While prices and sales volume declined again in the final quarter of 2019, Q4 actually saw the lowest rate of decline since the fall of 2017. An uptick in activity in the last month of the year -- and another drop in interest rates at the start of the year -- hopefully leads to further stabilization in the first half of 2020. Our analysis is below, along with links to Compass’s Q4 Market reports for even more data and details.
A “wait and see” approach by Manhattan buyers, coupled with anxious sellers, continued to weigh down prices this fall. As a result, 2019 price figures settled to their lowest year-end levels in five years, with average price falling 10% to $1.862M and median price—less skewed by high or low prices—slipping 3% to $999K to remain below $1M for a second quarter in a row. Manhattan’s luxury market saw sales over $5M drop 41%. It's important to keep some perspective on these figures: even at the lowest point this year, prices remained nearly 15% higher than ten years ago.
While days on market continued to increase, other metrics were neutral or slightly improved relative to the prior year. Manhattan sales volume were almost even with this time last year, and prices in some product types have begun to bounce back. Inventory is lower, and mortgage rates have remained steady. We saw a 1% uptick in resale co-op sales and an 11% boost in new development sales, but overall sales figures were brought down by a 13% drop in resale condo sales. Signed contracts in the final quarter, however, were up from 2018 figures for a third consecutive quarter—improving 4% annually—suggesting that demand, after four years of declines, may finally begin to absorb supply.
In a market hungry for improvement, the last quarter’s results leave us cautiously optimistic as we enter the new decade.
Much like the first half of 2019, sales activity in the second half of the year in Brooklyn moderated compared to a very strong 2018, though prices continued to rise. Average price across the borough hit its highest figure in any fourth quarter, and median price did the same, this year hitting a record high of $800,000. While these figures only represent a marginal increase, median price per square foot increased by double-digits in the final quarter of 2019. This reflects a shift towards smaller apartments, as many buyers chose to hold firm on price by opting for smaller homes -- indicative of a greater overall price sensitivity in the market.
Properties in the $500K-1M segment made up 36% of inventory in the final quarter, but accounted for 47% of closings, and competition for these units resulted in a 2% higher average price per square foot. For properties priced in the $1-2M range, inventory outpaced closings, but price per square foot increased 6% versus 2018 because units in this price tier were also 5% smaller compared to past years. Properties priced $2M and higher made up just 6% of all recorded sales, and these units offered the largest average discount. The $3M+ segment saw a decrease in average price per square foot, as more of this inventory was made up of townhomes instead of luxury condos compared to last year.
Days on market increased for properties over $1M as Brooklyn buyers also lost some of the sense of urgency that has driven the Brooklyn market to record-fast sales in previous years. By product type, co-ops had the smallest market share but moved the quickest, with 42% of listings entering contract in the first 59 days on market. Mirroring a trend across the river in Manhattan, condos (particularly new development), which commanded the highest average price per square foot figures in the borough, were the slowest to enter contract -- just 32% entered contract in the first 59 days, while 32% took 180+ days.
Updated: Oct 27, 2020
New development is a category all its own in NYC real estate and includes both ground-up new construction and pre-war conversions (essentially new construction inside of a pre-war building shell). Everyone knows there is a cachet (and price premium) to buying brand new. What are the pros and cons of buying in a new development?
Pros of New Development
1. Floor Plans Designed for Modern Living: Naturally, new developments are designed with today’s buyer in mind: en suite master bathrooms, double vanities, walk-in closets, large open plan kitchens with high-end appliances and vented hoods. New developments tend to maximize their usable square footage by eschewing layout elements often found in their pre-war counterparts, such as long hallways, closed kitchens, and over-sized foyers.
2. Quality of Finishes: To get top-dollar, developers know they have to invest in high quality, eye catching finishes. At a certain price point, that means things like solid slab marble counters, rainfall showers, high-end appliances, solid white oak flooring, and custom cabinets and tiles.
3. Amenities: Standard amenities in new developments include central heat and air, in-unit vented washer/dryers, heated floors, “smart home” features, and premium materials and appliance suites. A larger development might also have a full-scale fitness center (perhaps with a pool), a roof-deck or other shared outdoor space, doormen and concierges, cold storage for grocery deliveries, bike and private storage, resident lounges, business centers, parking, and a host of other amenities for children and pets.
4. No Unknown Renovation Costs or Headaches: Renovating is neither cheap nor easy, and a new development represents the ultimate in a move-in ready product with the home delivered pristine condition all the way down to scuffs on the walls and dings on the floor. A buyer in a new development is paying for finishes so exploring the different options in different projects is a major part of the process, unlike in resale where many buyers focus more on the potential of the space with some updating in mind.
5. That Feeling of Being the First. Most of my clients who have bought in a new development say that the main draw for them was being the first to live in their home. Many new development buyers are repeat offenders who will trade in their home for a brand new model when it’s time to move.
Cons of New Development
1. Higher Closing Costs: Developers almost always seek to shift to the buyer certain closing costs that would ordinarily be paid by the seller in a resale. These “asks” usually include state and local transfer taxes, which come out to 1.825% of the total purchase price for over $500,000, the sponsor’s attorney fees for closing, reimbursement fees, document preparation fees, etc. Even if the buyer does a good job of negotiating who pays closing costs, the buyer will almost certainly have to contribute a couple months of common charges to build up the building’s reserves at the onset -- and possibly even a substantial fee toward a superintendent’s apartment.
2. Higher Monthly Carrying Charges: New development condos, especially in new construction, tend to have substantially higher monthly costs -- both common charges and taxes -- than their resale counterparts. The higher common charges can be attributed to the cost of maintaining amenities, but the taxes are also higher because they are assessed anew, unlike in resale or conversion projects. The taxes can also be unpredictable for those who commit to purchasing in the early stages, when the taxes are mere projections in the offering plan and have not yet been assessed.
3. Unpredictable Timeline: There is always some uncertainty about when a buyer in a new development can finally close on an apartment. And even after closing, there may be further uncertainty about when the amenities and common spaces will be completed and operational. An experienced developer may be able to minimize delays, but much is outside of their control. For example, closings might not begin until a certain number of units have entered contract and the city has completed its many rounds of inspections.
4. New Construction Concerns: While most new development sales come with a guarantee of quality for major systems and the soundness of construction for a certain period of time after completion, it is almost inevitable that there will be some minor issues in the first few years. The building will “settle” (which means, at the very least, cracks in the paint) and there will almost certainly be a leak somewhere. Of course, there are horror stories about major issues -- like pervasive water infiltration -- but these are very rare, especially at certain price points. If possible (i.e. if the building is already built and the unit is ready), we always recommend having an experienced inspector thoroughly go over the property prior to signing the contract.
5. Price: Finally, the most obvious con of buying in a new development is the price premium. Prices for new development tend to run at least 15% higher than older resale inventory, and can be much, much more -- for example, in the last quarter, new development two-bedroom condos in Manhattan traded on average about 43% higher than resale ($2.65M vs. $1.85M). While some of the astronomical price tags have been negotiated (and many quite significantly) down during the slowdown, many new development units (about a quarter) have simply sat unsold as developers have not had to rush to lure buyers in the same way individual sellers have had to do. Developers are in the business of building to make a profit, and also have additional obligations to investors and lenders that limit how negotiable they can be on prices. Ultimately, it is a personal decision whether having a shiny new place is worth the price premium, especially as today’s new construction is tomorrow’s resale.
Updated: Oct 27, 2020
Many buyers are intimidated at the prospect of competing against an all-cash buyer for a hot property -- but does cash always win?
First, to address a common misconception: most buyers, and especially those vying for co-ops below $3M, are relying on financing to some extent, which means a majority of active buyers are submitting offers contingent on obtaining that financing. So as long as you have enough funds to cover the minimum down payment amount (typically 20%) along with required closing costs/reserves, your offer is still competitive -- and even more so if you’re able to put down 25% of the purchase price. That said, the mighty all-cash buyer still has a huge advantage, right? Well, not necessarily. First off, the seller gets the same proceeds whether they are paid by the buyer or his lender. More importantly, all-cash buyers tend to grossly overestimate the value of their cash and their draw as an all-cash buyer, leading them to make noncompetitive offers.
But an all-cash offer does have some value. Certainly it will tip the scales with all else being equal. And in some situations it might justify a modest discount on the sale price. The value to a seller of an all-cash offer is based on the following two advantages:
(1) Faster Closing. In a typical deal, eliminating the mortgage application and underwriting process can cut anywhere from 10-25 days off the duration of the transaction. Buyers who are financing typically have between 30-45 days from contract signing to apply for their loan and obtain a commitment letter from the bank. Upon receipt, they usually have another 3-5 business days to submit their board package or building application. Cash buyers typically have 10-15 business days from contract signing to submit their building or board application, so the time savings to a seller is really only about 3 weeks.
(2) Eliminating risk. To understand why and how cash reduces risk, it’s important to consider the three things on which financing hinges -- the buyer, the building, and the unit. By the time a seller accepts a buyer’s offer, they will feel pretty comfortable with the first two of these factors, so the only question mark is whether the unit will appraise at the contract price. While low appraisals are not common, even a $1 shortfall could jeopardize a financing-contingent deal where the buyer is putting down the standard 20% of the purchase price. However, the consequences of a low appraisal diminish as down payment amounts increase over 20% of the purchase price. In these cases, an all-cash buyer is effectively no better in terms of risk than a well-qualified buyer who can (and agrees to if necessary) put down 25% or more. It is important for all-cash buyers to be realistic about the value their all-cash status holds. Most often, the discount that it can entice is not worth tying up their capital or foregoing other benefits of cheap financing options.