Does the direction of January predict the course for the year? Wall Street where the adage originated thinks so. The first month of 2013 scored impressive gains with the S&P up 5.05% and the Dow gaining 5.77%—signaling the best January since 1987 and rising above 14000 for the first time in over five years. In Manhattan’s residential marketplace, a similar scenario is occurring on the Main Streets of our city with 859 contracts signed in the first month of 2013, up 30% compared to January 2012 and the highest January according to Noah Rosenblatt since his online UrbanDigs began compiling real time analytics in 2009. Following a gangbuster December when players raced to close before January 1 tax changes, and contrary to expectations for a beginning of the year slowdown, properties in January were snapped up by buyers who competed aggressively and speedily for a limited supply of homes.
Will competitive bidding become as commonplace in 2013 as it once was in 2007 when the market was at its peak? Today as then as high buyer demand and low quality inventory converge, when a well priced offering comes to market, crowds of buyers and their agents rush to view. Within days, brokers are collecting multiple bids, and the property goes to contract within weeks. For sure there are similarities to 2007, but there are also notable differences.
In 2007 at the height of the market after successive years of escalating prices, buyers could hardly imagine a downturn in Manhattan real estate. A combination of windfall Wall Street bonuses, easy lending practices and exotic mortgage products fueled the run up in prices from 2003-2007. Rates hovered at 6%, interest only and no income verification loans were prevalent, nearly anyone with a pulse could secure a mortgage and lenders readily approved nearly all buildings. Buyers leveraged highly with little concern for risk, and apartments flew off the shelves, often trading 10-15% above asking prices.
Current interest rates, while inching up slowly remain at historic lows—as of this writing 3.5% fixed for 30 years. But the lending industry is over regulated today. Both borrower and building are scrutinized exactingly and repeatedly, and clearing to close is fraught with delays. Citibank’s Jeff Appel observes, “In the last year, lenders have become better at interpreting the new blitz of regulations. But as the CFPB (Consumer Finance Protection Bureau) prepares to roll-out the long awaited QRM (Qualified Residential Mortgage) guidelines, we will have to see if there is any net positive traction for consumers who have struggled while seeking a new mortgage.” At the same time, there’s considerably less cash bonus money around to fill shopping purses. With few exceptions, financial professionals are being paid with stock options and little or no cash, and many firms are capping bonuses or deferring them based on long term performance.
Today’s buyers are more risk averse than their predecessors. Instead of frothy excess, they are seeking value, and when it surfaces, they are acting quickly and assertively to purchase. The current climate is indisposed to low ball offers and favors cash buyers first, and second those purchasers who can waive a financing contingency.
While there is increased velocity in all sectors of the market and all price ranges, not all properties are uniformly rushing to contract. Indeed, properties in mint condition are achieving astonishing results. Two from last week are noteworthy examples: a stunning high floor prewar 6 with a terrace and views on Park Avenue in the 70’s is purportedly going to contract 20% above the asking—a cool $1M over the $4.595 ask; in Tribeca, a Hudson Street loft designed by its architect owner received the first of several full price $3.395 offers during the first hour of the first open house. Meanwhile other homes that are either overpriced or have obvious shortcomings like a lack of sunlight, poor condition, or an out of the way location are being ignored.
In the current climate where the pace of activity is quick, the market poses challenges for everyone. Often it takes losing a property for a buyer to understand the elements that go into an offer, and that there are no second chances with Best and Final negotiations. Sellers need to appreciate that an inflated asking price not only diverts bidder attention but fails to capture the possibilities presented in the first weeks of marketing. Both principals need to acknowledge that a rising market creates problems with appraisals which are coming up short with more frequency. Appraisals that fall below the contract price not only affect the karma of a transaction, but also negatively impact the loan to value ratio, significantly reducing the amount a lender will lend; most vulnerable are jumbo loan borrowers and buyers of co-ops which limit financing to a specified percentage of the appraised value.
A spreading optimism is feeding the current market. As the economy improves, consumers who feel more secure are more likely to make a move. Maybe even inventory of resales will grow. While global uncertainties and a 7.9% U.S unemployment rate will keep overconfidence in check, January is a likely barometer for how the year will progress: 2013 figures to be very good.