September 16, 2020
If you’re at all interested in the NYC real estate market, there’s one question that keeps coming up - how is coronavirus impacting NYC real estate? It’s safe to assume the overall impact is not good but how worried should buyers and sellers be?
The NYC real estate market came out of lockdown on June 22nd with Phase 2 of the reopening plan and in-person showings are now allowed again. During lockdown, only "virtual showings” were allowed which generally meant a video walkthrough or a series of 360 camera shots. They were better than nothing but the vast majority of buyers still needed to physically walk a property before putting down six or seven figures. That was the #1, 2 and 3 problem for the market. Even with everything going on, transaction count would have been much higher if buyers could have safely walked an apartment.
While in-person showings are back, the market is far from normal. In order to confirm an in-person showing, two REBNY forms are required - the Limitation of Liability Form and Health Questionnaire Screening Form. Many individual buildings also have their own forms and some buildings are still prohibiting showings.
The inability to see properties during lockdown resulted in a dramatic decline in transaction count. Normally, Manhattan sees about 1,000 contracts signed in April and May but this year they averaged less than 200. The buyers in many (or even most) of those deals saw the property and/or made their offer earlier in the year. June saw some improvement but it really wasn't until July when showings could turn into signed contracts. July contracts were about double those signed in June (but still down 39% year over year) and August was down only 14% year over year.
We would caution anybody from getting too excited about August's numbers. August is normally a very slow month for Manhattan real estate with many buyers and sellers out of the city. This August, we had a lot of demand pent up during lockdown convert into signed contracts and it was still lower than last year. In other words, we had a temporary spurt of demand and still could not hit last year's seasonally low levels.
The more surprising development has been supply. There are over 8,200 listings on the market in Manhattan which is the highest since 2011. It would be reasonable to think this big increase in supply would push down prices but we haven't seen that yet. The countervailing force seems to be lower mortgage rates. More information on that below as well as in Yoreevo's August 2020 Manhattan Market Update.
During lockdown, the new development market essentially ground to a halt. On its May 28th earnings call, Toll Brothers said NYC purchase agreements from mid-March through April were down 96%! Things had gotten slightly better since and May agreements were down "only" 86%.
Toll Brothers released earnings again on August 25th and said their NYC operations are "not doing well" and they consider themselves fortunate to have a low level of capital invested in the city. However keep in mind the new development market has been weak for years. While COVID certainly didn't help, developers were already going to be in for a rough few years until new condo inventory comes down.
As a guide to what might happen to transaction count going forward, we can look at what’s happening in China. The chart below is from Capital Economics and shows real estate transactions in 30 major Chinese cities compared to 2019’s average. While the fall was dramatic with almost no transactions in February, activity has fully rebounded and is now above 2019 levels [updated September 16th].
So transactions are down dramatically. What about prices? Here we have much less information because prices are reported with a significant lag. It won't be until the fall that we'll have comprehensive data. That being said, we do have some anecdotal color.
During lockdown, it seemed like prices were down 2-5%. The higher end of that range was on new development. Sponsors are pretty rational. They looked at their spreadsheets, calculated carrying costs, factored in elevated risk and concluded $0.95 today was as good as $1.00 down the road.
However given the strong post-Phase 2 market, we're not sure prices have fallen at all. We have also heard developers are peeling back incremental discounts and pricing is going back to pre-COVID levels, especially on the better selling buildings.
In the resale market, there was never much flexibility. That's also the case nationwide where 74% of sellers had not reduced their asking price even during the thick of COVID. That’s partially because sellers are always slow to react to a weaker market but more importantly, they’re better off waiting as long as things go back to normal. Unlike new development, they can also get utility out of the apartment by living in it while they wait.
One of the leading housing research firms, Zelman and Associates, is actually still forecasting national home prices to increase 3% this year. That’s down from 5% previously and not specific to NYC but illustrates the fundamentals of the housing market are still solid.
In fact, many suburban markets are not only seeing a rebound, they're seeing bidding wars. Buyers have rushed back into the market only to find limited inventory so competition has been fierce.
And while coronavirus is different from past pandemics, we can at least look to them for guidance. Most recently was Hong Kong during the SARS outbreak. While transaction volume fell significantly, pricing did not. In fact, you can see below how a multiyear downtrend in prices actually reversed shortly after SARS.
Is that a guarantee NYC real estate prices won’t be affected? Of course not. But it’s good evidence that a pandemic does not necessarily lead to price declines.
While not a pandemic, we’ve heard a lot of comparisons to 9/11. Then too there was a sudden, non-financial shock to the economy. While there are certainly similarities, we don’t think that's a fair indication of what’s to happen. Below you can see Manhattan real estate prices since 1999 and there wasn’t even a dip in 2001.
The big difference between coronavirus and 9/11 is most of the economy was fine after 9/11. Of course certain industries such as travel were hit hard but there was not the widespread shutdown that we’re facing today.
Many more people are losing their job due to coronavirus. Weekly initial jobless claims previously peaked at 517,000 in late September 2001. From mid-March through May, that averaged 4,076,000 per week and totaled over 40 million. There is hope many of these jobs will come back quickly but a complete recovery will take time.
The good news for NYC real estate is some of the city’s largest industries such as finance and technology have avoided widespread layoffs so far.
Coronavirus has resulted in one positive for the real estate market - lower mortgage rates. Nationwide, 30 year fixed mortgage rates are almost 0.75% lower than they were coming into the year.
There is also reason to believe mortgage rates will fall further. While almost all interest rate forecasts are garbage, a return to the normal relationship between the 10 Year US Treasury and mortgage rates would result in lower rates for buyers.
The chart below is a bit busy but you'll see the "spread" or difference between the two in green is very high right now. If that were to come down to normal levels, we'd see the 30 year fixed at about 2.5%. While there is a long way to go, that spread has narrowed and the average 30 year fixed mortgage rate has actually been under 3% the last few weeks [updated September 16th].
For more information on how that works, check out our post on interest rates.
Along with fewer deals, the other known impact coronavirus is having on the NYC real estate is deals are getting more complicated. Pretty much every step between the accepted offer and the closing table has gotten trickier.
Due Diligence - There’s really only one part of due diligence that’s a problem - board minutes. Before coronavirus, board minutes were never sent out under any circumstances. They were treated as top secret documents and attorneys had to physically go to management and review them in person. If management's office is closed, obviously that’s no longer an option.
As a compromise, many management companies are now sending out minutes electronically under a non-disclosure agreement. If that’s not an option, attorneys can also submit a questionnaire (for a fee) to address their specific questions.
Appraisals - While most of the lending application is done digitally, the appraisal typically involves someone physically going to the property to verify its condition, size and attributes. Lenders have been compromising here and allowing the seller to do a video call with the appraiser or basing the appraisal solely on currently available information.
Board Interviews - A typical co-op board interview is the opposite of social distancing - a bunch of people in a room meeting one another. Most boards are now conducting interviews over video chat.
Walkthroughs - Getting into buildings is much easier in Phase 2 but buildings still want as few people in attendance as possible, sometimes just the buyer. As an alternative, building superintendents are sometimes tapped to do a video walkthrough with the buyer.
Closing - Closings in the time of COVID could be a whole blog series. Attorneys generally coordinate the closing so if you are in contract and wondering what needs to happen, you should check there first. However we can say closings are often the biggest incremental headache these days.
Management offices are still closed, funds need to be wired, notaries need to be done online, safety precautions need to be taken. If one surprise comes up, it can postpone the closing. Co-ops are more difficult than condos and condos are more difficult than houses but none are easy.
All of these comments are far from universal so before pursuing a transaction, you should check with your whole team - agent, lender and attorney. If there are any potential hiccups, you should be aware of them from the start and your attorney should make sure you are protected in the contract.
Coronavirus has taken what’s always a big decision and made it even more fraught. Before considering a purchase in such a chaotic environment, there are a few questions you should ask.
If you can answer yes to all of those questions, you’re in business. Pay no mind to friends who say you’re crazy to buy. If everyone thought buying was a good idea, there wouldn’t be any deals available. If you’re financially secure and confident in your purchase, it’s a great time to buy the NYC apartment you've always wanted.
To get the latest information and dive into the details, contact us at firstname.lastname@example.org or 212-365-0151. We’ve gathered a lot of data over the couple months to help you make an informed decision and as always, get you a commission rebate for up to 2% of the purchase price!