Here’s a preview of my column for the May issue of Mann Report. Happy Passover & Easter!
I’ve taken liberties with a line from Alexander Pope’s philosophical poem “The Essay on Man” for my title. This spring, we’ve witnessed a new bounce in our residential marketplace along with a renewed buzz, increased activity and stabilizing prices. As of this writing, roughly 18 month’s after banking institutions failed on Wall Street, Manhattan real estate is recovering. An improved momentum is expected to be sustained this quarter resulting in strong April to May stats for contracts signed.
Nationwide, we’re in the early stages of a very slow economic recovery, and in New York there are reports of continuing job losses. Nevertheless, stronger than expected corporate earnings and significant bonus payments have contributed to Wall Street’s rebound. With our local industry on the mend, consumer confidence has returned, high end retail is improving, and residential transactions for the ultimate luxury purchase of a New York apartment are on the rise.
There is general agreement among professionals and economists that mortgage rates will creep up as the recovery proceeds. That, plus the recognition that we have passed the market’s bottom, plus a low threshold for delayed gratification have awakened our area’s purchasers. Additionally, foreign buyers are back because the Euro is declining as the dollar rises. Buyer confidence is further buoyed by the government’s incentive for first time purchasers. Though the award doesn’t add actual dollars to the pockets of Manhattanites who exceed income limits, the incentive has led to a growing enthusiasm.
Since mid February, transaction volume has been accelerating steadily, and prices in nearly all segments have been leveling. In some categories, particularly the overactive $2-5 million market, prices have even been inching up. With extremely thin inventory in this real estate sector, well priced, well located 6-10 room resale offerings in good condition have been flying off the shelves.
Cash has never counted for more
Competitive bidding and overbidding have returned as increasing multiple demand meets limited flat supply, and time on the market for these specialty products has decreased. Not everyone is choosing to go with the highest bidder. Because the financing climate is so radically altered, sellers are recognizing that it’s often worth more to take less from an all cash buyer.
Aside from the delays involved with financing—it’s taking an average 45 days to get a commitment—those seeking financing today have to sidestep a veritable minefield of uncharted obstacles. Not only do buyers have to show 45% debt to income ratio, stellar credit scores and unblemished credit histories, but buildings also have to pass muster with Freddie Mae’s tighter lending guidelines. Some banks simply won’t lend in some buildings, and that’s rarely been the case before.
Among other things, to be considered credit worthy, a building must show that 10% of its total budget is available for future mechanical system breakdowns; in the past, it was enough to show a line of credit or healthy reserve fund. Additionally, no single entity can own more than 10% of the co-op or condo according to Freddie Mae. Adequate insurance, including fidelity bond insurance which protects against employee theft and hazard must also be documented.
A credit worthy borrower in an equally credit worthy property, however, can still be tripped up by a low appraisal. The new Home Valuation Code of Conduct (HVCC) has turned the appraisal process upside down, and lowball appraisals are occurring with greater frequency. With no recent closings in many buildings as empirical evidence, there’s no way to anticipate how a property will be evaluated.
While buyers are demonstrating an increasing willingness to spend money on housing, they are not overspending. On the contrary, they are taking on less debt, unlike their predecessors who overextended and overleveraged. Irrational exuberance along with froth and excess are gone. Today’s buyers are more conservative, more cautious, and armed with knowledge of past and current sales prices readily gleaned from the Internet, they are seeking value.
Not all sellers are rushing to contract. Fueled by the current wave of optimism, and believing that the market is on rise, some are still holding on to inappropriate expectations. Homeowners are cautioned to use discipline to set realistic prices. Testing the market with an inflated asking price wastes precious time and risks missing a market wave. Buyers are responding best to properties in mint condition, and they are ignoring overpriced properties especially those requiring renovation.
As we move from a declining market to a stabilizing market, the future looks promising. Our market is faring much better than expected. “Hope springs eternal in the human breast…”