Summer 2021 Market Update
The Post-Covid Market
Much has been said about the renewed strength of the NYC real estate market in recent months. The Manhattan market, which had been in a lull for a few years, has been on the rebound since late 2020 and is once again officially a "seller's market." In the first quarter of 2021, the total number of Manhattan closings increased by a striking 37% compared to the fourth quarter of 2020. Recent contract activity has also reached numbers not seen in many years. Since the start of this year, total signed contracts in Manhattan surpassed 2019 figures for the same period by more than 50%. The luxury market in particular is on an "extraordinary streak," according to the Olshan Report, which tracks contracts over $4M.
As for Brooklyn, sales had plateaued in recent years, including throughout the early part of the pandemic, but since the late Fall, sales have been climbing once again. Inventory has remained very tight and competition has been fierce, especially for properties under $2.5M that check all the boxes. Contrary to the doom-and-gloom predictions of an exodus, NYC appears to be experiencing a surge in housing demand.
The picture on the ground has been hectic. Showings are still, by and large, by appointment only. For some properties, this has meant that simply getting an appointment before the barrage of offers has been a challenge. More deals are being made, but the time it takes for transactions to close has increased as lenders, attorneys, and management companies have struggled to keep up with the pace. This has kept us busy, but we're grateful for the resilience and renewed vigor of the market coming out of the pandemic.
With all these positive market reports, what has been much less reported are some after-effects of the “Covid market” that has been affecting our transactions recently. Coupled with the overwhelming volume, which has led to lender delays and prolonged closing timeframes all around, we've encountered some unique challenges recently:
- Low Appraisals -
Many people think an appraiser provides an objective, unassailable "valuation" of a property. However, what they don't realize is that bank appraisals are limited by some very strict guidelines that apply uniformly. While the guidelines do allow for "adjustments" based on an individual appraiser’s judgement and their understanding of market conditions and trends, appraisals can sometimes be far less reliable than one would think - especially in rapidly changing market conditions.
Across Manhattan and Brooklyn, we’ve seen a recent spate of low appraisals which I believe can be attributed to Covid's effect on the market last year. Appraisers predominantly rely on sold listings to justify contract prices, and banks require that any sold listings included in their report must have closed in the last year. Given there were essentially zero contract/sales activity for 3+ months of 2020, the pool of available comparable sales that appraisers can choose from is much smaller than usual. Also, most deals that were negotiated during or directly after "NY on Pause" (March 21-June 28 for real estate activities) entered contract at a time of huge uncertainty and were therefore at lower levels (and with steeper discounts) that are not indicative of current market conditions. This is an issue that will resolve itself in time as more sales that reflect current market conditions continue to close. In the meantime, we have been advising our sellers to consider financing contingent offers carefully, especially with a downpayment of 20% or less since this provides no cushion for a low appraisal.
- Co-op Board Applications -
The second Covid after-effect we've observed is a heightened scrutiny by co-op boards in considering purchase applications – particularly when evaluating self-employed applicants, many of whom were negatively affected in some way by Covid-related restrictions in their industries last year. Co-op boards consider income and liquidity in evaluating purchasers, and both of these metrics have become harder to meet as a result of Covid. Usually, boards look at the last two years' income, but with 2020 being an aberration for many, we have had to hope that boards would consider an applicant's historical income and 2021 year-to-date information. On the liquidity side, many boards seem to be looking for increased reserves to protect against "another Covid."