What’s Next?
We are in the waiting period between the end of summer, when there’s not much new “data” to chew on.
Many people are away, weighing options of what they want to do in the Fall.
Buy, sell, rent, move to the suburbs, etc.
I’ll cover the Trump stuff in a separate post.
Everyone is looking for a deal.
My view is that the real estate market actually is moving along just fine, just at slightly lower prices.
The issue right now, if anything, is that sellers are still holding on to old pricing, which explains the average number of days on a property spends on the market (DOM)- being higher, nearly 20% higher year over year.
Sellers are finally adjusting, though .
And while some buyers are really hoping to score a “deal,” reality is more that once a price gets sufficiently low, buyers are there to help the price find an appropriate level.
The big question is the stock market and what it will do through 2018 and beyond.
Last year, the concern was the lack of correlation between the stock market and the real estate market.
Meaning, people couldn’t understand why real estate prices weren’t higher, considering how strong the stock market was (and is).
This was on the heels of a strong correlation between stock and real estate market.
Some three years ago, every time the stock market went up to a new high, there was a
seeming correlation with contracts signed over $10mm aka a positive correlation (one thing goes up, another goes up).
Now that relationship between stock and real estate may be divorced, or at least disconnected for right now.
If
the stock market ultimately takes a turn for the worse, will the inverse be true?
It could be.
In that case, if the stock market goes down, the number of transactions
could go up.
It’s not that I necessarily see prices going up on luxury housing just yet, just sales volume.
I do see is people moving money from the stock market to the real estate market, and taking advantage of a softer real estate market to park money, to move up, etc.; real estate
prices have been sufficiently depressed in certain price segments, that there may be more upside, or perhaps just less risk, in buying real estate.
August has been too busy in our offices to believe otherwise, unusually busy.
This makes sense to me after nearly nine years of a run-up in stock prices….
Renovating in the City and Its Impact on Future Sales
The other thing that’s on my mind is the cost of renovating in the city and the value of buying a “wreck.”
More than anywhere else, the expectation is that if you renovate your apartment, this spending will be an investment, not done just for your own personal enjoyment.
That you should be able to not only get all of your money out, but make a profit for your time and “sweat equity.”
Yet,
I have seen a number of recent situations where the money spent was not recovered in the sale price.
In some cases, my client, the buyer, often purchased a unit at a lower price than the seller’s cost basis plus renovation costs.
Some of it can be that there just wasn’t enough time between buying and selling for these owners.
In one case, a buyer purchased in 2016, spent about 3% of the purchase price on renovations, and expected to recover that and much more.
What likely happened is that the cost of selling (call it 8-10%) was just too steep in such a short time, and the market has moved against this seller, resulting in a loss of probably 8-10% in total- which are the “friction costs” of selling in New York City.
So we can certainly say that trying to “buy and flip” has much more risk than what some of these doofy guys on TV will have you think.
Let’s look at a slightly longer time horizon.
I’ve seen people who bought in 2013 and may only break even selling, after gut renovating their unit.
That is, sales price will likely be not much more than purchase price plus renovation and closing costs, not factoring in time of ownership, cost of living elsewhere during their renovation, cost of carrying the unit during the entire time.
In this case, they have gotten no premium for their efforts.
Is it that owners are overspending on renovations?
This could definitely be a culprit.
The only home renovation show I watch with any regularity is the couple in Waco, Texas who buy homes for $200-300,000 and spend $50-150k to renovate.
I love them.
It’s fun to look at what are the costs of a studio apartment in Manhattan and see these lovely families move into massive estates in rural Texas.
But they are spending 15-25% of their lower purchase price to transform a house.
The whole thing is fun, but doesn’t seem remotely realistic.
Unless the show in itself is causing real estate prices to increase in Waco, the property market won’t necessarily reward them for their renovation if they chose to flip.
I could be wrong, of course.
In Manhattan, buyers are looking for many more bells and whistles than they ever have, and spending $200-250,000 to renovate a $1mm purchase is probably too much relative to the purchase price.
people love to flip property
In the end, perhaps the real culprit is that
cooperatives have made it nearly impossible for contractors to make money, given the impossible hurdles of work hours, limitations, licenses, etc- so much so that renovation costs are insanely high to owners.
This feels much more likely.
And that the costs themselves of renovating could be lower, were there less red tape.
Renovating, like anywhere, involves
a certain amount of thought, and when the ratio of renovation cost to the cost of the property purchase gets too high, the risks increase dramatically for owners.
Planning, forethought, and sensible renovation budget are critical elements to consider.
And perhaps some insight from brokers like myself who have seen the downsides time and again.