The Ground Beneath Our Feet

Earlier this week several of my agents told me of contracts signed during the past ten days. Two sales exceeded $6 million for large Upper East Side co-ops, one in the 60s and one in Carnegie Hill, while the third came in at the far lower price of $1.5 million. In addition, our agents discussed the three recently signed contracts at 432 Park Avenue, the ultra-luxury condominium on 56th Street, and the extraordinary sale of 12 East 69th Street, the large townhouse just off Fifth Avenue, reported by the press to have gone into contract for $80 million.

All these deals have been put together since the press began reporting about the impending changes in the tax laws. I of course have read the dire predictions of disaster in the New York real estate market owing to the highly disadvantageous provisions of the law regarding the loss of deductibility of both real estate and state and local taxes (SALT). And no doubt there will be properties which lose value in the coming months. But these deals prove once again that the New York market is more nuanced than the pundits understand, and that there are a series of complex factors always at work. So what are they?

•       At the ultra-high end, the tax law changes will be advantageous to the very rich. With the tax on corporate earnings plummeting, and the reduction of the top tax rate from 39.6% to 37%,many of the wealthiest Americans will see their incomes substantially boosted. And they are being joined in looking at properties costing $15 million or more not only by Chinese buyers but also, in small numbers, by the Russians who have been out of our market for the past four years.
•       The overall national economic fundamentals are strong. The current environment of strong economic growth, low unemployment in the tristate area, a soaring stock market, and ongoing low inflation and interest rates will help to mitigate the pain of the lost deductions, as will anticipated change in the assessment of the alternative minimum tax.
•       Wall Street has had a banner year. Bonuses for most divisions of the Wall Street banks and brokerages are rumored to be extremely high this year. A good bonus season mints new millionaires, some of whom are always young men and women with growing families squeezed into small apartments.
•       Our Manhattan real estate market has already been correcting for the better part of a year. As the stock market pushed up into uncharted territory, Manhattan real estate was mostly headed in the opposite direction. Much of the market, especially at the high end, has already incorporated value loss of between 5% for less expensive units and 12% at the high end. As sellers have become more realistic about values, lowered prices have led to some increased deal flow. The tax law changes may well bring further downward pressure onto some segments of our market, but it’s important to remember that substantial price correction has already occurred.

Many buyers will flock to the sidelines, waiting to see what impact the new tax laws will have on our market. Certain populations within our core buyer demographic, especially those who are highly compensated but not so highly placed as to derive real benefit from the corporate tax rate reduction, may experience significant additional tax liabilities with the elimination of the SALT deductions. And perhaps the seven, eight, and nine room apartments which cater to that group have farther to fall, even though they are already selling 5% to 7% below last year’s prices. That said, here’s my prediction: prices will adjust during the first quarter, even as mint condition apartments and those already appropriately reduced continue to sell. Come the second quarter market activity will be strong as both buyers and sellers accept the new circumstances and get back to business. We’ll be here!