C arol Candiano walked into the sales office of a new condo in west Chelsea last December looking to buy. She asked to tour a few units and fell in love with a 736-square-foot one-bedroom with floor-to-ceiling windows and a small terrace. But the agents didn’t seem interested in talking to her. Maybe it was because she’d asked to negotiate the price—$910,000—or maybe they were just too busy. “They had lots of showings,” Candiano remembers.
Put off, Candiano looked elsewhere. But in July, she and her broker learned that the unit was still on the market. The asking price hadn’t changed, but the market had, and this time around, the agents were all too happy to make a deal. She got the apartment for $875,000.
After five years of paltry inventory, rising prices, and bidding wars, the seller’s market has finally started to turn into a buyer’s market—or at least the beginning of one. According to a report released this summer by appraisal firm Miller Samuel, the number of sales last spring—traditionally the busiest season—were down 14.8 percent from the year before. A typical home now sits on the market for 144 days, 42 days more than the previous year. And while the average sales price of a Manhattan apartment so far this year is $1.38 million, 5 percent higher than last year, prices aren’t accelerating anywhere near as high, or as fast, as they did in 2004, when appreciation clocked in at 30 percent. Futures traders at the Chicago Mercantile Exchange forecast that New York City prices will fall 6 to 8 percent by next August, while our own city’s most recent budget report predicts sales volume and prices will sag for the next four years.
All of this adds up to what Jonathan Miller calls “a market in transition”—though the rest of us might call it confusion. Those who own homes—particularly those who bought at the exuberant height of the market—are wondering if now is the time to cash out and take cover in a rental. Some sellers are still getting bids within a day of putting their homes on the market, while others are watching weeks turn into months. Some, in a hurry to unload, are slashing prices twice and three times.
Buyers too, meanwhile, are wondering whether to take advantage of the market’s favorable turn, or if there will be even better deals in six months. Alyssa Gelper, a lawyer who abandoned her search for a two-bedroom, two-bathroom apartment last spring (“I didn’t want to be the last sucker to buy high before the market tanked”), has decided the waters are safe to wade in: She just started poring over listings last week. Open houses no longer feel like cattle calls, and buyers who luck into something they like don’t need to steel themselves for a battle of best offers.
In a very short time, the rules of the real-estate game have changed dramatically—and buyers are more in control than they have been in a while. “They’re taking their time, and they’re not afraid to make an opening offer that’s 10 to 15 percent off the asking price,” says Corcoran’s John Gasdaska.
Some brokers characterize the market’s softness as temporary, describing it as a “lull.” They say Wall Street bonuses—anticipated to hit new heights this year—are going to drive prices back up. “[Wall Street types] love to spend those bonuses on real estate,” says broker Michele Kleier, president of Gumley Haft Kleier. “How many cars can you own? How many diamonds can your wife wear?” And while the market has downshifted, they note, it’s still moving. “When you’re doing 80 miles per hour and you see a state trooper and go down to 55, it feels like you’re barely moving, but you are,” says Prudential Douglas Elliman’s Dottie Herman.
Read one way, the economic tea leaves suggest that this downturn might not be as dramatic as the last one, when prices sank nearly 30 percent between 1989 and the mid-nineties. Over that period, mortgage rates crossed into double digits; there were twice as many properties for sale as there are now; and the city was suffering major financial difficulties, not to mention a crack-fueled crime epidemic. Families were fleeing for the suburbs, and changes in tax law made owning more than one home so unfavorable that investors—who made up about 30 percent of buyers in the eighties, estimates Miller—flooded the market with their holdings. (Only 4 percent of Manhattan’s sales are investor-driven these days, he says, compared with, say, 40 percent in Miami and 28 percent nationally.) Although mortgage rates have crept up to about 6.77 percent (based on national averages culled from the Federal Housing Finance Board’s Monthly Interest Rate Survey), that’s a far cry from the 10.2 percent they hit in 1989, when the market began its precipitous drop. Crime is down and schools are better; New York is a much more family-friendly city than it’s been in a long time.
That said, some economists suggest the bottom isn’t even in sight yet. One reason is that the sheer speed and altitude of the recent price run-up—an average of 81 percent in four years—has had virtually no relation to incomes and is thus unsustainable. “There is no economic fundamental—real income, migration, interest rates, or demographics—that can explain it,” says Nouriel Roubini, a professor of economics at New York University’s Stern School of Business. While a Wall Street crash or a sustained spike in interest rates could cause a fundamental downturn, there’s a more immediate threat to the city’s usual supply-demand equation: the construction boom. The supply of new condos for sale has more than doubled in the past two years, notes Miller. What’s more, some 24,000 units have been approved to go on the market by the end of 2006, an astonishing number considering that altogether only about 15,000 condos, co-ops, and townhouses are sold in any given year—20,000 at the market’s peak, according to Jeffrey Jackson of MMJ Appraisals.
High-profile projects like Downtown by Starck (a.k.a. 15 Broad Street), Bryant Park Tower, 99 Gold, and Schaefer Landing are giving discounts, and other condo developers are bailing out before they even break ground. Last week, it was reported that the developers of 485 Fifth, a new designer condo going up at Bryant Park, were essentially abandoning the project because half the units remain unsold, at over $1,000 a square foot. The growing list of casualties includes Williamsburg’s 55 Berry (which is now turning rental) and 133 Greenwich (they’ve put the land up for sale). The glut is affecting everyone in the market, whether they’re trafficking in new stock or a prewar. “If you have more homes on the market than there are buyers, then prices will fall,” explains Yale University professor Robert Shiller, an expert on housing bubbles and author of Irrational Exuberance, which explains how the stock market imploded in the late nineties. “We’ve had the biggest real-estate boom in the history of the city. There really isn’t much precedent. It’s a fad. It can’t go on forever. People have this expectation that prices should rise 10 percent each year.”
Of course, a seller’s sorrow can be a buyer’s opportunity. But with so many reasons to suspect prices may keep dropping, is this a market to buy into at all? The hopelessly unsatisfying answer: It depends. Two major incentives to make a move right now: Money is still relatively cheap to borrow, and rents are soaring. They’re already up 15 percent from last year, to an average of $3,970 a month in Manhattan, according to Corcoran’s most recent report. Rental vacancies are at a historically low 1 percent.
Let’s say for a moment that you currently lease an average one-bedroom on the West Side and pay Corcoran’s average West Side rent of $3,046. Let’s also say that you covet a one-bedroom co-op on the West Side, where the average selling price is $596,000, according to Miller Samuel’s most recent data. Assuming a 20 percent down payment (many co-ops require that amount), a 30-year fixed mortgage at 7 percent, and $600 for co-op maintenance, you’d be facing a monthly nut of $3,772. Factor in the tax benefits of ownership, and you’re looking at practically a lateral move. If you wangled the place for 10 percent off asking—a reasonable possibility in a market flooded with one-bedrooms—you’d have an even better deal, at $3,454 a month. Of course, you could also choose to wait a year. But by then, you will have spent more than $36,000 on rent—and there’s no telling where interest rates will be.
The drawback of buying is that one-bedrooms are quick to outgrow and not so quick to sell in a down market, given their ample supply. The most troubling scenario would be four more years of declining prices, during which time you would have to unload the space for less than you paid. But the eternal verity of real estate is that, by and large, if you stay in the same market, it doesn’t matter when you sell, because the discount of your sale will be offset by the discount on your purchase. Still, there’s no stopping people from worrying.
Carol Candiano is relieved that her building has a liberal sublet policy—she’s already moved to the West Twenties while her Upper East Side one-bedroom awaits a buyer at $425,000. “We had someone lowball the apartment and offer $340,000. I told my broker to tell him to get lost,” she says. “Just because the market’s a little soft doesn’t mean I’m going to have a fire sale. If I have to, I’ll rent it out. I refuse to be desperate.”
If you already own a home, you’ve inevitably wondered whether you should pass it off before it loses even more value. And if you do, what next? “If you bought in the last two years, you might want to hold. You’re not going to make a killing right now,” says Christopher Mathieson, managing partner of JC DeNiro, a brokerage firm. “But if you need to move—you’ve got three kids and you live in a one-bedroom, you’re relocating, or you’ve owned for ten years—why not sell?” Prices may slip further still, but what they do in the immediate future shouldn’t matter much if you’re buying a place you love. And that’s much easier to do now than it’s been in the past three years—if you really know where to look.
Although prime properties— a townhouse in the Village, a condo facing Gramercy Park, a Fifth Avenue co-op—are still precious, opportunities are tucked in pockets you wouldn’t expect: In otherwise white-hot Chelsea, there are many more studios and one-bedrooms than buyers want, so you may find a starter apartment at a steal there. (The two-bedroom market’s as competitive as ever, though.) Appreciation has slowed considerably in the Lower East Side and the East Village compared with the rest of Manhattan, says Miller—prices may be more realistic there than they’ve been in ages.
What prices do in the immediate future shouldn’t matter much if you buy a place you love. And that’s much easier to do now than in the past three years.
The Upper West Side remains fairly punishing to buyers, but the Upper East Side, which saw a steady stream of turncoats who traded it in for downtown, offers some markdowns. Recently, an 1,100-square-foot two-bedroom co-op on East 69th Street that sat on the market for 180 days went into contract; it was a bargain at its final asking price of $539,000. That’s about $30,000 less than what an apartment of a similar size in the same building sold for in 2004.
And in an interesting turn of events, west Harlem townhouses, long a barometer of the heated market, are beginning to surface, fully renovated, with price tags of less than $1 million. (In headier days, brokers used to say you couldn’t get a shell for that much anymore.) Across the city, sellers with apartments that aren’t perfect—the bathrooms dated, the windows facing air shafts, the rooms this side of tiny—are realizing they must be flexible. Cookie-cutter condo buildings constructed in the eighties may offer bargains, too, if you don’t care about bells and whistles. Units in these buildings can have a hard time measuring up to apartments in the shinier, sexier tower next door, so their sellers will have to compete on price. “In last year’s world, you were getting very little discount”—maybe 5 percent, if that, says appraiser Jeffrey Jackson. “In today’s market, that discount could be as much as 10 to 20 percent.” And as always, fringe neighborhoods—the first to see reductions when the real-estate climate turns—offer decent finds, even more so than before. (Bushwick, Inwood, East Harlem—here they come.)
And now may be the right time to get a deal on new construction. At the very high end of the market, developments that gilded themselves with name-brand finishes (Valcucine kitchens, Tea for Two tubs) and ostentatious amenities (bowling alley, a cinema room) to justify dizzying asking prices may sit on the market longer and need price cuts before deep-pocketed buyers will be persuaded to commit. Also look for neighborhoods rife with new buildings, like Soho, Chelsea, and Tribeca. The Upper West Side has seen a slew of buildings go up in the far West Sixties and West Nineties, too, boosting inventory by 450 apartments there. (The numbers change every day: Buildings sell in stages, with blocks of units put on the market at a time.) Developers in some areas are giving discounts, offering concessions on finishes or footing transfer taxes (just under 2 percent of the sale price) and closing costs. “It’s not necessarily the price,” says Dolly Lenz, vice chairman of Prudential Douglas Elliman Real Estate. “Developers don’t want to make it look like they’re negotiating on the price.”
Still, a bargain is a bargain—and that’s a word we haven’t heard in a long time.