Cash or Carry?

According to RealtyTrac, during the last nine months 80% of Manhattan apartments were purchased without financing. There is no question that cash is king here. However I believe that this percentage is inaccurately high and does not take into account, at the very least, all the people who are arranging financing privately. It is certainly true that we see very few deals these days which are CONTINGENT on financing. That said, the analysis would be much more informative if it parsed the data to distinguish between different property sizes and classes.

Few foreign buyers finance their purchases. Since the great majority of foreigners are buying new condominiums, and financing can be difficult for them to arrange anyway, the 80% cash purchase figure seems credible in this segment of the market. These newly built units also skew towards the upper end of both the price-per-foot and overall price metrics, and as prices climb the likelihood of all cash purchases climbs along with them. In general, the higher the price, the lower the likelihood that financing is involved. This is true of both co-ops and condos.

Interestingly, while expensive condos remain very much in demand, sales of higher end co-ops, those for $8 or $10 million and over, have slowed substantially in the past month. I have spoken with several colleagues at other companies handling these listings and all are experiencing the same thing: few calls on many of their high end co-op and townhouse properties. We are all trying to figure out exactly what precipitated this slowdown in buyer activity. Is it uncertainty as the economy continues to grow at a barely tepid pace? Anxiety about the Eurozone? Russia? All these ideas have been advanced to me as possible explanations.

In my opinion the reach of prices has begun to exceed the grasp of buyers. A substantial supply of high end co-ops has accumulated in the marketplace but very little price movement has occurred. Statistics about the New York real estate marketplace do not tend to segment between new condominiums on the one hand and everything else on the other hand. This is a critical distinction. As a result sellers can develop an overly optimistic view of the worth of their co-op or older condo properties. Even at its hottest the marketplace has been unforgiving to overpriced units, and as we now slow down for summer (there is always a drop off in business after Memorial Day week-end) these units are even more likely to linger.

But to return to my original topic, outside of foreigners we also see many cash purchases being made by parents for their young adult children. Typically these are one and two bedroom units being bought for grad students or young professionals early on in their careers. More often than not the parents pay in cash. It’s simpler and the complexities involved in co-signing the mortgage don’t arise.

At Warburg, many of our deals involve financing. It provides a rare tax deduction, and with money so cheap it seems almost foolish NOT to borrow. I don’t know where RealtyTrac obtained their information, but I would approximate our deals overall at being more like 50/50 cash to financing. Banks are again trying to woo buyers, especially with portfolio loans (which the bank keeps rather than selling into the secondary market) so mortgages even for financially complex buyers are easier to shepherd through the bank credit committees. And the appraisal process has increasingly leveled out as more knowledgeable, local practitioners handle the assignments. It’s still a good time to borrow money. And perhaps to use it to purchase one of those expensive units which is lingering on the market!