For most of my 15 years in the Manhattan real estate market, I have been expressing concern over where the middle class will live as property values have become more unaffordable for that segment of the buying population. Here are some of my recent blog posts regarding this issue:
Now the problem is spreading to the six-figure earning upper middle class. Max Abelson of The New York Observer points out that "Manhattan housing hasn’t been affordable for a long time. But now, even the upper-middle class can’t catch a break."
For the first time, even six-figure professionals—and six figures puts you in the top 10th of national income rankings—are being pushed off Manhattan Island.
“Five years ago, the price point wouldn’t be $600,000, it would’ve been $300,000,” said Pam Liebman, the president and C.E.O. of the Corcoran Group, referring to the rough cost of a basic apartment here.
The relatively rich suffer; the filthy rich prevail. “There has to be a middle ground between affordable housing for the low end of the demographic spectrum and the ultra-luxury at the top,” said appraiser Jonathan Miller, who authored the Elliman report. “You want to attract talented people to maintain your viability, and you can’t do that if they can’t afford to live here.”
…Therefore, a prospective Manhattan homeowner not only needs to be among the top 10 percent of Americans in income, but also must have gobs of saved money, too.
I have been watching the "luxury gentrification" of Manhattan for my entire real estate career and truth be told, I have benefited from it greatly from a financial perspective. Having said that, on a regular basis I witness both young and established professionals struggle to afford homes in Manhattan. The frustration for these educated, successful people is disheartening as they are becoming less likely to be able to raise their families on this incredible island. I have watched many flee to the suburbs as the gentrification of Manhattan creates a homogeneous environment that is altering the character that has always made NYC so special.
There is no doubt that more affordable housing needs to be built in order to stave off the possibility of a mundane, boring, and uni-cultural city. Until that happens, Manhattan becomes increasingly more wealthy and that is actually good news for those of us who own if all we are considering is our bottom line.
My friend Henry Abbott of TrueHoop fame sent me this incredible virtual roller coaster of home prices since 1895 (via Kottke.org). I can’t believe Jonathan Miller hasn’t done something like this as he is the master of stats and graphs. Curbed should also check this out. The last hill is quite a doozy!!! And the view from the end of the tracks is eerie.
Here it is:
Prudential Douglas Elliman Manhattan Market Overview 1Q 07 prepared by Miller Samuel.
And a brief summary directly from Miller Samuel:
…The Manhattan housing market saw a large increase in the number of sales, a drop in listing inventory and a general increase in price levels this quarter. This market has not experienced a large level of individual investors seeking short-term profits (a.k.a. flippers) but rather this market has attracted primarily owner occupant or second home purchasers from the surrounding suburbs, regions and other countries. This condition contradicts the national housing market. The national economy has been tepid, and has showed more recent signs of weakness, which has helped keep mortgage rates low, further stimulating demand in the local market. In the national market, inventory levels remain high, the number of sales have fallen and prices continue to weaken. Solid local economic conditions including low unemployment, rising income levels in the financial services sector, rising corporate profits, the weakening dollar, and gains in tourism have all provided an environment for fostering housing demand. The state of the economy has kept the number of new development projects entering the market at a relatively high level, and so far, the demand has been able to absorb the new supply…
Manhattan real estate bulls abound…but for how much longer. I will take a look at the report and weigh in with my thoughts as well as thoughts on other market reports later in the week.
It amazes me how many people begin the process of shopping for or selling a property and are completely unfamiliar with the costs associated with doing so. For those who are buying in new development projects, pay particular attention to these numbers as you will likely be paying NYC and NY State transfer taxes as well as other seller fees and expenses such as the cost of the seller’s attorney. Here is a good summary of closing costs from the Prudential Douglas Elliman web site that will give you a rough idea of what your sale or purchase may cost:
For Condominiums:
For the Seller
For the Purchaser
For Co-ops:
For the Seller
- Broker: Typically 6%
- Own Attorney: Consult your attorney
- Co-op Attorney: $450+
- Flip Tax: Typically 1% to 3% of price (if applicable)
- Stock Transfer Tax: $0.05 per share
- Move-out Deposit: Varies by building
- NYC Transfer Tax: 1% of price up to $500,000; or 1.425% of price if $500,000 and over.
- NY State Transfer Tax: $4 per $1,000 of price
- Pick-up / Payoff Fee: $250-$500
- UCC-3 Filing Fee: $100
- Miscellaneous Coop Charges: Vary by building
For the Purchaser
And that’s about it. Again, this is an estimate of closing costs and in no way represents a completely accurate indicator of your particular situation. Consult your attorney, broker, bank and mortgage broker to confirm your costs. And please don’t forget to read your Good Faith Estimate but it’s best to review the HUD-1 Settlement Statement for the most precise indication of your costs.
UPDATE: Micky pointed out that I forgot multi-family closing costs for NY
This comes directly from my Inbox received just moments ago from Real Estate guru and appraiser Jonathan Miller. Check out the link below to read more on hos blog, Matrix.
Manhattan Market Information
The 1Q 2007 Prudential Douglas Elliman Manhattan Market Overview was released today. The formal report should be available for download at the end of the day so you’ll have all the numbers. I’ll send a followup email with a link when the report is online. (And I will make it available to all of my readers immediately upon receipt)
Overview
The Manhattan residential real estate market entered 2007 with a surge in the number of sales, declining inventory, rising prices and shorter marketing times. Record bonus income and stabilizing mortgage rates helped foster the significant increase in demand this quarter. The rise in demand has helped reduce inventory, shorten marketing times and reduce listing discounts.
Key Stats
– Number of sales up (73.3%) from same period last year, a record (but some of the increases due to coops added to public record) means buyers are returning to the market.
– Listing inventory dropped (14.2%) from the same period last year and and remains below levels seen at the end of 2006. The increased demand is helping the market absorb the inventory that is entering the market.
– Listing Discount (2.6%) fell from the 2.8% discount seen this time last year. Sellers are remaining realistic about setting list prices for the moment.
– Median sales price up (1.2%) to $835,000 as compared to the same period last year. Prices are generally stable with some price spikes at the upper end.
– Average sales price down (0.8%) to $1,290,391 as compared to the same period last year. Market share gains of studios pulled down the overall average sales price.
The Manhattan market is in a position for a positive 2007 as compared to the national market
– Bonus money is at record levels for the second consecutive year, with possibly several years of strong earnings remaining for Wall Street
– No significant short term investor activity (flippers); market is driven by owner occupants and second home purchasers.
– Weaker dollar makes investment from abroad less expensive
– The city is well-run, has a surplus with tourism at record levels with local unemployment levels are low
– Commercial office rents are rising rapidly demonstrating demand for employment and residential rental market continues to grow.
Here’s a post on Matrix about the media coverage of the report.
The subprime mortgage market upheaval
While it is certainly something to be concerned about, we don’t expect it to have much of a direct impact in this market. However, it could have a pronounced effect on the national housing market for a variety of reasons. The area of concern for us will be likely limited to credit tightening, which is already happening. Mortgage underwriters are already looking more closely at marginal deals which could temper the number of sales for the next few quarters.
Yet another saga to report on the absolutely ridiculous behavior that some co-op boards exhibit. In May of last year, my team and I brought a property on the market that wasn’t without it’s challenges as far as procuring a buyer. Some of those challenges were directly related to current Board policies:
- NO SUBLETTING ALLOWED under any circumstance (a bit unusual for this type of building)
- NO PIED A TERRE ALLOWED (also unusual for this particular building)
- FLIP TAX (10% of profit and not uncommon these days)
These three factors played a very large part in turning away a multitude of qualified candidates who weren’t interested in these policies. Many in fact considered making offers but chose to continue their search for a less "oppressive" building. Those who did make offers within the 6 month marketing period were not financially qualified to pass the Board’s stringent requirements (the current owner, a banker, was asked to put 3 years of maintenance in escrow).
In November, 2006 a contract was signed for the purchase of this property and fully executed by all parties. The Board application including all financial documentation and mortgage commitment letter was submitted to the Board of Directors in December. So imagine our surprise when we only found out on March 5th that the Board would APPROVE these applicants if they agreed to put 2 years of maintenance in escrow to be held for 5 years and to have monthly maintenance payments automatically deducted from their bank accounts. I should also add that the purchasers are financing less than 30% of the purchase price. The purchasers agreed to the Board’s requests and they were GRANTED FORMAL WRITTEN BOARD APPROVAL.
In the meantime, the seller has been compiling receipts for renovations and the like to offset profit in calculating the flip tax. Those receipts were submitted yesterday. I had totally thought that the closing would have been set while I was on vacation last week but I received this email from the purchaser’s agent upon my return on Sunday (forwarded from the managing agent of the building):
I just got off the phone with a few Board members and they want the following form Mr. & Mrs. "Purchaser".
Updated financial statement with verification (recent statements)
Update monthly cash flow statement (same format as the other one)
And 2006 income tax returns with W-2s
This is not an unusual request, particularly when the Board took so long to review, interview and approve. However, it is HIGHLY UNUSUAL when formal Board approval has already been granted as it has in this case. In my 15 years, I have never encountered this from a Board. None of my colleagues have either, some of whom have been doing this much longer than I. Having said that, the purchasers did change their mortgage provider and their mortgage product to a more conservative one just two weeks ago after Board approval was received. Becuase of this, the Board asked the following questions (answers from purchaser follow):
1) Why the last minute change (in mortgage)? Citimortgage Commitment expired and getting extension was lengthy process (they want to close and contract was signed in November).
2) Why didn’t the purchaser’s inform the board of the change prior to the board meeting? We were told that the getting the commitment extended was a simple process. It turned out that all the original information had to be resubmitted and reprocessed as if it were a new application.
3) Why is the board hearing about this now? Because we are now trying to get closing as soon as possible. The new commitment with Countrywide was only received on 3/16/07 well after we were approved by the Board.
4) What happened with the loan at Citimortgage? The Citimortgage Commitment expired and since it had to be extended we were required to submit all new documentation. We decided to review all of the options available to us. The Countrywide Mortgage is a 30 year fixed loan which we felt more comfortable with than the interest only loan with Citimortgage. With Countrywide we will be paying down the principal starting with the first payment. The Citimortgage was going to be interest only for 10 years,
5) Is the old mortgage payment and rate available, if not what happened? Citimortgage’s mortgage rate was floating until the closing date when it would be fixed. There was no ‘old rate" on the Citimortgage.
6) Why didn’t the purchaser’s try to extend the rate lock extension (if this was available to them)? See answer to question 5 above
7) What made the purchaser’s decide to change from Citimortgage to Countrywide? Suggested by our mortgage broker, The mortgage broker worked for Home mortgage acceptance Corp this was taken over buy Countrywide mortgage. and we are more comfortable with a traditional 30 year fixed rate loan.
The moral of the story: Co-op Boards are sometimes made up of people who don’t wholly understand the processes in which they are involved. These purchasers changed their lender which happens all the time and they are actually getting a better rate and better terms that should be more favorable to the Board. I suspect that some Board members are reading way too much about the sub prime mortgage market implosion (which doesn’t apply at all to this situation) and are reacting to the fact that they are familiar with Citimortgage and perhaps not so with Countrywide? Again…pure speculation on my part as a real estate professional and former board member. Who really knows what they are thinking?
Advice to purchasers: Keep your prospective co-op Board in the loop regarding all changes to financial documentation and lending institutions and/or mortgage products. If the board feels that you are open with them and not trying to "sneak" something by them, they will be more likely, in my opinion, to cooperate (after all you are buying a "co-operative") making the process more efficient and less painful for all involved.
Stay tuned for the update to see if these purchasers ever move in to their new home???
I just returned from my vacation to an Inbox loaded with thousands of emails. The following is just one of the many mass emails that I receive regularly recommending services in exchange for a referral fee.
hi everyone ..
i just wanted to pass this on to all brokers . i have had such great raves from my clients when they have used "blah blah" MOVING ANd STORAGE.. they are fabulous!!! .. they are pleasant and work fast and are quite helpful with all the moving needs.. i recomend them highly !!!!!!.. my family used them as well and were sooooo happy with their efficancy and help all along the way … call so and so at 212-555-5555 and tell her i sent you .. she is very helpful ..
my best..
Seems like a helpful gesture for this agents colleagues but upon reading the email string that she sent along with this, I realized that she is getting paid (no problem with that except from whose pocket is the payment coming):
Hi so and so (the agent who sent the above email),
I was very glad to hear that another one of your referrals was happy with our services. We really appreciate your confidence in us and will continue to insure your clients are well taken care of. You should receive your check in a day or two. (hmmmm?)
As you know, we pay commissions/referral fees for all moves referred to us by agents and have enjoyed a mutually beneficial relationship with many …of your… agents for years already.
As a suggestion, email me or call our office if you want us to call someone directly, or if possible, keep a list of who you referred so we can insure all are credited to your name… Commission checks go out to the agents within a week of the completion of the move.
As you know, we don’t advertise a lot. Most of our customers are referred to us or are repeat clients. We are proud of and emphasize our Better Business Bureau record which continues to be excellent.
Check out our website or our discount packing supplies site which will give you some additional information. As FYI, I also provide referral fees to agents who bring in other agents!! It’s an easy way to make extra money.
Please don’t hesitate to contact me with any questions you may have or special requests your clients may have.
I have a huge problem with referral fees being paid for such services, particularly because most clients are absolutely unaware that such fees are being paid. And let’s face it, the money has to come from somewhere and I speculate that it is coming indirectly from the client’s pocket. Unfortunate to say the least. This particular agent is also receiving referral fees from this moving company for each agent that she refers to them. She may very well believe that this company is the best moving and storage company in New York, but the fact that she receives payment for saying so makes her "testimonial" much less meaningful.
Advice to Buyers and Sellers receiving referrals from their real estate agents:
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ask the agent if they are compensated by referring your business
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if so, how much and why?
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ask the agent if they have used the services of the company to which they are referring you?
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I would steer clear of any referral that would generate financial gain for your agent
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ask them if they are willing to pass the "kickback" to you in the form of savings
And finally, as far as moving and storage companies go in the greater New York Metropolitan area, there is none better in my humble opinion than Steinway Moving and Storage and I get ABSOLUTELY nothing for saying so except the comfort that those who use Steinway are very well taking care of.
From the True gotham Archives (be back on Monday):
Last week all of the big players in New York City released third quarter numbers.
Although I have discussed the varying results in these reports, let me take a moment to put a spotlight on one number in particular: price per square foot. I’d bet every agent and buyer out in this history of the Manhattan marketplace has been frustrated and discouraged by the ridiculous variance in reported square footage of apartments across the city, particularly co-ops.
Why is that? There are various reasons. While condominium offering plans state unit square footage (and great liberties are often taken when doing so), co-op offering plans do not. That leaves the reporting of square footage to sellers and their agents. See a conflict here? There have been more times than not where I have been preparing a market analysis for a prospective seller and have come across three or four different square footage numbers for the exact same apartment. Almost always, the number is increasing over time.
A hypothetical partment 12D at 123 Big Apple Lane may have been listed at 1,400 square feet in 1993 and is now for sale and estimated at 1600. Oh let’s not forget that all of us in the industry “approximate” square footage which is why these discrepancies exist. That said, if apartment 12D has “grown” by 200 sf, this is going to affect the price per square foot numbers. People are almost always paying more per square foot than they think they are. Let’s say our example 12D is $1,000,000. At 1400sf it is selling for $714/sf and at 1600sf it would appear to be selling for $625/sf.
I am not for one minute suggesting that these discrepancies are entirely intentional, nor am I suggesting that they sometimes aren’t. This is just another example of the gross inefficiencies that taint our market.
I have two suggestions (one immediate and another longer term) to help remedy this situation: First, I would suggest that buyers not focus too much on price per square foot numbers when comparing co-ops and I would highly recommend acting with trepidation when doing so with condominiums. They’re just not reliable numbers–so why use them as a basis for one of the most important decisions of your life?
If it is very important to you, measure yourself or hire the same person to measure units that you are comparing. If an architect, a developer, an appraiser, a contractor, and a real estate agent all measured square footage, you would undoubtedly end up with four different numbers. But at least you’d have something closer to reality. Just choose the same person to measure all units.
My other suggestion to remedy this problem over the long term would be to have an independent entity "certify" square footage. Obviously a daunting task, but perhaps a lucrative one if this one particular entity could bring uniformity to an inefficient marketplace. I know of companies who have created massive databases of NYC property including such things as building photos, amenities, and financial data. Perhaps one of these companies could begin the task of offering to measure "real" square footage for a fee to give credibility to the agent and seller listing the property. Over time, hopefully this would catch on and with the insistence of buyers, we would have more accurate numbers to reflect property size and real value. I can see it now…our sample property above would be represented as 123 Big Apple Lane, 12D, 1475rsf (“real” square feet).
From the True Gotham Archives (yep, still on vaca):
Mark S. Nadel has written a paper about fee structures in real estate. From the abstract (via Inman):
While real estate brokers have long set their fee as a straight percentage of a home’s sale price, this formula is an anomaly and a primary reason why such fees may be inflated by more than $30 billion annually. Although competitive pressures ordinarily produce a fee structure reflecting costs, real estate broker commissions are strangely unrelated to either the quantity or quality of the service rendered or even to the value provided. Rather, this fee has been based solely on the price of the home. (It is as if tax preparers set their fee as a flat percentage of a client?s gross income, irrespective of how difficult the return was to prepare or how much their efforts saved the taxpayer). Oddly, not only is there no evidence that it is any more costly to sell higher-priced homes than median-priced properties, but it is possible that the opposite may be true! Furthermore, the straight percentage fee formula creates little incentive for real estate agents to provide home buyers or sellers with additional value.
I know a lot of people might expect that, as a broker, I’d shy away from this kind of talk. Isn’t that 6% my bread and butter? Aren’t people doing crazy things across the nation to protect this arcane structure that needlessly enriches morons like me?
Well, it might surprise you to learn (unless you have been reading TrueGotham religiously) that I find this kind of talk healthy, appropriate, and overdue. I am all for reforming the industry to create a hybrid of the current percentage plan and a fee-for-service.
To be honest, I think it would benefit me and my clients–by better approximating reality. I wouldn’t mind working for clients who have a financial incentive to make the sale as straightforward and speedy as possible.
And for those complicated sales, it would offer a measure of protection I don’t have now. I can honestly say that if I logged the hours that I spent on a deal (and I recently had to over a dispute with another broker) and assigned myself some reasonable hourly rate, I would often be paid more than the 6% commission.
Let’s just take a recent sale as an example (granted, it was a complicated one, but not insanely so). We showed the property more than two hundred times. Every time we did, one of my assistants had to walk the dogs. We also often had to get to the property early to straighten up.
The couple selling the property was going through a terribly contentious divorce and I received at least three calls per spouse per day–some of which lasted for well over an hour and most of which lasted at least 30 minutes (let’s also not ignore the amount of duress that I and my team were put under dealing with insane accusations and distrustful partners).
It took seven months to sell the property and hundreds and hundreds of hours of showings, communications, marketing meetings, open houses, cleaning, and dog-walking. I conservatively estimate that we spent about four hours a day on this one sale for seven months. We can argue all day about the proper hourly rate for a Manhattan professional with 15 years’ experience. But whatever the market rate proves to be–I’m confident that with an hourly rate component to my work, in many cases I’d come out ahead.
Not only would I be willing to participate in this type of "billing," but I would suggest that it absolutely will become a reality over time as the industry evolves. Consumers will be able to choose from menu of services that include both a commission percentage and a fee for service structure. And my income would be at least somewhat proportionate to the amount of work we do. Doesn’t seem to crazy to me.
From the True Gotham Archives (yes I’m still away and back on Monday):
Bloodhound Blog, (which is based in Arizona) has a very interesting debate about dual agency–that is, when an agent represents both buyer and seller in a transaction. This is from Greg Swann’s latest post on the topic:
I have not heard what I consider to be a persuasively-valid argument in support of Dual Agency. Counting Our Lady Ardell in a comment, we have three testaments to personal integrity, and these I do not dispute.
But: So what?
The question is not: Can very trustworthy people effect Dual Agency in a way that occasions no overt objections from their clients? Surely this is possible.
The question is, rather: What policy should obtain in the absence of a presumptive angelitude?
The question is: Taking account that a certain percentage of licensees will be stupid, untrained, avaricious, uninformed or openly larcenous, what policy best protects the interests of the consumer — the alleged justification for our licenses?
Manhattan doesn’t really have buyer agency agreements, so the formal dual agency disclosure agreement doesn’t exist either–leaving room for frequent conflicts of interest.
Many sellers don’t ask their agent if they are representing both sides of a transaction and this is a very important thing to know. 99% of my transactions are two agent transactions where another agent brings a buyer to a property that I represent. And although I have successfully represented both buyer and seller in the othee one percent of my transactions, I often recommend that a buyer seek representation from another agent to allay any concerns about my fiduciary responsibility to the seller.
Integrity must always win in these situations. Rather than risk the perception of distrust on either side, it is much easier to involve an agent on the buyer side. I am a firm believer that the industry should put stops in place to prevent agents from representing both sides of a transaction to protect consumers. Again, not because all lack the integrity to handle this situation, but because too many do. I would gladly welcome a system that required representation on both sides of all transactions.
