Thu, Jul. 01, 2004
REAL ESTATE - Miami Herald

Developers Anxious Over Future Rate Hikes

Worried about where mortgage rates will be in a week? Condominium developers are more concerned about where rates will be in two years.


South Florida developers say they're not worried about the Federal Reserve increasing interest rates by a quarter point on Wednesday, the first in four years. It's the ones to follow that have them uneasy.

Despite several years of frenzied home buying, many of the region's new high-rise towers have yet to break ground. Buyers signing sales contracts today will have to wait until their buildings are nearly finished to know their mortgage rates -- a two- or three-year delay that could stretch into a far less favorable era for borrowing money.

''If interest rates go up significantly, it certainly makes it more difficult for the buyer to close and make mortgage payments,'' said John Chappelear of the Related Group, which recently took less than a week to sell out a 1,000-unit condominium complex planned for Miami's Brickell Avenue.

At the end of its two-day meeting Wednesday, the Fed moved the interest rate it charges banks overnight up from 1 percent to 1.25 percent, saying an improving economy and job market required the move.

The Fed's decision triggered a one-quarter percentage point increase in commercial banks' prime lending rate, which also had not risen in four years.

This benchmark borrowing rate for millions of consumer and business loans rose from 4 percent, the lowest since 1959, to 4.25 percent.

The Fed said it anticipated more ''measured'' increases -- phraseology interpreted by Fed watchers as meaning more incremental, quarter-point hikes.

But the Fed's statement also warned it will pick up the pace if inflation rises higher than it had thought.

Housing analysts and industry executives mostly shrugged off the quarter-point hike, saying the move was so widely anticipated it's unlikely to affect mortgage rates.

But there was also consensus that the Fed is bound to raise rates again, leaving condominium developers to hope that the pace of increases won't accelerate to the point that their current buyers find themselves unable to become their future owners.

Gregg Covin, a developer of the Ten Museum Park project in downtown Miami, said he's worried enough about interest rates to plan for some of his buyers defaulting on their contracts when the 50-story tower opens in the fall of 2006. Should his buyers be unable to afford their loans, Covin said, the company will pay lenders upfront in exchange for discounted mortgages.

''I'm prepared to pay a couple points for each one of my buyers to buy them a lower rate,'' he said. ``This is something the developers might have to do.''

The prediction of higher rates to come as the Fed combats inflation would raise borrowing costs for developers too, and at a time when building supplies, including cement, lumber and steel, have risen dramatically from previous years' prices. But developers said they've budgeted themselves enough cushion to absorb those costs; they're just hoping buyers have made similar contingencies.

''It's more of a challenge for the buyer than the developer,'' said Jerry Krystoff, executive vice president of Colonial Development Group in Fort Lauderdale.

Most developers said they are confident that buyers who put down hefty deposits on sales contracts should be able to afford the higher monthly costs that come with rising interest rates.

Most sales contracts require deposits worth 20 percent of the purchase price, which the buyers lose if they decide not to close on their units. The financial consequences of that, developers said, would dwarf the cost of a slightly higher mortgage payment each month.

But the assumptions become trickier when dealing with speculators, those buying condominiums in hopes of selling them quickly at a profit.

Analysts and developers are divided on how large a role speculators play in the current condominium boom, but there is little argument that a sizable portion of the preconstruction buyers don't plan to live in their units.

Those buyers can be dangerous for developers because if interest rates rise to the point that they cool the housing market while increasing the cost of mortgages, a speculator may decide there's more money to lose in closing on a sale than in abandoning a deposit.

''They may not be able to flip a lot of these things,'' said Jack McCabe, president of McCabe Research and Consulting in Deerfield Beach. ``Right now, it's as hot as it can be. . . . It's going to become a much more competitive market.''

Hillel Slohet, 52, has bought several units in the Aventura Marina project, a waterfront condominium complex planned to open in phases over the next two years. He said he plans to keep one or two for himself, but that others he will try to sell and rent. The thought of rising mortgage rates don't worry him.

''I don't see a danger in preconstruction unless interest rates double,'' he said, citing the strong demand for South Florida's sun and its real estate. ``If you bought it right, you'll definitely make money.''

The Associated Press contributed to this report.