As reported by Bloomberg, what began as a softening of the luxury real estate market in New York has expanded to lower-tier properties. The top 20 percent of apartments are now experiencing price cuts.
Changes in real estate values tend to make investors and homeowners break out in a cold sweat, much like swings in the stock market. But, the current trend in New York isn’t anything to panic about. 2016 wasn’t anything like the crash of 2007-2008.
According to Bloomberg, the luxury market and the tier just under that market (again, the top 20 percent of properties) saw price drops in the 5 to ten percent range.
The definition of a stock market correction is a ten percent drop. The drop, unlike real estate, is often hard to predict, but it’s still considered business-as-usual and not a crash.
In order to keep perspective, it’s important to understand why the real estate market is softening. What’s causing the current dip in New York property prices?
First, 2015 was a “record year for residential building permits in New York City”, according to Slate.
In December 2016, the magazine ran an article that stated, “With developers pressed by expiring loopholes, the city authorized nearly 35,000 new units in the second quarter and nearly 10,000 more in the fourth. Total permits topped 50,000—more than any year since the early 1960s. And many of them aren’t done yet—according to the U.S. Census Bureau, about half of all multi-unit projects take more than 13 months from the permitting date to be completed.”
Translation: the permits issued in 2015 created projects that were being finished in 2016 and early 2017. With those units on the market (or soon to be there), basic supply and demand theory indicates that residential real estate prices will drop.
Yet, New York is still an expensive place to live. Even with the building boom, finding affordable living options is still a challenge.
According to Fortune, “more younger folks are finding themselves attracted to medium-sized cities, which may not have the same professional opportunities as their larger counterparts, but provide housing affordability. Cities like Raleigh, N.C., and Fort Collins, Colo., have seen building permit issuance soar over the past six years as they attract younger adults seeking cheap rents and lower asking prices. Expect the trend to continue in 2017.”
Younger professionals whose wages haven’t kept up with the cost of living are moving to smaller, more affordable cities. So, when they do get to a point that they can afford to buy, they’re not buying in New York. Ironically, that could drive down the housing prices. Fewer buyers and potential buyers means more competition for the buyers that are still in New York.
Finally, there are truly only so many people who can afford high end, luxury, housing, even in New York.
Curbed’s sales market report states, “In 2016, contracts to buy Manhattan houses priced at over $4 million were 21 percent fewer than in the same period in 2015. And the properties that sold sat on the market an average of 291 days, or 54 more days than in the same time last year.”
A $4 million home, with a 20 percent down payment ($1 million) has a monthly mortgage of $21,099. According to the Bureau of Labor and Statistics, in the first quarter of 2016 Manhattan’s average weekly wage was $2,783.
Not nearly enough to cover the mortgage on a luxury home. So, maybe it is time for a little bit of market correction?