Is This A Good Time To Buy?
So where are we in the real estate cycle? The Manhattan market has come under pressure since 2016 with the influx of luxury new development inventory. The pressure on the top end of the market has trickled down. In addition, mortgage rates finally started to rise and the new tax laws had negative clauses for the market. However, on the flip side, New York City is enjoying a very strong economy with good population grown and job creation. Which side wins in this duel?
Let’s look at an example. 110 3rd Avenue is a desirable condo built by Toll Brothers in 2007. Units there have floor-to-ceiling windows, many units have great light and view. It’s close to NYU. Apartments there go. These 3 units are the same layout with virtually no difference in view. In summer 2016, #13A sold for $2.395mm in a bidding war to an all cash buyer after just 1 month on the market. #12A sold for $2.35mm after quite a few months on the market, because the seller wanted the same execution as #13A. This is why transitional markets are slow - it takes the sellers some time to come to terms with reality. Now, #11A is on the market, asking $2.295mm. This real example shows that the resale market is off 6-7% from the peak of 2015/2016.
Now let’s take look at what’s happening with new construction. One West End is a popular project on 58th and West End because it is one of the few new construction buildings with tax abatement. The project first started selling in the summer of 2015. We compared the latest asking price vs. the first asking price for 1, 2 and 3 bedrooms. We see here - both one bedrooms and three bedrooms dropped ~8% from 2015/2016. Our data show that 2 bedrooms only dropped 1.3%. One of the reasons could be that the 2 bedrooms were released last - in June 2017, so they missed the initial market drop.
Let’s go from one project to a broader picture. This is an interesting slide. Because it shows the granularity in NYC real estate. How we should always keep in mind that no trends apply to all. The resale example we saw speaks to majority of the market but not all. Here, most of the new dev projects are down with the exception of One Manhattan Square. One Manhattan Square started sales with modest asking prices. It is also in an area that’s still up and coming in Manhattan with very good views.
Now we have looked at the past 2-3 years. Let’s go back and take a look from 1995. Here we see positive year on year price changes in most years with a few down cycles. The chart doesn’t show negative growth the past couple of years. Remember, this is YoY change on median sales price for the whole market. The new construction numbers we showed before were on $/sqft. So for the market as a whole, overall prices haven’t come down.
Let’s go to Brooklyn. As expected, Brooklyn went down more than Manhattan during the 2007 crisis but has enjoyed more price appreciation in the last 5 years as Brooklyn went through its renaissance. In my experience, Manhattan is without a question a buyer’s market now but Brooklyn is not so much. I don’t feel prices have come down in the last 2 years for Brooklyn.
OK I admit making this presentation brought out the geek in me. I got over excited about all the different graphs and charts. I promise this is the last one! This chart compares price appreciation for homes at different price points. The second quintile performed the best from 1995. The median sales price for second quintile started at $178k in 1995 and ended in $768k in 2008. The third quintile was 1.2mm, fourth quintile 1.9mm and 5th - a big jump - $4.2mm. The most expensive 20% of the market actually performed the worst.
So! The market is under short term pressure for the 3 reasons we mentioned (inventory, taxes and rates). But fundamentally, the fact NYC is a destination for young people chasing their dreams, global investors seeking capital preservation has not changed. Between 2000 and 2016, the New York housing stock grew by about 8% while the adult population rose nearly 11%, jobs were up more than 16%. The question remains - is the market going lower in the short term? No one has a crystal ball. What I can tell you is historically the down cycles generally last just a few years. Banks have cut back on construction lending for some time so the inventory problem is being addressed. Tax and rate wise, I will leave to our two experts. But even though some clauses are bad for real estate, but many higher earners in New York will end up winners in the tax reform. The old wisdom is to not buy on the dip but buy on the recovery. But the real estate down cycles are short. If you are purely investing perhaps it makes sense to wait but if there are other reasons to buy - to live in, this is a good time to buy. A buyer’s market with negotiability. With that, I will hand off to Steve, who will talk to us about taxes.
