of the latest rate increase. He doesn't expect prices to fall.

If, however, the Fed raised rates 50 basis points next time, it would likely have a bigger "psychological" impact on investors and home buyers, which could lead to a bigger pullback, Curran said.

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