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Rising Mortgage Rates Blamed for Spike in Broken Contracts, Experts Say

By Amy Zimmer | October 1, 2013 7:32am
 The changes in Fannie Mae and Freddy Mac will likely affect buyers looking for apartments like these in the mid-range of the market, priced about $459,000.
What $459,000 Will Buy You in New York City
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MANHATTAN — The city’s real estate market has seen a lot of records lately, from record high rents to record low inventory.

Now there’s another one — the number of broken contracts.

The third quarter saw more than 215 broken contracts — a 15 percent jump from the quarter before, according to a report released Tuesday by StreetEasy.com which has been keeping track of deals for seven years. 

Rising mortgage rates may have been the culprit, StreetEasy’s Sofia Song said.

The nearly half-percentage-point increase in June added extra dollars to monthly payments, so some buyers, who signed deals, may have then gotten turned down by co-op boards or by banks which pay close attention to homebuyers’ debt-to-income ratio, experts said.

"Co-op boards want to keep a certain ratio. Housing expenses, for instance, shouldn’t be more than 38 percent of someone’s income,” Song said. "If you’re already at the borderline, [higher rates] could push you over.”

The biggest spike in broken contracts came in July.

That month’s 37 percent increase suggested that June’s steep rise in mortgage rates may have affected some buyers’ ability to afford the homes they inked contracts for, Song said.

The number of broken contracts was 11 percent higher than when there was a flurry of broken contracts just after the Lehman Brothers collapse in 2008.

“In the first few months of the economic breakdown we saw a lot of broken contracts,” Song said. “But it was nothing like this spike.”

With a record 4,200 contracts in the second quarter of this year, there were more opportunities for failed deals, Song noted.

The average rate for a 30-year fixed mortgage jumped in one week at the end of June to 4.46 percent from 3.93 percent  — the biggest one-week increase ever recorded.

Rates, however, have since dropped back down a bit to 4.32 percent.

The Federal Reserve — recognizing the real estate market was still too weak — announced last week that it would continue its economic stimulus program of buying mortgage-backed securities, thereby driving mortgage rates back down, Song explained.

That decision came on the heels of Fannie/Freddie Mac announcing it would lower the loan caps starting in 2014.

In New York, the loan cap is currently $625,000. So, when the loan cap is lowered to a yet-to-be-determined amount, buyers who need to borrow more than the cap will have to seek mortgages from more expensive private lenders, Song added.

“Anything that decreases the affordability of buying will have a negative impact in this market,” Song said. “While lowering mortgage rates increases affordability, the lower loan caps will balance that out.”

The changes will likely affect many buyers across the city, although it isn’t expected to touch high-end buyers, many of whom pay in cash, brokers said.

“Frankly, for people in the upper end of the market, it doesn’t affect them that much,” said Jeff Schleider, founder of Miron Properties, where the average deal is $900,000.

We don’t see anyone accepting mortgage contingencies for those apartments,” he said of contracts where buyers agree to go through with the deal even if they don’t get a mortgage.

“We’re still seeing multiple offers, especially in the $3 million-range. We just did a bidding war that was over ask for a $3 million apartment. The buyer is going to get a mortgage, but is going no-contingent,” he said.