Buying New York

Welcome to my 2018 preview of the upcoming spring season for buying and selling real estate in NYC. Market reports and the media tend to be reactive so I wanted to express some thoughts that are more predictive. Although, apartments are bought and sold year round the main buying and selling seasons in NYC are the spring and fall months. These two time periods give us the best indication of the market.

As such, here are some thoughts about the spring market 2018:

1. Higher Inventory

Inventory in Manhattan has gone up rapidly. The end of February featured over 5400 apartments on the market, which is the highest amount of inventory on the market for this point in the year since 2012.

Based upon looking at historical data combined with the current economical environment, my projections for Manhattan inventory at the end of the following months are below.

2. Contracts Signed Slowing

Since the tax bill became a focus late in 2017, we have now experienced three consecutive months of year over year decrease in contracts signed in Manhattan.  Are these buyers who disappeared from the market when the tax bill was getting all the media coverage coming back into the market or staying on the sidelines? This is perhaps the biggest question with regards to the upcoming spring market.  Out of the past five years when looking at the time frame of March to June only two of the twenty months had number of signed contracts dip below 1000. However, I project that contracts signed will dip below 1000 for at least two of the next four months.

3. Increasing Days On the Market- Higher Discrepancy Between Buyers and Sellers

One of the signs between higher discrepancy between buyers and sellers is increasing days on the market.  In an increasing days on the market environment there are more stale listings on the market. More stale listings translates to more leverage for buyers when making offers. This past February shows the trend of increasing days on the market.

As such, based upon data of past trajectories of days on the market, I am predicting the following:

Please note on the above projected chart, it is typical for days on the market to decrease over the spring months. However, these projected numbers are up from the past few springs.

4. Trading Up Opportunities

The following types of apartments in neighborhoods below are experiencing lower inventory than one year ago. In addition, the next product size up is experiencing higher inventory than one year ago. Therefore, there are favorable conditions to sell and then buy a bigger size apartment

Greenwich Village – Sell One Bedroom Coop and Buy Two Bedroom Coop

West Village- Sell One Bedroom Condo and Buy Two Bedroom Condo

Murray Hill- Sell Studio Coop and Buy One Bedroom Coop

5. Best Neighborhoods to Buy and Sell

Buy- Many neighborhoods in Manhattan represent high inventory and high days on the market, which really favor buyers when making offers. The neighborhoods that stand out are Tribeca, Soho, Midtown South, Midtown West, Chelsea, Financial District, Dumbo.

Sell- The best neighborhoods for growth reside in Brooklyn and Queens and consist of Prospect Heights, Flatbush, Glendale, Flushing, Woodhaven and Kew Gardens Hills.

1. Get Pre-Approved– Getting this step of the process done lets you know the maximum amount that you can spend. With a firm price range you won’t fall in love with properties above your budget or see properties above what you can spend. Pre- approval is also required when submitting offers so showing that you have this step done gives you credibility when speaking to real estate agents. Also, the earlier you do this step than the less hassle you have later on when you are in time crunch.
2. Choosing the Right Real Estate Attorney- It’s imperative to use a real estate attorney who is licensed in New York State. Don’t go using your friend who is a personal injury attorney or your mom’s cousin who works as an attorney in Upstate New York. I would also recommend that you pick an attorney that just focuses on real estate. Buying in NYC has a lot of nuances and you need an experienced attorney who can due the due diligence properly and let you know of potential risks.
3. Money in Reserves– Most co-op boards want to see 24 months of mortgage and maintenance in reserves post-closing. Without this money in your liquid accounts, you won’t be able to get approved by the co-op board.
4. Understand Proper Length of Time to Find a Home, Get Approval and Close – Buying a home is an expensive decision and it very unlikely that you want to make an offer on one of the first homes you view. The search process can take a few weeks or months or years depending upon the attributes of a property that you desire. After you have an approved offer, the attorney will need a week to perform due diligence. It will take a few weeks to produce a comprehensive board package that is required in most co-ops. Depending upon the time of the month that it is submitted, it may take two to six weeks for the board to call you in for an interview. Once approved, it will take a few weeks until the closing takes place as management companies have little availability to schedule closings.
5. Listing Agent’s Fiduciary Responsibility- Although the listing agent will answer all of your questions about a particular apartment, the listing agent has a fiduciary responsibility to the seller and not to you. They are there to get the seller the highest amount possible for the property. It is up to you to bring up questions that affect the apartment’s worth such as new construction that may impact your view across the street.
6. A Buyer’s Broker is There to Market You– If there are any potential pitfalls that may hinder your ability at approval such as a missed credit card payment or unstable job history, it is best to let your broker know so they can figure out a way for you to gently mention this while keeping the focus on your positives. If financials are a bit tight, your broker can recommend putting a few months of maintenance in escrow. The listing broker/owner/board may have a different take on your issue and writing a letter gives a chance to explain your side of the story. In addition, I have all of my clients write a letter to the owner about why they like the place and how they can imagine themselves or their family being happy in the apartment. These letters work and they can win bidding wars or even save you money as owners want to see their home passed down into solid hands.
7. Get Mentally Prepared for the Board Package– Most co-ops in NYC require a comprehensive board package. The financial statement must show all of your accounts and tie out to the nearest penny. You will be asked for between two to four personal and professional references. Between all of the forms and documentation required this will involve a lot of your time after you sign the contract. The board package must look perfect and there are no shortcuts.
8. Treat the Co-Op Board Interview Like A Job Interview- Similar to a job interview make sure to allow extra time to arrive on-time and dress and speak professionally. You should be prepared for probing questions about your life and there is no need to provide details that are not brought up. You are not there to make a friend.
9. Job Stability Is Important- A bank will recheck your employment status before the closing. If they see you are unemployed than they can rescind your mortgage and then you won’t be able to close. In addition, job stability looks very strong to co-op boards and can help you get through that part of the process.
10. Gifts– Bank statements are required for the past 60 days when getting pre-approval. If you are planning on getting a gift then lenders won’t see the gift if you received it over 60 days before then. In addition, some co-op’s do not allow gifts so if you plan way ahead then it can give you more apartment options down the road.

1. Sells Faster– Staging has proven to produce more offers and sells homes faster than non-furnished apartments. Studies have shown that staged properties sell 88% faster than nonstaged ones. I hear countless stories of apartments that are listed without staging and then are staged and receive multiple offers.
2. Adds Dollar Value Back to the Apartment- According to the National Association of Realtors, 74% of buyer’s agents said that staging increases the dollar value offered. Staging is typically done for 1% of the purchase price but can add purchase price value back to the property.
3. It’s the Online Era– More buyers than ever gaze at photos online. With an empty unfurnished apartment, it is much harder to grab the buyer’s attention. Staging provides energy and personality to the apartment while appealing to various buyer demographics and highlights the positives of the apartment. With inventory rising in NYC and more competition than years past, if the apartment fails to look appealing than buyers will go right on to the next listing.
4. It Can Add Freshness and Personality- Staging is very basic and can add a personality to the apartment and make it more desirable. Replacing dark, old, big furniture with simpler furniture adds more space and freshness to the home.
5. Helps to Envision the Apartment– – Staging makes it easier for buyers to envision their belongings and the apartment’s potential by giving buyers vision of how the apartment will look.  The National Association of Realtors reported that 77% of buyer’s agents say that staging makes it easier for buyers to visualize the apartment. This is especially true in loft or flexible layout apartments. Staging also puts more focus on the strengths of the apartment and helps get buyers past the parts of the apartment that look dated. Another example is that a buyer may have a king sized bed and additional furniture. Staging can help to show that the bedroom has plenty of room to fit the king sized bed and additional furniture.

Continued Weakness in NYC Sales and Rental Markets

2017 was a very rare time in the NYC Residential Real Estate market as both the sales and rental markets exhibited weakness. The amount of sales above asking price is now around one in eight compared to one in three back in 2015.  In addition, the use of concessions in the rental market continued its upward trajectory with a new eight year high in the fourth quarter.

The fourth quarter of 2017 featured tax bill uncertainty in the residential sales market as sales slowed. Buyers waited to see the results of the Tax Cuts and Job Act as contracts signed in December dropped 12% (according to Urban Digs) from a year earlier. With inventory continuing to rise year over year, the result in the fourth quarter was prices falling on the higher end of the market.  Although there is now certainty with the tax bill, the results are not good for New Yorkers as the tax bill will cap state and local tax (SALT) deductions at $10,000.  This will have the most affect upon the mid to higher end price points of the market. In addition, interest deductions on new mortgages will now be limited to $750,000 instead of $1 million. This will affect the $1 to $3 million segment the greatest. It will limit mobility at the lower end of the market since the new tax law only affects new mortgages. This will keep inventory tight among this segment.

There is still wide disconnect between buyers and sellers in the condo market $3 million and up as this price point features 38% of the inventory but only 25% of the contracts signed (according to Miller Samuel).

Although there was downward pressure overall in the sales market during the fourth quarter there was still plenty of activity. Interest rates are still very low and sales could pick up in the first quarter if buyers who postponed their decision choose to buy. The real impact of the tax bill will not be known for some time but with unemployment running low and a strong financial services bonus season there is a case for optimism in the market.

The end of 2017 saw rents fall the most since February 2014, as landlords could no longer just rely upon concessions to find new tenants. 2017 was a very challenging year for landlords. The market is quite soft as renters face many options. The use of concessions hit new eight-year highs in Manhattan, Brooklyn and Queens. In Brooklyn, the use of concessions more than tripled to 46.1 % of the market as the number of apartments has surged in neighborhoods such as Williamsburg and Downtown Brooklyn. While the number of new leases signed jumped by 48% for Manhattan in December this is due to a crop of new buildings entering the market.

Courtesy of Miller Samuel Inc

Rents are basically in decline in every neighborhood as the limits in rental pricing have been reached.  However, there are a few exceptions. Rents are still growing in the Financial District and Yorkville. Access to public transportation is a major engine for real estate growth so it is no surprise to see year over year growth in Yorkville.

With more new rental inventory hitting the NYC market in 2018, the downward pressure on rents will be here to stay.  If you own property, the best advisement is to keep your tenants. It is very likely that you will get less rent when finding a new tenant than what you received in 2015 and 2016.

1. Interest Rates Are Still Very Low- Interest rates are still near historic lows. This year is possibly the last opportunity to secure a mortgage rate near historic lows with the Federal Reserve expected to raise its rate several times this year.
2. Diminished Buyer Pool Due to Tax Law-There are many buyers who will use the new tax law as a reason to delay a home purchase. There are those that already own a home, who will decide against moving to a larger and more expensive home if they lose their tax benefits which are grandfathered in for their current home. With fewer buyers on the market, there’s less competition for those that want to purchase.
3. Lots of Inventory On The Market- The number of apartments currently on the market in Manhattan is up approximately 16% from one year ago. Inventory will continue to rise throughout the year and the busy spring market will feature the most second quarter inventory since 2012.
4. Negotiating Ability- Currently only one in eight listings are being sold above the asking price, which is down from approximately one in three in 2015. In addition, this January featured a five-year high for days on the market compared to previous January’s. Both of these factors increase a buyer’s ability to negotiate.
5. Baby Boomers and Millennials- The new $10,000 maximum itemized deduction on State and Local Property Taxes, in the new tax bill, affects homes in the suburbs such as Westchester and Nassau County more than NYC. There are many towns in those counties that have higher local taxes than NYC. More baby boomers can decide to sell in the suburbs and buy in the city, which would lead to more compeitiion and higher prices. In addition, with a favorable 2018 outlook for the economy, more millenials will accumulate wealth. This group will have more purchasing power in the market during the years ahead.

1. Sublets– What’s the sublet policy? It’s important to know before you purchase what options you will have. Certain buildings restrict subletting to a specific period while others only allow a certain percentage of apartments to be rented at once.
2. Amenities– Are all of the amenities included? Free amenities can decrease your expenses.
3. Washer/Dryer- Does the building allow in-unit washer/dryers in this apartment? Specific apartment lines in certain buildings can be restricted so it’s important to double check this.
4. Pets- Any pet restrictions based upon size and breed? Dogs are allowed in a higher percentage of coop’s/condos than rental buildings but some of them restrict sizes and breeds or only allow you to have one dog.
5. Renovations– Any restrictions on renovations? There are a number of buildings that only allow renovations during the summer and restrict the amount of apartments that can be renovated at the same time.
6. Assessments– Are there any current assessments and when does they expire? Assessments are a temporary increase in expenses for an owner. They usually fund a building improvement. However, if you were to buy towards the end of an assessment than you get the benefit of the improvement without having shared the cost.
7. Boiler– What was the last time the boiler was upgraded? This is very important when buying in a small building as a new boiler will increase your maintenance or common charges.
8. Flip Tax– Who pays the flip tax and what’s the percentage? It’s important to know if you will be hit with an additional tax when buying or selling.
9. Litigation– Any current lawsuits in the building? A building with a few current lawsuits is a red flag.
10. Seller– Why is the current owner selling? Most real estate brokers will answer this but if not than it would be a reason that would give me a red flag.

With very low demand from foreign buyers, the strength of the market continues to be with co-op’s in the entry- and mid-level markets. Buyers that are planning on owning for many years see value in the co-op market. In addition, another selling point for co-op’s over condo’s is that many buyers want to complete their own renovations and upgrades. These listings are predominantly contained to co-op’s.

This summer featured higher inventory levels than in previous years as more properties did not sell during the spring market. At the end of the third quarter, Manhattan had 5,672 active listings which is the highest amount since early July 2012. With so much inventory, it’s super important to be priced right from the beginning. Owners have only one chance as a new listing when the exposure is maximized.  With more inventory and a softer market overall, the trend of the amount of sales sold over listing pricing decreased during the third quarter of 2017 from 17.9% in 2016 to 13.2% this year.

Courtesy of Miller Samuel Inc.

The third quarter is always the sweet spot for the rental market as it encompasses the summer market when demand is at its peak. It’s a renter’s market that hasn’t been seen since the aftermath of the last recession. According to Miller Samuel, newly signed leases dropped by 11% for September. The newly signed leases number decreasing is a sign of a soft September rental market.

  Courtesy of Miller Samuel Inc.

Renters have adjusted to a reality of expecting landlord concessions. Miller Samuel stated that 27 percent of all new leases signed in September had a concession which is about double from one year ago.  The biggest increase in concessions took place in Queens with 42.8% of apartments offering concessions which is up from 11.7% last year. The effectiveness of paying broker fees and offering a free of month or two while keeping rents stable is fading as the vacancy rate continues to rise and rose to 2.63% in September. More owners are adjusting to a 36x income requirement for applicants compared to the standard of 40x. In addition, more owners are changing to friendlier pet policies.

The luxury rental market, defined as $6,500 and above continues to experience oversupply. Owners should expect a decrease of 10 to 15% in monthly rent for a luxury rental that they own. A condo investor’s return will continue to push lower with another 15,000 market rate apartments hitting the rental market in 2018 which is primarily contained to the luxury market.

The past two years have featured an increasing trend of more sales listings in Manhattan being listed in the week following Labor Day than in the previous years. Reasons for this include an increasing trend of sellers pulling their apartments off the market during the summer and then re-listing them right after Labor Day. In addition, more sellers are waiting until after the holiday to post.  The past two years have featured an increase in inventory in the week after the holiday, which was significantly up from the preceding five years.  At some point though, you have to wonder when this trend has gone too far and whether an owner will benefit from listing later in September.

While condo supply outweighed co-op supply by a 54 to 46% margin, co-op’s outnumbered condos going into contract by a 57 to 43%. This helps to show that the co-op market held up much steadier then condos throughout the second quarter.

While many price points had a sluggish spring compared to past years the lower end of the market is still very strong. Multiple bid situations are still common on the lower end of the market as 16% of studio sales closed over the listing price this spring. Bidding wars are still in common in Brooklyn for properties under one million. In addition, the Upper East Side had the biggest neighborhood increase this spring with contracts signed having a 12% year over year increase which is primarily attributed to the opening of the second avenue subway.

Owners should have an expectation that they are not going to get the rental price that they got one or two years ago as it’s clear that the period of steady growth for owners is in pause for now. We are seeing apartments that rented within a few days in past years take approximately twenty to thirty showings to rent this year. If an owner wants to rent the apartment fast, the owner is much better served to pay the broker’s fee. Renters who see an apartment linger think the price is very negotiable given the soft market. The softness in the market is going to linger for a while as there is a lot of inventory that needs to be absorbed.  The troubles at the high end rental market are inflated in a soft rental market as this sector is down approximately 10 to 15 percent from late 2015. The high-end condo rental market remains very oversupplied with a glut of new inventory entering the market this year.