Back to the Future
Five years after Lehman Brothers crashed and burned, the New York residential real estate economy finally righted itself. Primarily driven by a significant lack of inventory, and until recently, mind bogglingly low-interest rates, the level of deal activity was, in a word, unprecedented. Although the manic mood of the past year may leave some with that bubblicious feeling, the pent-up demand was so high, and the need for many to sell so great, that market forces were in alignment for a high volume experience. But now what?
The Pause that Refreshed
After 10 months of non-stop activity, the market took a pause in late August and deal activity trailed off until late September (as a number of my colleagues have confirmed). Since then, the market was again quite active and many buyers found themselves losing deals over higher or better offers. Any delay in getting a deal done, caused paroxysms of panic from the buyer's broker, concerned that a better offer was around the corner. Needless to say, the Clydesdale of the transaction, the attorney, was driven batty by brokers who demanded unrealistic deadlines to get deals done. Recently, Jonathan Miller opined that low inventory was bottoming out. In other words, there will be more apartments available for buyers, rather than less. Should that be the case, the pace of transactions will slow, at least to some extent. Perhaps deals can once again be processed in some version of a reasonable manner. Unless interest rates rise significantly, even with more inventory to be disposed of, the resilience of the market should continue well into 2014 and beyond...
Due Diligence Downer
I'm not one for conspiracy theories, but when it comes to assistance with due diligence, the lack of cooperation from most of the institutional managing agents, is puzzling to say the least. In almost all cases these days, the buyer is required to cut a check for as much as $300.00, just to get basic due diligence questions answered. Often, the response time after the check is delivered is over a week. Getting the property manager to respond with more than a "yes" or "no" answer is a Herculean task. Actually getting someone on the phone to clarify an answer has become almost impossible. Perhaps it's the liability issue, but for some reason, there is a wall of silence between the buyer's attorney and the co-op or condo property manager. Buyers are continually faced with going forward with a deal, even though many queries have not been answered satisfactorily. Looking to the future, I see this problem as getting worse, with no possible improvement in sight. One managing agent simply refuses to answer due diligence questions, making a decision about purchasing somewhat of a roll of the dice.
Show Me the Money
Nothing was easy this year when it came to getting loans cleared to close. The hyper-scrutiny by the underwriters, slowed deals to a crawl. From an era when the Weekend at Bernie's. guy could get a loan, we now find ourselves in a lending environment, where even borrowers with pristine credit, get put through the underwriting meat grinder, to the point of absurdity. Those buyers who selected out-of-state lenders with better interest rates rather than the conventional players familiar with the New York market, often found themselves with loans that could not close because the lender had underwriting guidelines that the co-op or condo could not satisfy. With stricter Fannie Mae guidelines kicking in next year, and the birth of the so-called "Qualified Mortgage," the processing of a loan certainly will not get easier. Expect the period of time from application to clearance to continue to increase.
Carrying Cost Crisis
As I have discussed previously, carrying costs for a typical New York City apartment will continue to increase, in some cases, significantly. Even well-managed co-ops and condos, can't control rising real estate taxes and utility expenses. A huge slice of the operating budget for most co-ops is allocated for these two-line items. In addition, an aging housing stock will require major capital improvements to deal with replacement of roofs, boilers and deteriorating infrastructure. If a building does not have deep reserves, capital improvements must be paid for by maintenance increases, assessments or additional borrowing. Folks who buy in buildings with already high carrying costs may find themselves in an untenable position down the road when it's time to sell. At least the pain of higher carrying costs will be felt throughout the entire city. Accordingly, buyers are well advised to consider the present and future carrying costs of a building under consideration before signing on the dotted line. Selling an apartment with exceedingly high maintenance or common charges is always a challenge, even in a super heated market.
Residential Reality: Think Positive Thoughts for 2014
It's unlikely that the deal volume of 2013 can be repeated in 2014. Yet, market dynamics are still strong and deal activity has stabilized since the pause in the fall. Perhaps another good year is on the way. We shall see...