Last February, our market was reeling from the aftershocks caused by a stunning chain of events that began with the collapse of Bear Stearns and bankruptcy of Lehman Brothers. The subsequent downturn in Manhattan's residential market was sudden and precipitous. Sales activity nearly halted and then grew tentative as buyers waited for successive shoes to drop. Whatever limited transactions occurred came with steep discounts averaging 25-30 percent off the highs. Fast forward more than a year, and there are real signs that our marketplace is on the comeback.
Despite the financial strains that remain, a new energy has emerged among housing’s players that reads like a Hallmark Valentine's card to the city. With what’s being called a “return to normalcy” by many, optimism is being restored. With boosted confidence, buyers are out actively shopping, making purchasing decisions and, in fact, closing. Unlike those before them who took on too much debt in a rising market, today’s consumers have bank imposed limits on borrowing, so they are making more practical choices. The good news is that value has returned, and transactions are up though driven by reduced prices.
With historically low interest rates and decreased prices, more people can afford to enter the market. Bonuses this year will be much improved over 2009, although it’s unclear at this writing how much will include stock over cash payments. In addition, sales activity is bolstered especially for first time buyers who can participate in the government’s $8,000 tax credit which has been extended to those who contract to buy a principal residence of up to $800,000 by May 1st and close by July 1st 2010—with income limits of $125,000 for individuals and $225,000 for joint filers. Other new buyers may benefit from a $6,500 tax credit for property owners who have been in their homes for at least five years.
On the rebound
As optimism replaces uncertainty, a new foundation for sales is being built. There’s less tension between buyers and sellers as we move from a declining market to one of stability. With more transactions occurring, there’s greater comparable empirical data for property appraisers to draw on.
In sharp turnaround from last February when credit was nearly frozen, today’s lenders are back in business ready to make loans despite a new regulatory environment defined by rigid scrutiny and delays. For the most part, lenders are requiring 35% down, and borrowers must present unblemished credit and consistent income histories. Underwriters will red flag income and bonus inconsistencies and unusually large bank deposits. Increasingly, loan approvals can take 45 days or longer with equally comprehensive examinations of the borrower and of the property being financed. Buildings must meet Freddie Mae and Freddie Mac guidelines for adequate insurance coverage and sufficient reserve funds plus an additional 10% of budget for mechanical system breakdowns. Moreover, clearing to close can take weeks as the property gets reviewed a second or even third time with more questionnaires and requests for insurance evidence. Not surprisingly, cash buyers are making broad jump moves over buyers who are unable to waive a financing contingency.
Last year’s 4th quarter saw an unexpectedly quick absorption rate for properties perceived as being priced right. Purchasers stepped up in competitive bidding to secure homes offering that rare combination of space, condition, views and price. As I write this on a cold December day less than a week before Christmas, I reflect on my own transactions from October through December which sold within 45 days of the listing date to all cash buyers at, near or over the asking price.
More and more sellers are listening to the new market realities. They are cautioned to use discipline to set appropriate prices to generate action and stimulate bidding, and not misinterpret the new confidence as a reason to set unachievable levels. There won’t be a rally up in prices any time soon. Testing the market with an inflated asking wastes precious time and risks missing the moment of a market wave.
Buyers should understand that low ball offers might have worked in the fall of 2008 and winter of 2009, but rarely today. Prices are leveling off, not caving down. Even before purchasers bid on a property, they should identify mortgage options and also investigate their personal credit scores with companies like North Shore Advisory who can help to restore credit profiles if needed. Buyers should rely on guidance from their brokers to address the difficulties with co-op boards, especially in the light of recent turndowns.
Last February’s fear and inertia have abated. Though uncertainty still clouds the big economic picture, Manhattan’s housing market has been showing resilience. This February as friends and lovers exchange mutual love notes, here’s hoping that leveling prices bring together buyers and sellers in increasing numbers. Xoxoxo. Happy Valentine’s Day!