The Housing Bubble

A report from National Mortgage News on New York. “At a new luxury-condo building in Brooklyn, one buyer told broker Ryan Serhant that she’d like three apartments — one for herself to live in, and two as investments to rent out. She wasn’t the only one. The tower, 550 Vanderbilt, had more buyers become landlords in 2017 than any other condo project in the city, according to data from listings website StreetEasy. For New York as a whole, a record 10.7 percent of all condos that sold last year were listed by their owners as rentals within months. Investors, undeterred by the city’s flagging rents, are adding residential real estate to their portfolios on a bet that the properties’ underlying value has nowhere to go but up.”

“And it’s an opportune time to jump in, with developers cutting prices to move units before another competitor’s project opens. All told, there were 1,313 condos purchased in New York last year as investments rather than residences, also a record in StreetEasy data going back to 2006. ‘When was the last time in New York history that you could buy one of the first new condos in a new neighborhood?’ said Serhant, the sales agent for 550 Vanderbilt, a 278-unit project that includes communal gardens and a pet-grooming station. ‘You want to buy real estate the same way you buy into IPOs. Then you sit and watch it grow.’”

The New York Times. “Springtime in Manhattan was far from sunny for home sellers, as inventory increased, prices continued to decline and sales volume dropped to its lowest level in nine years, according to new market reports. Real estate agents pointed to rising mortgage interest rates and uncertainty surrounding the federal tax overhaul that went into effect late last year. The result was a widening gap between buyers and sellers, who often hit an impasse on price.”

“There were 2,629 closed sales in the second quarter - a nearly 17 per cent drop from the same period last year, according to a new Douglas Elliman report. That is the lowest number of spring sales since 2009, when the market was stifled by the recession, said Jonathan Miller, the real estate appraiser who prepared the report. Overall, the median Manhattan sales price in the quarter fell to US$1.1 million, down 7.5 per cent from the same quarter last year. Part of that decline reflected a shift away from pricier new-development sales.”

“And that does not account for sluggishness in the resale market, in which sales fell 12 per cent compared to a year ago, Mr Miller said. ‘This is an affordability issue,’ said Richard Grossman, president of Halstead Real Estate. Resale apartments spent an average of 103 days on the market, or 7 per cent longer than the same period last year, he said, and that was due, in part, to listing prices that did not reflect the higher mortgage interest costs for buyers.”

“The surfeit of inventory is dulling buyers’ sense of urgency, Mr Miller said, noting that there were 6,985 units for sale in the quarter, an increase of almost 11 per cent over last year - the largest supply in the second quarter since 2011. That oversupply has also meant fewer bidding wars this quarter.”

“The New York Real Estate Journal recently sat down with Greg Kalikow of Kalikow Group & Kaled Management for a question and answer session. Q: What’s it like being the next generation of leadership in a real estate business - especially one based in New York? A: I think that individually and together, we’re facing a new set of challenges, some of which have yet to reveal themselves.”

“Q: What are some of those challenges? A: Just check the skyline–we have a glut of residential units set to come online from mega projects in Hudson Yards and Long Island City. We’re one of many investors who have decided to wait and see how the new inventory is absorbed before we look to acquire multifamily units – and that might not be until 2019. Manhattan investment sales are down 60% year over year from 2016 to 2017 and that effect is rippling out across Brooklyn and Queens as well.”

From Globest. “Halstead Property’s Q2 2018 Manhattan apartment report is out. It shows the median Manhattan apartment price of $1.1 million decreased from $1.2 million from the same quarter last year. There were also 12% fewer closings compared to this same period year-over-year. Median prices fell for the fourth straight quarter with resale apartments selling with their highest discounts off asking price in more than five years.”

“Halstead president Richard Grossman says this reflects the issue of affordability for the buyer, and people saw this trend coming. ‘We know there are two things that are affecting prices right now: the higher interest rates and the loss for certain buyers of some of the tax benefits of buying.’”

From Mansion Global. “The weather might be heating up in Manhattan, but the borough’s apartment sales market cooled during this year’s second quarter, according to reports from four of New York City’s major brokerage firms. The overwhelming consensus from Tuesday’s batch of reports from Corcoran, Douglas Elliman, Halstead and Stribling & Associates is that Manhattan was a buyers’ market in the second quarter. An overall oversupply of inventory, paired with a lack of new development closings, led to lower sales numbers and prices.”

“The median sales price for apartments in Manhattan dropped 3% to $1.14 million in the second quarter, according to Corcoran, as the market shifted to favor lower-priced transactions and new development closings fell. Closed sales dropped 14% compared to the same time last year to nearly 3,200 transactions, as the ‘effects of the new tax law, high real estate taxes and volatility in the financial markets all contributed to a dampening of buyers’ purchase intent’ in the second quarter, Corcoran’s report said.”

“And as Manhattan buyers declined, inventory rose 17% to 7,491 units, the 10th consecutive quarter of year-over-year inventory increases. Co-op inventory rose the most, up 26% year over year, resale condos increased by 11% and new development inventory increased by just 4%, the report said. The past three months logged the highest second-quarter inventory in seven years and lowest second-quarter sales in nine years, according to Douglas Elliman.”

“The median sales price for apartments declined 7.5% from the same time last year to $1.1 million, and the number of sales declined 16.6% to 2,629, according to the brokerage’s data. Across the same time frame, listing inventory rose 10.7% to 6,985. The median Manhattan apartment price fell for the fourth straight quarter, according to Halstead. The brokerage also logged the median price at $1.1 million, down 9% from the same time a year ago, as higher inventory pushed prices lower for many apartments, the firm’s report said.”

“The sluggish new development market, which saw 30% fewer closings than a year ago, is also responsible for putting downward pressure on prices. ‘Currently, the average new apartment sells for more than double that of a resale one, so a sharp decline in these sales has a substantial impact on the overall average apartment price,’ the report said.”

From The Real Deal. “As luxury buyers take refuge in the rental market, sales brokers are being forced to adapt. In the midst of a sluggish sales market, would-be buyers are turning to the high-end rental market to wait out the uncertainty. As a result, sales brokers have found themselves working with a shifting group of clientele and increasingly negotiating pricey rental deals.”

“Clients in the market for an apartment have been spotting sales listings that haven’t budged — and are looking to rent them instead, brokers said. This would have been a nonstarter not long ago, said CORE’s Elizabeth Kee, but more owners are now at least willing to have the conversation. Kee is currently listing a Chelsea apartment for $5.2 million, but the same three-bedroom unit, which spans 3,000 square feet, is also available to rent for $25,000 a month. The rental listing notes it has a variable lease term.”

“It’s a negotiation tactic that highlights how brokers’ roles are changing. Concessions, for example, have been a fixture of the rental market. May marked the 36th consecutive month of a year-on-year rise in concession market share in Manhattan. During the month, nearly 38 percent of new leases included landlord concessions. And the high end isn’t immune, given how much inventory is on the market.”

“On the other side of the deal, owners are also becoming more open to renting their apartments. The number of new leases in May for units with three or more bedrooms surged 20 percent since the same time last year, according to the Elliman report. Corcoran’s Malessa Rambarran and Candace Milano pointed to the example of a client who was unsure about what he wanted to buy and looked instead several rentals in Soho around the $15,000 price point.”

“‘We’re definitely seeing an increase of clients being more cautious,’ Milano said. ‘Buyers are more sensitive to changes in the market.’”

From MarketWatch. “Since moving to New York City in 2014 I have lived in four apartments with eight different roommates. But lately I have started to wonder if I’m paying too much. My two-bedroom, two-bathroom apartment costs $2,300 per month. My roommate, whose room is slightly larger than mine, pays $1,200 and I pay $1,100. I happened to come across a listing for another two-bedroom two-bathroom unit in my building advertised at $2,100 and decided to ask my apartment management company if they could lower my rent. They did, and under the new agreement, I will pay $1,000 and my roommate will pay $1,100. The new $2,100 rent will save us each $1,200 per year, or $2,400.”

“Rent reductions, even in pricey cities like New York, are actually more common than you may think. As of May 2018, 1 in 6 rental units in Manhattan offered a discount to the advertised rent (16% of rentals on the market) according to StreetEasy.”

From City and State New York. “Scan the windows of a luxury apartment tower in midtown Manhattan some evening and you might notice it: The lights are out. In some buildings, signs of life are so scarce that the few inhabited apartments stand out like lanterns against a sea of dark glass. New York has always had its share of part-time residents. Increasingly, however, the city’s housing stock is attracting the international elite, drawn by the promise of a second home (or third, or fourth) in the playground of Manhattan and a way to invest, or launder, cash.”

“Were New York not in the middle of a severe housing crisis, these pieds-à-terre might be of only passing concern. But as the cost of housing in New York continues to climb faster than incomes, the city can hardly afford to have so much of its housing stock underused, constricting supply and raising prices for New Yorkers.”

“Part-time residents do not pay local income taxes. They don’t pay sales taxes when they aren’t in town. Many of the new buildings benefit from huge tax abatements and ultra-luxury condos and co-ops are vastly under-assessed by the city’s byzantine property tax system. CityLab summarized the situation accurately in 2015, when it wrote, ‘The values of these new condos are being assessed at just a fraction of what they’re worth. And buyers are paying only a fraction of that fraction in property taxes.’”

“So these super-rich property owners contribute vastly less than their fair share to the cost of government services, like the parks, mass transit, sanitation and public safety that make New York a desirable place to live – and that are essential to the escalating value of their investments.”

“Some might be inclined to dismiss pieds-à-terre as too small a phenomenon to distort New York City’s housing market. However, the number of pieds-à-terre is growing rapidly. According to city estimates, in 2017 some 75,000 apartments were used for ‘occasional, seasonal, or recreational use’ rather than as a primary residence – an increase of 20,000 units since just 2014. Over that same period of time, the total number of housing units grew by just 69,000 – meaning new part-time use erased almost 30 percent of the growth in overall supply. While some units were removed from the market by other forces, like Airbnb, the role of pieds-à-terre in siphoning off supply, especially in the luxury market, is real.”