Economists complain that it’s difficult to isolate factors in their experiments on the real world.
Thinking Real Estate,
I’m wondering if we could isolate any factors as to why the 2bedroom+ market is outperforming the 1bedroom market.
Let’s make a few stabs at it, shall we?
Maybe by looking at how the 2-bedroom market and see
how that impacts the 1-bedroom market- even peripherally.
Lots of snarky comments from my 2-bedroom feature in the NY Times.
I don’t blame people for making fun of the writing- or how quotes are interpreted by writers like Vivian Toy.
However, I think that the various people quoted are pretty much spot-on.
Here are a few reasons I think the market for 2-bedrooms is
2-Bedroom Pricing Down from Market Highs
Prices for 2bedrooms came down from the height of the market, making these affordable.
If a buyer could try to reach to make a 2bedroom happen, wouldn’t he?
Conventional wisdom would bear out that appreciation, just in terms of actually cash, would be higher in a two-bedroom.
The push to 2-bedrooms
seems to be pushing inventory levels down in two-bedrooms, keeping levels higher for studios and 1-bedrooms.
In the process, prices have been getting pushed up a little bit, too.
From watching the market carefully, I would say we’ve seen 2-5% price increases minimum over the last 6-9 months in 2-3 bedrooms.
We’ll see how this bears out in future quarterly reports.
Rates Impact 2-bedroom buyers most:
I argued in a recent New York Times article that two-bedroom buyers would be affected most by the new Fannie Mae and Freddie Mac guidelines.
If the rates become significantly different on mortgages below $625,000, those buyers looking at typically prices- 2 bedrooms close to $1mm- are going to be impacted.
Their buying power will be diminished, because they will not be board passable anymore for the mortgage they need to get.
To give you a real life example:
Let’s assuming a $1mm purchase price, with 25% down (typical of coop purchases).
A rate increase of 75 basis points (0.75% in the rate) can require income to be
10% higher for prospective buyers.
The spread between rates of “conforming” loans versus “jumbo” loans is already in place- and if the government stops buying loans- we may or may not see banks step up and lend at rates that are attractive.
Even still rates will eventually go up:
These mortgage rates will not stay down forever.
Eventually, rates will go up, and with this limited inventory, we will likely not see much, if any, downward pressure in prices from this.
What we will see, is continued diminishing purchasing power for Mr. and Mrs. 2 bedroom buyer.
However, the rates don’t have to change broadly – yet the shift in policy will still make them rise.
So there are some thoughts on the two-bedroom market.
You can apply the same logic up the chain, so whoever is financing a purchase.
However, if you move it down, to the one-bedroom buyers, the logic begins to break down.
Same Argument: Rates are low for “conforming,” and not enough visibility about when they’ll rise
Mortgage bankers seem to think rates will continue to be very low for the next 12-18 months.
In the mindset of a buyer, there isn’t any rush to purchase.
A buyer can look around at all the inventory before making a decision.
This inventory level is more pronounced on the East Side than Downtown and Westside, but there is much to see.
Prices are still low
If anything, we’re seeing downward pricing pressure on 1-bedroom apartments.
What do I mean?
Prices have come down, and they are, for the most part, are not pushing up.
Condo market has held up somewhat, buoyed by foreign investor money and pied-a-terre buyers, but coops, especially those with high monthly maintenance, are seeing much slower sales volume.
That said, there is a straightforward argument, which is simply the cost of renting vs buying the same apartment.
Right now, all signs point to buying being a better choice.
Even in buildings with high maintenance, the outlay is slightly less on the purchase.
I do not expect this standoff of 1-bedroom buyers to last much longer.