For Manhattan residential real estate, how different will 2017 be from 2016? Last year the market was in transition as the pendulum swung away from sellers to favor buyers (especially for properties priced above $4M) and shifted even more to a preference for condos over co-ops, also continuing to highlight downtown as Manhattan’s hottest neighborhoods.
As expected, after the November elections, benchmark fund rates rose by a quarter of a percentage point in mid December, only the second rate hike by the Fed in 10 years. At current levels, an increase of 25 basis points means relatively little; however, a probable trending rise in the next three consecutive years could have ripple effects. When the Fed raised rates on December 14, they also forecast two to three more increases for 2017 as well as two to three raises per year in 2018 and 2019. It’s entirely possible that buyer urgency will reenter the marketplace at least in this year’s first and second quarters as buyers rush to secure still low rates. Rising percentages will obviously impact the volume of refinancing which in 2016 made up 47% of loan originations; this year refinancing is anticipated to drop to 31%. Moreover, increasing mortgage rates will impinge inventory, since those who refinanced at fixed rates of 3.5% or better will be reluctant to give up their access to cheap money to make a new purchase. Hardest hit by rising interest rates will be first time home buyers who will need deeper pockets for higher monthly costs.
Following Trump’s election, the stock market rallied, creating a banner year for the Dow which rose 13% last year and achieved several closing highs, including a first time above 19,000 and closing the year at 19,762. Will stocks move even higher towards the next milestone of 20,000? What effect, if any, will recently soaring bank stocks have on Wall Street bonuses which were forecast in early November by compensation expert Alan Johnson to decline for the third straight year by 5-10%? If corporate and personal taxes are lowered as promised by a Trump administration, greater individual wealth will be added to fattening stock portfolios and discretionary real estate budgets. If current strict lending regulations are loosened—another Trump pledge—buyers will gain much needed borrowing power. Will a more relaxed financing environment spread to developers for whom acquisition financing is practically nonexistent today? Contrary to the heated market of 2013-2015 when everyone wanted to get into the new development business, the current challenge is to find acquisition sites and navigate the credit markets to acquire financing.
We’re well past the highs of 2015, described as the “golden years of new condo development” in the latest Olshan Report. I look at Donna Olshan’s weekly review of signed contracts for properties over $4M for market intelligence, because she focuses on the real time of signed contracts rather than on closed transactions which can follow by up to three years for new construction. Consider four key takeaways from her year-end report:
1. Transaction volume totaled 1,102 contracts adding up to nearly $9B in sales—down 18% in the number of transactions from 2015, and also down 16.7% in asking prices. (Actual sales prices become a matter of public record only after closing.)
2. 76% of the total 1,102 contracts were condos, and more than half of those (58%) were in new construction.
3. Co-op transaction volume is down 25% from 2015, and condo transaction volume is down 16.9%.
4. 48.9% of signed contracts were on downtown properties; 17.5% were on the west side and 20.4% were on the east side.
In 2016 developers hit the Pause/Reset button, some shelving or walking away from projects while others offered dramatic price concessions. Negotiating opportunities will continue as the overheated, overbuilt luxury market settles to find its footing again.
On the other end of the market, millennials are gaining more and more attention. While 70% of this estimated buying audience whose average age is 29 says home ownership is important, ownership rates are significantly lower for this group than it was for their parents. Saddled with steep student loan debt, they lack sufficient funds for down payments and post closing liquidity, have less than stellar credit scores and don’t easily qualify for a mortgage. For this group, a desire to live close to work trumps the American Dream of the big house, and with the Internet serving as their proverbial living room, this sector is most likely to choose housing that is newer, smaller and closer to work. It’s an underserved market priced below 2.5M. Taking cues from the WeWork office co-working model, residential co-habitation is being explored along with micro modular units.
A strong local economy will be driving the Manhattan market which remains a safe haven for foreign capital. Asian, Canadian and Indian among other investors will continue to look for investment opportunities, although they may be focusing more on middle market properties which hold less risk. New York continues to be the safest big city in the US, and with a New Yorker in the White House, we can count on his keeping a lid on street crime.
If you’re thinking of buying in 2017, the recommendation is to dive in this winter rather than wait until spring. If you’re considering selling, price realistically to capture early buyer attention. With consumer confidence at a thirteen year high, we’re on track in 2017 for a solid, if not robust, residential marketplace.