REALITIES FOR A NEW NORMAL
This will appear in the October issue of Mann Report Residential. Who knows what our economic picture will look like then.
August 8, 2011. A dateline is essential when faced with a 2 month advance deadline for an October publication issue—especially when it’s 3 days after Standard and Poor’s downgraded the credit rating for U.S. Treasuries from AAA to AA+. The Dow plunged today 635 jaw-dropping points, the biggest stock market decline since December 2008. It will take time to absorb the full impact of this unprecedented measure, and all eyes will be watching as events unfold.
For more than two years, we’ve been dealing with a “new normal”–a condition coined by Pimco’s CEO Mohamed El-Erian to describe a slow moving improvement for the foreseeable future for global markets. El-Erian characterized an environment with higher unemployment, greater government regulation and a weakening U.S. dollar, and forecast slower growth worldwide that could last until 2014 or beyond. With the exception of a three month wave from March through May when sales performance and prices in Manhattan were exceptionally strong and high, with a number of noteworthy outlier transactions, residential real estate activity settled into a “new normal” where prices have remained largely flat this year.
There are benefits to slow growth in a fragile economy: an incremental pace is sustainable, and there is less reliance on credit and debt. But in a slower paced market, there’s less pressure for prudent buyers to act quickly, so properties remain on the market longer. When sellers are uncertain about their future, fewer products come on the market.
A new normal in residential real estate acknowledges some old and some new realities.
1. The market for affordable rentals is shrinking. Did you know that owners of real estate in Manhattan are in the minority? Our housing stock is separated into approximately two thirds renters and one third owners. This year, we are experiencing an unprecedented vacancy rate below 1%. Consequently, rents are higher than ever, and landlords have stopped offering concessions to tenants or incentives to brokers. Savvy investors are recognizing this is a particularly good time to make a condo purchase and lease the unit.
2. There’s no privacy any longer. Co-op sales prices have been a matter of public record since the summer of 2006 when then Governor Pataki signed into law a bill that required the disclosure of cooperative sales prices along with details of ownership and financing. While purchasers of condominium units may mask their identities by buying in the name of an LLC, it’s more difficult for co-op buyers to protect privacy as co-op boards for the most part require individual ownership. With privacy jeopardized, the full details of a transaction are available to anyone who takes the time to look. Not only celebrities are exposed by the press, but mainstream citizens are helpless and unable to protect their privacy.
3. Condition matters, and staging has gained increased importance. There’s no good reason for a property not to show to its best advantage. Armed with practical advice from brokers and tips from apartment stylists, today’s sellers understand the advantages of presenting a property for maximum visual and emotional appeal. Staged apartments sell faster and for more money.
4. Pied-a-terre buyers should keep residence records. New York State has been aggressively auditing the returns of non-residents. Out-of-towners who maintain a residence in New York, either rented or owned, who spend more than 183 days of a taxable year in New York are required to pay city and state taxes on all income whether or not the earnings are from work physically performed in New York State. During a residency audit, the burden of proof rests with the taxpayer. Accountants advise that individuals record their location each day in personal diaries that are consistent with credit card receipts, phone logs and E-Z Pass registers. According to the State’s Nonresident Audit Guidelines, revised in 2010, a day in New York is counted as a day regardless of whether it is for business, shopping, dinner, or a medical appointment. Although hospitalization does not count for statutory residency, outpatient care and visiting someone hospitalized in New York counts as days spent in the state.
5. The roadblocks to financing continue. While interest rates as of this writing are still at historic lows, Fannie Mae and Freddie Mac guidelines are not very efficient for lending in Manhattan. It’s important to be connected with savvy mortgage experts to keep up with a changing climate. Loan approvals are averaging 45 days or longer with equally comprehensive examinations of the borrower and of the property being financed.
6. Phase 1 of the Second Avenue Subway is testing our patience. Once completed, transit service will run from Harlem to Lower Manhattan. Phase 1 excavation and construction from 105th to 72nd Street is expected to finish December 2016 with stops at 69th, 72nd and 96th and will be a huge enhancement to the area. Until then however, area residents and shopkeepers are dealing with a mix of issues ranging from poor air quality, compromised sanitation, safety concerns and noise. Apartment sales along this corridor of the city are hurting, and prices have taken a nosedive.
7. New York is one of the most insulated real estate markets in the nation, if not the world. Compared to the rest of the country, Manhattan real estate is holding its own. While other markets struggle to regain their footing, New York has been demonstrating relatively stability. Short sales and foreclosures are minimal in our borough, mainly because of the prevalence of co-ops requiring large down payments and significant post closing liquid assets. In addition, NYC remains a magnet for the world’s super wealthy and talented labor force. Similarly, foreign buyers continue to find a safe haven for their yen, euro and drachma. In short, Manhattan is where people want to live, work and play.