How to think about what’s going on in New York right now.

Mortgage Rates are High

We all know this. Yet we’re not thinking in three dimensions. What is its impact across every element of the housing market?

Think about it these different situations:

1. Sellers have super low mortgage rates if they bought more than 12 months ago. If they are looking to buy something new, 6.5-7% interest rates make the move far less interesting. So they are not moving. See this inventory report- inventory is stubbornly low.
2. Buyers want to move to the suburbs, where inventory is down for reason #1, down perhaps 50-75%, if not more. What do they do if they are renting in the city? They hunker down and stay where they are.
3. All-Cash Buyers want to go ahead and purchase in the city, but there’s limited inventory here, too (again due to reason #1). If anything makes sense, they make a bid. And if it makes sense to them, it seems to attract multiple bidders. And the unit finds its level pretty quickly.
4. Financing Buyers want to purchase, but the cost of a mortgage is a bit scarier. If they don’t lose out on a propety due to scenario #3, they bit the bullet and buy what’s on the market, convinced that mortgage rates will go down in the next 12+ months. If they can’t find something, they will stay put in their rental unit.

The impact of low inventory everywhere? A backstop on price softening. That’s good for sellers.
The impact of low inventory in the suburbs? Upward pressure on rents in the city. That’s good for landlords, but terrible for anyone who wants to buy a house.
The impact of low inventory in the city? Upward pressure on rents in the city. Great for landlords, tough for buyers.

The second order impacts of high mortgage rates include the out-of-control rental market. Hence, the New Yorker cover this week. And 60,000 real estate agents leaving the business across the US.

Cost of Renovations Are High

Fewer people are talking about the cost of renovation in the city, but it has leapt 50%, or more, in many cases. Renovations that would have cost $500,000 five years ago are more than $750,000. Renovations that were $750,000 might be $1.25mm. Contractors aren’t even available.

Here are a few situations to consider:

1. Seller with an estate apartment that she must sell. The cost of renovation has put substantial downward pressure on the value of the apartment. And she must ride that price until she finds a buyer.
2. Buyers with limited inventory are looking at properties that needs full renovations, priced based on an old paradigm- when renovation costs were much lower. They are making bids based on the new paradigm, and sellers and their agents can’t seem to understand why they can’t get the old prices.
3. Sellers whose apartments are livable but are starting to show their age- these units are on the edge of needing work, and buyers are also discounting those apartments accordingly.

The impact of high renovation costs in the city? A fear of the unknown for buyers who just don’t know how much a fix-up will cost. Uncertainty = no offers or low offers.
The impact of high renovation costs in the city? Significantly lower estate sale prices. Some sellers get the short end.
The impact of low contract prices? Coop board rejections. Sellers lose.
The impact of board rejections? A negative cycle away from cooperatives. Shareholders lose, and buyers may win, but much, much later.

The second, third, and fourth order impacts of high renovation costs are everywhere.

Monthly Maintenance is High

Lastly, I’m looking at the monthly costs of building charges. Between taxes and regular upkeep, it can be scary for homeowners. What used to be $1200 a month for a one bedroom is getting closer and closer to $2000 a month. What used to be $1600 for a two-bedroom is approaching $2500. And for large apartments, $4000-10000 is no longer crazy to contemplate. How does it impact the market?

Here are a few scenarios to consider:

1. A longtime owner in a small building with a full staff has just seen his one-bedroom apartment maintenance go to $2200/month. He is considering selling now.
2. A seller in a regular prewar building just had his monthly charge go up to $3000/month.
3. A buyer looking for a two bedroom apartment just saw mortgage rates go from 6% to nearly 7%, along with monthlies jump 20%. She can’t afford the new monthly cost.

The impact of high maintenance in the city? Fixed-income owners may have to sell. Bad for sellers, bad for buildings, good for buyers- maybe? Not if these units need a lot of work.
The impact of high maintenance on sellers? Buyers may no longer be able to afford their apartments without price reductions. Bad for sellers. Bad for buyers. Bad for the market.
The impact of high maintenance on buyers? They have to rethink their math when mortgage rates rise. Bad for buyers. Bad for mortgage brokers. Bad for sellers.
The impact of high maintenance on renters? They stay put instead of buying, and drive the rental market up. Good for landlords. Bad for new renters. Bad for would-be buyers.

In Summary

Again, it’s not always the direct impact of mortgage rates, or renovation costs, or even the rising costs of running a building. It’s the second- or third-order impacts that are holding back the market.

It’s going to take a little time to wrap your head around what’s going on. But once you do, it’s easier to see where the opportunities are- and to make bids that make sense.

Be in touch if you’d like to think through this together. Thanks! -Scott