The expectation and predictions in this blog have been that when mortgage rates and inventory increase, the market and price appreciation will both slow down, allowing for a bit of a healthy landing of some sort.
But making predictions in this moment feels like trying to determine how long this ridiculous New York City winter will last.
I’ll leave the predicting to Punxsutawney Phil
Perhaps we can have him around to blame if the winter lasts longer than another 6 weeks.
Instead, let’s look at the early-year benchmarks that have passed, helping to set the table for 2015 for us to see how big (or small) the real estate feast will be:
- Wall Street Bonuses have been paid
- Restricted Stock paid during the 2009 Crisis have vested, available as of January 2015
- Private School Admissions have been announced and decisions have been made
- Winter Break is over, minds have been made up to sell or stay, or to buy or stay
- Low property inventory levels are creeping up ever so slightly, with proper pricing remaining a real challenge
low mortgage environment persists, for now
- New Development in Manhattan and Brooklyn is just trickling out, even with double the inventory coming
to the market in 2015
- Chinese New Year has passed, and soon those vacations will end in Asia as well – those buyers and other foreign buyers will make the pilgrimage to the US to buy real estate in larger numbers than ever
With all of these moving pieces, what does this mean for New York City real estate, in the Year of the Sheep?
Let’s look at the above and see how each pushes or pulls at the market.
Wall Street Bonuses
Bonuses will likely turn out to be a net positive for buyer demand in New York City.
That is, bonuses will continue to drive demand for larger apartments at higher prices.
Private School Admissions Decisions
Now that schools have made their admissions decisions, and parents have determined which school to commit to, we can now see the apartment shuffle begin.
While the rental side of the coin will not be impacted for another 2-3 months, the sales demand from families looking to move will be felt almost immediately.
IMPACT: A renewed demand and strain on inventory levels.
Winter Break’s Over
Behind the scenes, many buyers or sellers have finally made decisions.
That is, buyers have determined to stay in their rental, or to make another go at purchasing this year.
With the promise of inventory hitting the market at this time of year, the buyer fatigue I saw at different points last year has dissipated, leaving those committed buyers ready to move forward if they can.
Sellers, on the other hand, have committed to sell and upgrade, sell and downsize, or sell and move to a house.
The big concern right now is PRICING.
The disconnect between buyers and sellers persists.
Overpriced properties abound, and finding that right pricing strategy in this market remains quite a challenge.
What seems to be working best is a very conservative pricing at the start, allowing for the abundance of buyers to bid up a property to its appropriate level.
We’re seeing more bidding wars than we have for years.
I’m concerned about some of the pricing decisions sellers will make when they come to market.
It may be helpful to see more inventory, but I expect to see longer times to signed contracts if the pricing is too aggressively high.
Buyer demand will continue but buyers will not pay any price.
Low Inventory Levels Tick Up
Inventory remains around its lowest in years, though it’s up 10% year-over-year
– it’s still too low.
Even though I’m seeing preparations underway for a significant number of larger resale properties to hit the market- thank goodness!- when we see 60 people at an open house on the slushiest Sunday in memory, inventory is clearly a problem.
Days to contract remains incredibly short.
IMPACT: The creep of more inventory will help buyers find their new home, unless the pricing disconnect is too wide.
Low Mortgage Rates Persist
Low rates have had massive impact across the world.
Costs of borrowing have inflated asset prices, including the wealth of the target audiences for New York City real estate, while also improving income for these buyers.
A persistent low rate environment can delay purchases, unless outweighed by the fear of rising prices.
Right now, I would argue that buyers are caught in between rising property prices, and the specter of rising rates.
Focusing in on these buyers, we have to take a look inside the mentality.
Rates hold a great deal of sway.
If there is more concern about rising rates, we will see many run to make their purchases.
These will be the buyers who take a long view of the market, who are buying to live, and for the long-term.
They may likely be taking advantage of Interest-Only mortgages.
In 7-10 years, when rates will almost certainly be higher (that’s not a prediction), these buyers feel that they will simply have a decision to make about whether to refinance their mortgages or invest their liquidity in ways that will promise a higher return.
The structure of Interest-Only mortgages places a limit on the increase in the rate.
That is, 3% rates are capped at 8%.
It may be hard to remember that rates were at 6.5% 10 years ago.
Even resetting mortgages at 8% in 10-15 years, when these current products reach these limits, may look reasonable at time.
The other buyers are those who fear rising rates in 1-2 years’ time will dramatically impact the pricing on real estate for the worse.
This is the big distinction in the market right now.
Very different viewpoints on real estate.
I believe that this viewpoint, the darker of the two, likely requires the assumption that the monthly cost of a purchase will be lower in the future factoring in housing costs and higher borrowing costs.
These buyers must also factor in the cost of renting in the interim!
There is a cost to flexibility, and these buyers will likely be considering this as well.
IMPACT: More seem to be betting on having optionality in ten years’ time- that is, they are buying now.
The question is whether more people ultimately take the long-term or the short-term view of rising rates.
Those buying smaller apartments may not be thinking about these considerations at all.
More New Development, But Not Enough
The buyer psychology mentioned above plays a huge role when buyers are considering spending $3mm+ on a purchase for a primary home.
With so much New Development focused on these buyers in Manhattan, and so little inventory coming out, these buyers are competing against investors from across the globe.
Even if there is double the new development coming to market, little of it will be in Manhattan or Brooklyn, even less of it will be for sale (rather than rent).
IMPACT: Unless a flood of smaller units are on offer, there is very little the addition of
new development will do to slow down the market velocity.
We cannot believe that properties are
“overvalued” here without looking at what is going on in the rest of the world.
Whether we start with the current or future strength of individual economies (if that’s possible), currency considerations, rule of law, etc, so much factors into the prices buyers are willing to pay.
This is exponentially true with foreign buyers.
Even if the New York Times writes lengthy pieces on villainous characters across the globe buying apartments in LLC’s in New York (YIMBY wrote a terrific rebuttal/commentary worth reading), they could also have just written a piece saying that foreign buyers like the United States more than their home countries as a safe haven for their assets.
One can earn her income or wealth in a legal way and still feel this way, too.
Further, the concept of “Mo’ money, mo’ problems” rings true when lawsuits are brought against wealthy people, whether here or across the globe.
Developers in NYC or India get sued by buyers.
It’s a matter of course.
If real estate is also part of a culture’s lifeblood, as it is in Asia, then one could hardly be surprised to see money piling into US Real Estate, even with little to no return.
Less risk, lower return.
Chinese buyers comprised 45% of all foreign investment in US Real Estate in 2014.
Will this increase?
IMPACT: The world gets scarier, the US and New York City specifically looks better and better.
Foreign demand continues to increase to chase safe assets.
This will help development site sellers, and ultimately condominium buyers/investors regardless of the market conditions going forward.
What is the net result?
We shall see.
The push and pull of all of these factors should make for a very interesting Spring market to be sure.