October 2008 is one for the history books. Not just because Barack Obama battled John McCain for the Oval Office as the first black Democratic presidential nominee, or because the Philadelphia Phillies won the World Series for the first time in two decades.
Monumental as those events were, they were largely eclipsed by the wild swings of the stock market and the realization that the downturn of the residential and commercial real estate markets in New York is essentially a fait accompli at this point.
Now that the shock of the collapse of some of Wall Street’s biggest firms has started to wear off a bit, The Real Deal examines how this new chapter in the life of New York real estate is beginning to play out and how the city’s developers, brokers and real estate finance experts are adjusting to a real estate market that appears to be falling out of grace.
One key question on everyone’s mind, of course, is: What’s next for the residential market? Last month, Wall Street’s wild volatility caused the city’s residential market to freeze. Deals fell apart as some potential buyers watched their net worth evaporate. Brokers said the economic seesawing continues to paralyze buyers and sellers (see Residential market halts in its tracks).
Another question that many are asking is: Could it happen again? In other words, is there a chance that the rapid gentrification of the last decade could recede and bring the city back to where it was in the late 1980s and early 1990s? Experts say that while crime and homelessness are already on the rise and though gentrification of many outer-borough neighborhoods is already stalling, the city is far better positioned to weather the crisis now than it was back then. For example, while inventory is on the rise, it is only a fraction of what it once was. Mortgage rates are also lower, and there is less speculative building (see Could the early 1990s return?).
Still, in the last month, mortgage lenders have clamped down even further on potential New York buyers. Experts say banks have started requiring higher credit ratings than they were mandating just a few weeks ago, and mortgage brokers report fewer clients seeking mortgages since the Wall Street meltdown (see Bear market squeezes mortgages).
Some of those who are abandoning mortgages may, however, be taking another route to clinching apartments. The number of all-cash deals saw a significant spike last month, as some wealthy buyers pulled their money from the tumultuous stock market and invested in real estate instead. On the other side of the spectrum, lower- and middle-income buyers saw a program that had been stimulating sales in the struggling outer boroughs come to an end. So-called seller-funded down payments were made illegal at the beginning of last month as part of a federal housing recovery bill. While critics say homes bought with the help of seller-funded down payments were riper for mortgage defaults, brokers were not happy with the ban (see Green is the new black and No more help from sellers).
In another ominous sign of the times, new data compiled for The Real Deal by StreetEasy reveals that the number of broken apartment contracts is on the rise, and that the number of apartment price cuts increased even further over the course of the last few months. Downtown led the way in Manhattan for both the most scuttled apartment deals and price cuts (see Contracts collapse, prices drop).
As if all of that wasn’t bad enough, buyers found that they weren’t the only ones unable to get a mortgage. Banks are now increasingly unwilling to write mortgages for some new development condo buildings, especially those that have sold only a small percentage of their units. This chicken-and-egg problem is likely to pose significant obstacles for new developments in the coming months (see Ominous signs from new condos).
The New York market’s problems could be most acute in Queens, where prices have declined more than they have in other boroughs. But that doesn’t mean the rest of the city isn’t going to feel pain. While the rest of the country was brought to its knees by the subprime debacle, it appears the financial meltdown that followed will be what triggers the worst of the problems here (see New York City moves closer to U.S.).
Finally, while all eyes are on the upcoming election, real estate experts weigh in on what the selection of a new president will mean for city real
estate activity (see Brokers focus on West Wing).