The Impact of Rising Interest Rates on the New Jersey Housing Markets - Term Paper Example

Commercial capital markets are abuzz with the talks on raising interest rates for the past few years. The reason attributed to this is the direct impact on the state of capital markets supply and pricing which combined together can have a very significant impact on the commercial real estate market. In the backdrop of a rising interest rate environment, it serves well, for better understanding, that one comprehends the property level supply and demand drivers at the macroeconomic level. It is also essential that the resultant impact on Net operating income (NOI) be carefully tracked along.

As an economic thumb rule, the cost of new construction rises with the rise of interest rates resulting in a slowdown of construction and depletion of new product supply to the market. Thereby the market assumes the dominance of a landlord market with higher market absorption rates. This, in turn, will result in an increase in rentals thereby keeping the NOI pegged with the rise of interest rates as and when it climbs further. While the situation is very congenial for the existing owners of the property the plight of developers and tenants is rather detrimental and can contribute as a negative influence on the economy for the period of time the rise in interest rate lasts.

The purpose of this research is to study the impact of rising interest on commercial capital markets at a more micro level, on the basis considered above, whereupon the key industry segment of real estate development in a particular metropolitan area of the United States can be more closely examined. The study has been done over the period 2001-2005 examining among various other factors market indicators like PMI, Consumer Price Index (CPI) for investigating the parallel rising of income levels of people which influences their investment in the capital markets especially the real estate against the backdrop of rising interest rates impacting the cost of new constructions.

Related indices of study for this level of the examination are the impact on the flow of funds which can direct or redirect the investments to be made in real estate in comparison to other low-yielding asset classes. The other indices are the loan pricing, sizing, and cost of funds.