2009 Year End Review

2009 charted a unique, decade-defining trajectory through the world of New York real estate. It began deep in the doldrums, with mounting inventories and sinking prices, and ended 180 degrees away, with diminishing inventory stabilizing prices. And it was quite a wild ride in between!

As the year began the economic news was dire. Prices were falling and throughout the fourth quarter of 2008 there were few active buyers. With the financial system seemingly dysfunctional and a new President waiting to take office, everyone held their breath. Government funds, though injected in vast quantities into the banks, neither eased credit nor allayed public anxiety. And so, as real estate brokers, we waited. Buyers were sure the market had further to fall and many offered 30% or 40% below asking price; sellers couldn’t quite believe that they had missed their moment and were not ready to accept the new reality.

At many new developments, buyers threatened to walk away from their deposits on properties contracted at the height of the market but now being paid for after slippage of up to 25% in value. Some actually abandoned deposits of 20%, but most others, saber rattling exhausted and maybe a few developer concessions thrown in, closed on schedule. Otherwise, it was the smaller apartments which held their value the best during the first months of the year. And the top of the market, the ultra luxury, $10,000,000-and-up properties, went begging. No one wanted them. They just sat, prices creeping down, as the months went by.

Typically, as the sales market slows the rental market accelerates; people, the reasoning goes, have to live SOMEWHERE. In 2009, apparently they did not. A weak rental market meant that vacancy rates were high, owners paid commissions, and rents were negotiable. Tenants mostly steered clear of co-ops, with their time consuming Board packages, since all the new condo buildings were full of both newly purchased and unsold units, choc-a-bloc with amenities and completely new, available for rent at attractive prices.

Throughout the sales market there was a bit of reinvigoration in late February, which was quickly quashed as the stock market nosed to its bottom in early March. And then, gradually, as spring began, a confluence of forces brought sales activity haltingly to life.

Most importantly, sellers began to acknowledge the new realities and negotiate accordingly. Prices swerved more into line with buyer expectations. Some great deals were achieved by buyers willing, to paraphrase Warren Buffett, to buy when people were nervous. April and May provided real opportunity for buyers – they bought at prices anywhere from 15% to 40% off comparable values from a year earlier, depending on the size, location, and condition of the property (the biggest discounts were seen in large properties needing renovation.) And as June rolled around, one began to hear murmurings from buyers that they did not want to “miss the bottom.” As brokers, it is always our duty to inform buyers to try to buy value and not await “the bottom” since that phenomenon is only visible in retrospect. The months between March and May clearly represented a bottom for our market, which then, laboriously, began to stabilize.

Loans, though cheap, remained (and remain) difficult to get. And the credit of the buyer was not the only issue. For the first time, banks began to hyper-scrutinize the balance sheets of the co-ops and condos in which they were lending. Was there a 10% line item in the building annual budget for capital repairs? If not, no loan! Did the building carry adequate insurance? If not, no loan! Had the market for this type of property remained stable since the original appraisal? If not, a new appraisal was ordered a week before the closing and if it came in lower, then the amount of the commitment sank proportionately. Behaviors like these left many buyers with no loan, or a smaller loan than they had been promised, just days before the closing was scheduled to occur. And buyers with mortgage contingencies in their contracts were horrified to discover that the language was fuzzy: sellers and their attorneys were arguing that once a commitment was received, the contingency was satisfied, and if the bank then withdrew the commitment, or lowered the amount of financing it was willing to provide, that was the buyer’s risk. This has led to more than one litigation during 2009 and the issue has yet to be resolved. In the meantime, the financing language in the standard form contract needs tightening!

During the summer, the pace of transactions continued, gradually, to increase and by fall we found ourselves in a fairly active marketplace. Not only were current buyers increasingly fearful that the bottom was receding, but a whole additional group of buyers, priced out of the market in recent years, came hurrying back to seize their opportunity to purchase at lower and more stable prices. For the first time in a decade lawyers and doctors led the list of professions in our buyer mix, with finance dropping to third place. And Boards, increasingly skeptical of bonus money or restricted stock and options in institutions they no longer saw as ironclad, welcomed these steady income professionals with open arms.

As the year drew to a close inventory across the board was at far lower levels than in January. In particular, resale inventory, especially properties under $6,000,000 in the older buildings, has fallen to a point where competitive bidding, in a more orderly and moderate fashion than heretofore, has once again become common. While the $10,000,000 and up market remains very slow, prices otherwise seem stable, with a slight upward trend; no-one expects major gains in 2010 but a 3% to 5% increase in value seems realistic and sustainable. And while transaction volume overall for 2009 was substantially below that of the two preceding years, as were prices, we in the brokerage business in New York, with contained supply and value conscious but steady demand, have much to be grateful for as the second decade of this new millennium begins.