Mopping Up Sandy and Looking Ahead to 2013

The New York residential real estate market was on a tear throughout 2012, with an incredible crescendo during the summer. Then the storm hit, and overnight, the market quieted. So where did this force of nature leave the New York market?
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In a New York Minute

Ever talk with a survivalist? A recent article in the Times Magazine profiled Ron Douglas, a suburban end-of-the-worlder. Stocking up on commodities, he preaches passionately about self reliance and the coming apocalypse to anyone who will listen. His tag line to his friends: "Are you ready? Gotta get ready..." But in highbrow New York, survivalists are usually just the butt of jokes and condescending head shakes. At least that was the case until Sandy.

Putting Out the Fire

The New York residential real estate market was on a tear throughout 2012, with an incredible crescendo during the summer. Like Lucy in the candy factory, professionals were running from deal to deal, coping with uncooperative banks and Boards. Let's just say client satisfaction was elusive. Then the storm hit, and literally overnight, the market quieted. The happy chatter may be back on Twitter, but the edge seems to be off... So where exactly does this force of nature leave the New York market?

The Good

Everyone has an opinion about the real estate recovery and I'm no exception. Looking back over the past year and the four years since the Lehman crash, there seems to be one factor more than any other that influences both real estate volume and pricing: Inventory. And when inventory starts to shrink, real estate activity and market craziness increase geometrically. Such was the case in Manhattan, Brooklyn and other parts of the boroughs in 2012. Low inventory created a false sense of urgency that increased sales volume and helped pricing to some extent. At the end of the day, whether an improving market was real or imagined, increased volume benefited all involved. Perhaps low inventory will continue to buoy the market in 2013, with damaged buildings and hesitancy about certain flood-prone neighborhoods reducing purchasing options even further. There are other factors, however, that make predictions about the coming year difficult if not impossible.

The Bad

There is a dirty little secret in New York real estate that no one likes to discuss -- increased carrying costs. The budgets of most New York co-ops are consumed by two line items: real estate taxes and utility costs. Although many buildings are implementing new technologies, such as switching from oil to gas heat to save money, real estate taxes cannot be controlled. Condo owners, who are billed directly for real estate taxes, suffer the same fate. Into this costly mix, we can add increased insurance costs as a result of the storm. The extent of the impact is not yet known, but particularly in Zone A, as buildings renew insurance coverage in the coming year, many co-op and condo owners may be in for a shock. Will insurance companies start to pull out of the New York market, as they have in other coastal areas along the eastern seaboard? With lenders already scrutinizing the financial wherewithal of co-ops and condos, including line item review of insurance policies in every deal, the inability to obtain flood coverage could limit access to financing throughout the New York area. We shall see...

The Potentially Ugly

With the above in mind, we approach the so called year-end fiscal cliff. Potentially on the chopping block for the real estate industry is the elimination, reduction or cap on the beloved mortgage interest deduction. Although there is presently an orgy of conversation in the pundit class about the pros and cons of changing this bedrock of real estate financing, as William Goldman once observed about Hollywood, "Nobody knows anything." Such is the case with this issue. With the recovering economy dependent upon folks buying and selling homes, changing the financial DNA of residential real estate by eliminating or limiting this tax benefit, at a bare minimum, seems like a really bad idea. Hopefully the deduction chop starts somewhere else.

Back to the Future

Low inventory and the nascent recovery have also ushered in a return to a scary protocol -- buying apartments sight unseen. As demand increases, buyers are once again purchasing apartments from floor plans and models, without the opportunity to inspect the property until the pre-closing punch list process begins. As most new condo buyers can attest, customer satisfaction from completion of punch lists on time and as promised, can be difficult to achieve. Because of the complexity of the construction process and the likelihood of problems that inevitably occur with new developments, purchasing an apartment in a building under construction is probably the riskiest investment for an apartment buyer. Fixing post-closing construction issues, in either the individual apartment or building-wide, is always time consuming, costly, and most importantly, extraordinarily stressful for the apartment owner. Memo to Purchasers: Proceed with extreme caution when considering the purchase of an apartment that does not yet exist.

Residential Reality: Are You Ready? Gotta Get Ready...

From all accounts, empirical, anecdotal and atmospheric, New York's real estate market should continue to improve in the coming year. But it is a market with new complexities and unknowns that will complicate resale for many potential sellers and create unanticipated ownership liabilities for purchasers. Do your research, crunch the numbers and be careful out there...

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