Room At The Top

New York real estate typically functions as a top-down marketplace. Beginning after the recession of 1989-1990, our market both recovered through and was sustained by the most expensive apartments. For once, trickle down economics worked here: as the richest among us ventured back into the marketplace, others followed suit. Within a year of prices rising for the more expensive properties, the one-bedrooms followed.

This tendency became exacerbated after the most recent recession. The aggressive increase of foreign money investing in New York properties, especially condominiums, drove the top-end of the market higher each year, with the less expensive units following suit. In recent months, however, we have seen the trend reverse. What is going on?

I believe the change relates to the fundamentally different reasons people at different levels in the price hierarchy have for buying. The most expensive units are almost always discretionary purchases; as one descends the price pyramid, the element of discretion diminishes. The buyers of the smallest units just need someplace to live!

In general, the wealthiest purchasers have multiple homes, and more often than not they are either investors or buyers who already own another home in or near the city. So if they perceive prices moving beyond their comfort zones, they simply stay where they are. As this blog has noted in the past, foreign investors are far less active currently in our marketplace than they have been in previous years: the Europeans suffer from a devalued euro, while the Russians, for reasons economic or political or both, are notably absent from the New York market this year. Even the Chinese, our most stalwart investor customers, have purchased in slightly smaller numbers during 2015. And the Chinese, cautious by inclination, don’t tend to buy big. They are far more likely to buy four smaller units than one enormous unit.

Meanwhile, New York-based luxury buyers don’t have to act. For most locals, the desire and the means to buy a four-bedroom property don’t suggest that remaining in their present three-bedroom is a hardship. Many of these buyers have hit a price wall. They can stay where they are, and often they believe that they can wait the market out and buy what they want six months or a year from now at a better value.

As one moves down to the lower price ranges, the dynamic changes. Young families living in a one-bedroom with two kids are NOT discretionary buyers, especially in the current environment in which rents remain extremely high and interest rates extremely low. In the market for units under $2 million, the rent/buy dichotomy is particularly powerful. Rent paid with after tax dollars simply does not make sense compared to a purchase made largely with tax deductible funds borrowed for less than 4%. So properly priced small apartments still frequently excite competitive bidding while their larger, more expensive counterparts can wait weeks on the market for an offer or even a showing appointment.

Buyers are sending a clear message to the sellers of the most expensive properties: we can wait. Meanwhile the one- and two-bedroom marketplace in Manhattan, Brooklyn, and Queens remains quick and competitive. At least for today, there is room at the top.

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