MARKET PROBABILITIES AND REALITIES
Following is a preview of my upcoming Manhattan Market Watch to appear in the June issue of Mann Report.
Are sales prices on the verge of stabilizing? Probably yes. Is the worst behind us? Almost certainly yes. We’re about 33% down from the highs of 2007—less perhaps for mint condition apartments—with not much further to go to hit ground level, if we accept the prediction made some months ago by JPMorgan Chase of a 40% decline from peak to trough.
Speak to brokers, and they will tell you they are working harder than ever for their buyers and sellers, and it’s more challenging than ever to keep deals on track. Activity definitely is picking up which means there will be more closings in the offing, so the stats for this year’s 3rd and 4th quarters will be measurably better than those for the first half of 2009. More buyers are not only looking at apartments, but they are attending open houses in increasing numbers, making offers, sometimes even competing with multiple bidders and signing contracts.
Faced with continued economic uncertainty, rising unemployment, shrinking incomes, and increasing credit card and car loan debt, foreclosures are expected to escalate however. The downturn in our market is unlikely to reverse itself quickly in the short term. Once the market stabilizes, it’s likely that a flat market will remain, and then gradually increase with modest annual appreciation. It will doubtless take several years for prices to return to 2007 levels. A similar 40% decline in real estate values occurred in the down market of 1989-1991 when early ‘89 prices were not recouped until ’95.
As the market labors to recover, some new realities are emerging.
1. In the boom years, when there was exuberance and speed in the market, the contractual financing clause all but disappeared. Today, not only is financing reappearing as a condition of the deal, but lawyers are also specifying that the deal be contingent on the funding of the loan. With changing regulations from Freddie’s Mac and Mae, the bank’s loan commitment to a borrower is no longer sacrosanct, and we’ve seen banks come up short of their commitment at closing or require a second appraisal closer to the time of closing.
2. We’re seeing more conditional approvals by co-op boards, as application reviews become more stringent. As a consequence, more and more sellers are looking for additional protection and are requiring that buyers acknowledge in a side letter addendum to the contract that they will agree to conditions imposed by the board for their approval. Since the boiler plate language of the contract states the “sale is subject to the unconditional consent of the Corporation,” buyers have a contractual right to either agree to the conditions, renegotiate with the seller because of the conditions, or walk away from the deal taking back their 10% deposit. Conditions have included the following: that a buyer proceed with all cash, or finance less than the amount specified in the contract, or provide a 3rd party guarantee for the maintenance, or require that 1-2 years of maintenance be deposited with the co-op in escrow. One attorney tells us of a seller who stepped in to assume the responsibility of an escrow deposit when the board asked, since the buyer claimed not to have family who could lend that amount. One wonders how another most recent situation will play out. Just today (5/4/09), a board asked for an appraisal in an all cash deal where the selling price was perceived as being too low.
3. The embattled economy is inflicting greater pain on condos than on co-ops. When a highly leveraged condo owner defaults, and the lender forecloses, the other condo owners must share the burden of paying those unit’s common charges. Not so in a co-op. If a shareholder is delinquent in co-op maintenance charges, the repossessing bank is required by law to pay the arrears.
4. Complaints are increasing to the Attorney General from condo purchasers who went to contract as many as two years ago who are looking either for discounts or to get out of contracts. Websites like nocondo.com are emerging to take advantage of this mostly disenfranchised group. In some instances, condo buyers have joined together in class action suits to sue sponsors for faulty construction. Attorneys see more law suits ahead, especially against projects where construction has been delayed.
5. To stimulate sales at new developments, struggling condo sponsors have been offering financing, upgrades, price cuts, and paying closing costs. Some are taking a page from car maker Hyundai’s book and providing guarantees to buyers who lose their jobs. National builders like Clayton Homes and Toll Brothers have proposed payment protection plans to lure buyers. Rockrose Development is advertising they will buy back an apartment after 5 years at 110%. In the co-op market, we’re seeing sellers who are providing short term loans as a way to bridge the gap for a buyer who needs money above the committed bank loan amount. Similarly, we are seeing sellers approaching their boards to request whether flexibility can be granted to ease established financing limits.
For purchasers who have been sitting on the sidelines, now is the time to re-enter the market. With ballooning inventory and interest rates at historic lows, there has never been a better time to buy. That’s the new reality.