The deluge of press ink on the housing bubble debate continues even as the media offers broad coverage of record breaking highs for transactions during the first and second quarters of 2005. In every category and in every area of the city, milestones have been set. Last year, the headlines broadcast that the average price for a Manhattan apartment was a cool $1 million. By the end of the second quarter of this year, the average sales price had topped $1.3 million. Despite the negative environment created by all the talk about boom and bust, prices rose steadily.
To be sure, the various reporting agencies used different methodologies; however, each concluded that the second quarter numbers were exponentially high. Despite worries about a real estate bust, buyers were paying up for their homes, encouraged by continued low interest rates and short inventory.
The current real estate boom is at least four years old; some would argue it’s even older. Because of the duration of the flourishing market and its ever-rising plateaus, a psychology has set in, complete with emotional supports and comfort levels, which has sustained the escalating prices. Because of these support levels, the downside risk is minimal. Buyers, sellers and their brokers are comfortable with the sense of value achieved.
A modest slowdown that began in mid-July was followed in August by a very seasonal deceleration. This pause in the marketplace, decidedly not a bust, was not unusual considering this summer’s heat and humidity. The summer ebb, hardly a collapse, was predictable. Phones weren’t ringing, and showings were down as New Yorkers took time out to vacation and chill out. The slowdown caused apartments to remain on the market longer. If anything, Manhattan prices moved sideways, not down, in the third quarter.
With the urgency gone from bidding and attendance down at open houses, buyers have been taking advantage of the change in the environment to pause and deliberate more over their decisions. Unlike the tempo of the first half of the year when apartments were snapped up in a matter of weeks in fierce bidding wars, apartments are staying on the market longer before they sell. After frenzied first and second quarters of peak activity, a slower and more balanced second half of the year makes sense. Twenty percent gains for each quarter can’t be sustained. For the rest of the year, prices are expected to rise modestly. In the near term, leftover overpriced apartments will continue to be reduced in price until they are absorbed or removed from the market. Inventory from new developments and conversions should have a stabilizing effect on an already short supply. Mortgage rates are projected to increase minimally, moving to 6.2% for the fixed 30-year product during the fourth quarter, and to 6.6% by the end of 2006.
Safeguards for the industry may come from federal banking regulators who announced last May that new underwriting standards for mortgage lenders were in the works and would be in place in 2006. According to Loan Performance, a mortgage data firm, nearly one-third of all new mortgages in 2005 were interest only. Although risky with high loan-to-value ratios, interest only loans are commonplace today, especially among condominium buyers and investors—the latter group accounting for 23% of all home purchases in 2004, according to NAR. Should prices cool, investors and other highly leveraged buyers holding big mortgages but little equity may be in jeopardy of having loans higher than their property’s worth. This worst case scenario is unlikely to occur with owners of cooperatives since co-op boards have specific financing requirements, ranging from zero financing permitted (in all cash buildings) to a maximum of 80% allowed. Additionally, many co-op boards are steering buyers away from exotic loans, specifically prohibiting interest only products.
For most of this year and much of last, skeptics have been predicting that our market will tank. But housing prices move much slower than stock prices. In real estate, there are no black Mondays. Apartments can not fall 23% in a day or plunge to zero. At the end of the day, real estate is a usable asset.
NAR economist David Lereah predicts that the real estate market nationwide will remain healthy throughout 2006 at the very least. The advice to real estate principals is to work with an experienced professional who will help buyers to evaluate purchase opportunities and who will guide sellers to set realistic prices.