The Real Deal New York

Stuck in limbo

How fiscal policy negotiations in D.C. are impacting NYC’s housing market
By Katherine Clarke | December 01, 2012 07:00AM

Manhattan’s luxury residential real estate market will remain in limbo for the remainder of the year as speculation continues over how negotiations on the nation’s fiscal policy play out in Washington, brokers say.

While some buyers and sellers are rushing to close on deals already in motion in order to avoid an inevitable rise in capital gains taxes, brokers said, consumers still considering a sale or purchase are holding off. They are waiting until Congress agrees on a plan to deal with a confluence of fiscal issues, including the expiration of the Bush-era tax cuts, spending cuts and the national deficit.

If the government does not reach a solution by Jan. 1 — the date that the nation goes over the so-called “fiscal cliff” — capital gains could reportedly go from 15 to 20 or 25 percent, while taxes on dividends may go as high as 43 percent from 15 percent for the wealthiest Americans.

Wealthy Manhattanites looking to gift their children pricey properties may also be in trouble: If Congress fails to act, a lifetime gift-tax exemption allowing the transfer of assets worth up to $5.2 million, in place since the beginning of 2011, is set to revert to just $1 million on Dec. 31. That would mean all transfers over $1 million could be taxed as high as 50 percent.

Sotheby’s International Realty broker Nikki Field said she’s seeing hypermotivated sellers flood the market, with the aim of closing on pricey properties before the end of the year.

“The talk of a fiscal cliff is accelerating, rather than slowing down, sales at the high end,” she said. “Some sellers are concerned because the possibility of the [tax] rise reduces their profit margin significantly, while a few are even willing to discount prime properties for a quick close before the end of the year.”

She said her team has recently worked on several deals in which the seller accepted the buyers’ offer on the condition that the deal close by the end of 2012.

Indeed, real estate attorney Bruce Cohen, of the Manhattan law firm Cohen & Frankel, said he didn’t plan a December vacation this year precisely so he could deal with the volume of clients looking to close in the last quarter.

Some of the superpricey transactions that have recently closed include last month’s purchase by Susan Weber Soros, ex-wife of billionaire George Soros, of a townhouse at 116 East 70th Street near Park Avenue for its full $22.5 million asking price. Also last month, media mogul David Geffen paid $54 million for a penthouse duplex owned by socialite Denise Rich at 785 Fifth Avenue.

In the current climate, buyers are able to take advantage of sellers’ eagerness to sell before the end of the year, said Michael Graves, a broker at CORE.

“The fiscal cliff and capital gains tax could negatively affect property values next year, and that volatility is heavy ammunition” for the buyer, he said.

Another factor working in buyers’ favor is that condo inventory is on the rise. According to a report issued by the real estate website StreetEasy last month, the number of apartments for sale in new development projects in Manhattan has risen 10.2 percent in the last six months.

However, those high-end buyers who don’t already have deals in the works are sitting back for the moment. That’s because most buyers are also under-the-gun to sell their own property before they buy another home and will end up getting hit with the capital gains tax on that end of their transaction.

“The probability of a tax increase on the wealthy may cause some high-end buyers hesitation,” said Patricia Levan of Levan Real Estate. “However, when the expected tax compromise comes through, most buyers will feel relieved, and this will increase demand.”

Factoring in both the political situation in Washington and the impact Superstorm Sandy has had on closing volume in November, Jonathan Miller, CEO and president of real estate appraisal firm Miller Samuel, said he predicts a slightly slower fourth quarter than seasonal expectations normally suggest.

According to preliminary data provided to The Real Deal by StreetEasy, just 43 closings that took place citywide in the week immediately after the storm have been recorded so far, compared with 662 closings the previous week. In Manhattan, only 17 closings had been recorded by press time, compared with 238 the week prior.

However, the dip is not expected to be catastrophic in the long term.

A greater concern, Miller said, is what will happen to the housing markets if Congress doesn’t hammer out a compromise before Jan. 1.

“The betting money says that if we do go fully into this fiscal cliff, we’re going into a recession,” he said. “That means rising unemployment and easing demand for housing. We would see the default rate rise and another heavy foreclosure cycle.”