The data is finally in on the 2019 Q3 market, and while it’s not surprising, it’s still a blow for many. Prices for Manhattan real estate took their biggest plunge since the 2008 financial crises, according to the Q3 Elliman Report. The average sales price for condos and co-ops is now $1.66 million, down 14% from last year. Sales also fell by 14.2%, making it the lowest third-quarter sales total since the financial crisis. One of the only areas to see growth was inventory, which grew by 6.2%. A rise that continues and is only adding to the problem of a slowing market.
While these numbers are hurting sellers, there is hope that segments of the market are stabilizing. The average number of days on the market has declined throughout the market for properties below $10 million. As more sellers recognize the need to lower their prices, buyers who’ve been paying attention will see this as a golden opportunity to enter the market.
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Condos, Condos, and more Condos
The city has been going through a condo boom since the start of 2013. More than 16,000 new units in 682 buildings have gone up across the five boroughs since then. Many of these units are in the top 10% by price and include some of the most expensive homes ever sold in the history of the country. But with such high price tags comes the challenge of finding enough buyers to afford them. Of these 16,000 units, 25%, or about 4,000, remain unsold to this day. This glut continues to grow with more high-end developments in the works and still moving skyward. With the median price of these units being $1.1 million across the city and $2.3 million within Manhattan, they remain well out of reach for most New York home buyers.
The condo development boom that led to this mess was primarily driven by historically low U.S. borrowing rates in 2012. Developers saw an opportunity and began buying up land and erecting these new luxury condo developments. The success of these early ventures encouraged a wave of followers with overly rosy estimates that the demand would keep up. Unfortunately for them, it hasn’t. Foreign buyers made up a large portion of these original purchases, but a combination of factors has led to a decline in foreign sales. This includes closer scrutiny of anonymous shell companies, overregulation with increases in Mansion and Transfer taxes, strengthening dollar, recession fears, and trouble in their own countries. For instance, Chinese buyers have fallen off due to the continuing trade war and a slowing economy at home.
With declining demand and an oversupply that keeps on growing, developers have been competing aggressively to win over buyers. In an attempt to keep their recorded prices high, many are offering to pay for attorney fees, taxes, and even some decorating. Some are turning to real estate agents and offering then a higher than average commission split if they can find a buyer. Any units that do sell, but at a lower purchase price, tend to make things worse for other would-be sellers in a building. Buyers are more likely to negotiate for a lower price if comparable properties in the building sold for less. There may even be a comeback of tactics used in past cycles. Such as bulk sales of unsold units to investors, mass conversions to rentals, or multi-million dollar “rent-to-own” offerings.
Looking ahead, the city’s condo glut looks set to continue for some time yet. Some experts believe the backlog of units already on the market could last at least two years. The heart of the issue is that many of these condos were built to satisfy international buyers. There is a real concern now about the sustainability of the city’s condo market. Perhaps, in time, prices will fall low enough to tempt local executives, bankers, and lawyers to buy. Developers and investors may find this hard to accept, but, as it’s often said, it is the market that sets the prices.
An Ill-Timed Tax Increase
Another problem for high-end apartments and a big reason why sales dropped so drastically this quarter is the new increase in the mansion tax. Last quarter saw a huge rush of buyers desperate to avoid this increase, which went into effect on July 1. The mansion tax, which previously placed a supplemental tax of 1% on all homes valued at or above $1 million, will now increase progressively. Homes valued at $2 million or more will now be taxed at 1.25%, while homes worth $25 million or more will be taxed as much as 3.9%.
A Buyer’s Market
The cooling investor market has led to another phenomenon. More people are buying with a mortgage than cash. Generally speaking, home purchases in NYC are roughly 50-50 between all-cash offers and mortgage-backed offers. Furthermore, it tends to go that the higher the price, the more likelihood there is of a buyer paying all-cash. As much as 80% of home sales above $5 million are usually paid this way. However, this quarter, a little less than half of the purchases above $5 million were all-cash offers. 42.8% to be exact, the lowest share since 2014. This is a further suggestion that the deep-pocketed investor market is drying up. But also a hint that some buyers are taking advantage of falling prices.
The drop in sales prices could very well have been worse if not for these mortgage-backed purchases. Interest rates are now at an all-time low, which is starting to attract those who need financing and more affluent buyers that wish to take advantage of cheap lending. That said, many buyers still seem to be sitting on the sidelines. Some of this could be due to a lack of confidence. But it may also be because many sellers are still refusing to drop their prices. The mood among many sellers appears to be one of reluctance to face harsh realities.
What we seem to be at now is a pivot moment. One that may change the NYC residential market for some time. If, as predicted, the market continues to cool, more sellers are likely to come around and lower their prices. However, there’s only so far they can go. Developers who paid peak land costs and who promised lenders overly ambitious returns to have less wiggle room. Those who’ve managed to refinance their projects have only bought themselves an extra two to three years to make good on their promises. Buildings with less than 75% of their units sold are unlikely to have met their lender obligations. Which, in effect, puts them between the devil and the deep blue sea as far as price cuts go.
But despite the outlook, demand for new condos is still there. Those units that are priced under $5 million are moving much faster than their higher-tier counterparts. As time passes, more buyers are likely to recognize what an opportunity this presets and jump in. It may not be a good time now for sellers in NYC, but it’s a golden one for buyers. The next few months will reveal whether or not more buyers will take the bait.
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