Third-quarter Manhattan market reports recently released by the city’s top brokerage firms showed a slowing rate of price decline while the transaction volume increased. The question everyone is asking is when Manhattan would hit bottom. Nobody knows because when we find out about it, the bottom would be over. Consensus seems to be that the rate of decline is slowing, but a recovery is still not on the radar.
While prices in cities like San Francisco and Los Angeles have declined more than 40% from their peaks, Manhattan has only decreased by 20%. US stocks also declined by 40% as well last year, which shows the relative stability in prices of Manhattan real estate.
The reports showed that prices have dropped compared with a year ago, while declines were less or flat compared with last quarter. Prudential Douglas Elliman, Corcoran Group, Brown Harris Stevens and Halstead report that average apartment prices dipped by between 10% and 16% compared with the same period last year.
Dottie Herman, CEO of Prudential Douglas Elliman, has even said the worst is over for Manhattan. Prudential’s market report shows transaction volume, at 2,230 units, increasing by 46% from the prior quarter, signalling buyers are back in the market. The median sales price of a Manhattan apartment is now US$850,000 (RM2.8 million), a 1.7% increase compared with last quarter but still 8.4% lower than the same period last year. The average price per sq ft is US$996, a 16.5% decline compared with last year and 5.7% down from the last quarter.
Brokers attribute the increase in activity to falling prices, the stock market performance, improved consumer confidence and the first-time homebuyer credit of US$8,000. The increased activity also shows that the steep post-Lehman drop in prices has ended.
The recent market reports depict closed sales for 3Q2009 and lag real-time activities. It takes roughly two to three months to close [a transacation] after a price is agreed upon. Hence, prices reported are for those properties traded in June or July of 2009.
Since then, my real-time observation is that prices have declined further and by the time the 4Q2009 report is out, I wouldn’t be surprised if the numbers are 5% to 10% lower than 3Q2009 numbers. Meanwhile, transaction volume has indeed been increasing.
Brokerage firms are painting a picture of an improving market, but there are negatives which include the unemployment rate hitting 10%, expiration of the first-time homebuyer credit in November and of course, the glut of new development units.
Inventory in Manhattan is around 8,400 units, which is higher than the 10-year average of about 7,100 units.
Every week, we hear news about a developer announcing potential bankruptcy or something related to inability to repay loans.
For those ready to get into the market, the current market favours buyers because of the low interest rates. Also, it is a buyer’s market as everyone seems to be running away from real estate. Below are suggestions on how to effectively negotiate the next deal.
• Winter will be a great time to buy because it’s a “dead season”. This means developers will be more willing to extend better deals.
• Be aggressive when negotiating. You want to be a beneficiary of the downturn, not a victim of it. Even before potential buyers ask for it, sellers are already offering lower prices than what are listed. Prudential’s 3Q2009 report shows the average price per sq ft (psf) for a condominium is US$1,101. But we’ve observed that even very nice new developments are selling for 10% to 20% lower.
• Cash buyers should be even more aggressive when negotiating. If you’re a cash buyer, you’re gold because no credit is required and closing is a lot faster. We have seen buyers who offered to purchase multiple units at a substantial discount and wanted a response on the spot. Of course, the seller gave in. Each additional signed contract increases the developer’s credibility with the bank and with the next potential buyer.
• Do the numbers. Compare the price psf you would be paying relative to what has been closed in the same building. It’s all public information. Also, look at the number of units for sale and for rent, both of which will tell you a lot about the demand for the building.
The cap rate of a Manhattan condo is about 3% to 4%, and for a mixed use building, around 5%. The cap rate is the net rental yield, assuming no financing is involved. Hence, for investors, it can be compared with a stock’s dividend yield, a bond’s coupon or a bank CD.
• Finally, get a fixed mortgage! With the Obama stimulus plans, we will have higher inflation ahead. This is one reason why gold prices shot up recently. With inflation, prices of all things increase and this includes property value and rental income. For residential real estate, mortgages could be fixed for up to 30 years and for commercial properties, up to 10 years. By fixing your mortgage, you are essentially repaying the debt with weakened currency over time. If you’re renting out the property, rental income will rise with inflation while mortgage payments stay the same. This leads to a larger cash flow over time.
Inflation is the reason why buildings in Manhattan that are worth US$300 million today only cost US$10 million 30 years ago.
The successful landlords understand and practise the concept of using real estate as an inflation hedge and letting inflation do its work over time.
Tan Wei Min is a real estate entrepreneur focused on investments and brokerage and CEO of Castle Avenue Partners and lives in Manhattan. He can be reached at [email protected]
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 781, Nov 16-22, 2009.
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