Trump’s Tax Reform and New York City Real Estate

 The Tax Cuts and Jobs Act signed by President Trump on December 22, 2017, has initiated numerous changes to how residential property owners can write off their local taxes and mortgage interest payments on their federal tax returns. It caps state and municipal property tax deductions on federal tax returns at $10,000, reduces mortgage interest deduction caps from $1.1 million to $500,000, and prohibits such deductions on second homes.

But what does this really mean for the Manhattan and Brooklyn real estate markets? Well, we’re here to ask the experts just that: does this new tax law have any effect on the real estate market here in NYC? Initial views on this were mixed, and current market trends reflect those prognostications.

The fourth quarter of 2017, when New York buzzed with a mix of suspicion and sanguinity about its native President’s impending tax overhaul, saw Manhattan housing sales activity at its lowest fourth-quarter total in six years, Douglas Elliman and Miller Samuel reported. This included a 12.3% sales volume softening from Q4-2016 to 2,514 closed sales from 2,868 in Manhattan real estate, an average sale price drop to $1,897,503—the first below-$2M figure in two years—and a 13.2% increase in luxury listing inventory to 1,439, the first increase in nine consecutive fourth quarters. To circumvent the lack of tax-write-off incentives for homeownership the Act would create, cash buyers purchased 51.2% of all co-op and condo units sold.

But why? These trends were due largely to the market cautiousness the Act’s reduction of tax benefits provoked in the minds of many buyers, Miller Samuel’s CEO Jonathan Miller told The New York Times in January. Our very own Steven James echoed this sentiment to Bloomberg and Newsweek: “The buyer is very worried about overpaying.”

The Brooklyn market fared a bit better, perhaps due to its up-and-coming status in New York’s higher-end real estate market compared to Manhattan’s long-established one. Brooklyn’s Q4-2017 closed with 2,627 sales, a 1.7% increase from 2,582 in Q4-2016, causing a 23.1% reduction in inventory over the past year. Brooklyn’s $948,706 average sales price was up 0.1% from Q4-2016’s $947,553, and its median sales price rose 2.7% from $750K to $770K over that period. Its luxury median sales price, however, went down 1.9% to $2.4M over that time frame.

Now let’s dive into the 2018 numbers. Elliman and Samuel’s Q1-2018 reports generally indicated continuation of these cautious trends. Manhattan’s home sales dropped 24.6% from 2,892 sales in Q1-2017 to 2,180, which included a 24% fall in luxury home sales. The average sales price dropped from $2,104,350 in Q1-2017 to $1,933,198 (slightly better than the Q4-2017 showing, however). Brooklyn’s market growth slowed its pace but remained strong: the average sale price reduced from $993,955 to $982,093. Then we have the luxury sales, where the median sales price fell 4.7% to $2.425M.

These reports painted quite a different picture from Dezeen’s rosy reportage that Manhattan’s high-end residential real estate market was “booming, thanks to President Donald Trump’s economic policies and tax cuts for the wealthy,” with a reported overall 27% sales volume increase by the beginning of March. Whatever truth those findings hold may be partly attributable to the downward pressure the market’s highest end was already under, pricing-wise.

Prices in the over-$8M+ market have dropped significantly over the past 18 months, possibly to move inventory faster in light of the Act’s diminution of homeowner tax benefits, even though many of these sales involve cash purchases that make the lowered interest expense write-off irrelevant. (In fact, 90% of Q4-2017’s over-$5M sales were cash transactions, Elliman reported.) To boot, some buyers are actually using Trump’s tax reforms to bargain down home prices so they hopefully won’t get socked with higher taxes once the sales are closed, The New York Times reported in June.

Manhattan’s individual neighborhoods varied in RE market sales percentages over the first half of 2018, most showing incremental increases. Downtown consistently held the largest share of the borough’s market, 36% in January and 40% by May. The East Side carried 19% in January and 20% in May. The West Side went up from 18% to 20%, Midtown increased from 16% to 20%, and Upper Manhattan dropped from 7% to 4%.

Brooklyn’s market softened slightly as well. Q2-2018 sales were 5.7% down from last year’s second quarter, from 2,845 to 2,683, the first such decline after ten consecutive year-over-year gains, though sales increased 11.3% from Q1. Inventory rose 18.5% from Q2-2017’s 2,257 to this second quarter’s 2,675, which was up 30.9% from Q1. This significant inventory expansion followed 11 consecutive quarters of year-over-year depletions. Median and average sales prices both dropped from Q2-2017—$997,654 to $984,047 and $795K to $780K, respectively—with very minimal differences from Q1.

With all of this data being enough to make your head spin, what does this mean to our buyers and sellers who are uncertain about the effects of Trump’s new tax law on the NYC real estate market? The answer is, of course, nuanced, like any complex market. Because of the multiple up-and-down pressures the real estate market must weather consistently, assigning responsibility to any individual cause, trend or force wouldn’t be fair and/or accurate.

“External influences outside of the vibrant city economy such as rising mortgage rates, the potential impact of the new federal tax law, and an unclear direction of the national economy have continued to remain a concern of market participants,” Miller reported in the Q2-2018 Elliman Report on Manhattan sales. Another external influence could be a predicted mass exodus from New York to lower-tax states like Florida, where “you can save a million [dollars] a year,” our own Richard Steinberg told The Real Deal.

So there you go. No omens of a recession or bubble-burst are on the horizon, but cards are being played cautiously in NYC real estate investment, yet with hopeful signs that Brooklyn could be a worthy “Trump” card for the homebuyer or investor. Looks like we’ll have to stick around and see what happens in Q3 and Q4.


At The Core | Q2 Market Report Summary

Q2 is now behind us and it’s time to take a look at what it’s telling us.  There’s nothing like diving into the data, itself, to complement anecdotal evidence and get a clear picture of the market.

So, here are some of the take-away sound bites from Elliman’s own 2nd Quarter Report:

  • The average NYC sale hit yet another all-time record of $2.19 M – that’s a healthy margin over the $2 million mark that defines the average price for a NYC apartment … no small feat
  • Strong sale prices were driven by two primary factors: more realistic sellers who have been adjusting to the new norm in the market, and the pent-up demand that we’ve seen from buyers either sitting on the sidelines or trying to buy to no avail during the past year
  • The sheer volume of sales was the strongest in 7 quarters, driven by increased inventory and the fear of rising interest rates looming right around the corner
  • Condos continued to fuel the rise of price-points, overall, and the entry-level market (as defined by the combination of size and price – studios and the sub $1 M price-point) continued to be strong and the arena for the greatest number of bidding wars. To that end, make no mistake about it, the sub $1 million market has been hot, hot, hot!
  • The outlook for the upper end of the market has improved and will be stronger than we think this year, as resale inventory has dropped sharply
  • Interestingly, the share of all-cash sales fell by 4% to 42%, the lowest since this metric began tracking 3 years ago. (Still, we’re always in awe that close to half of all sales are cash – keep this in mind when it comes to making an offer on a place you love.)
  • New development prices nudged up over the past year, as did sales volumes, despite their lower share of overall sales volume, and despite the increase in both time on market and listing discount.

 The bottom line for the last quarter is that buyers and sellers continue finding common ground. Sellers have adjusted to the new market reality, and prices have followed suit.  We are in a far more sustainable phase of this market’s growth now.  Buyers and sellers, both, can expect that focusing on the fundamentals will serve them well.

At The Core | Now Is The Time To Engage Your Broker

Last month in this section, we strongly advised against betting on NYC, articulating the transition we see occurring in the markets.  Based on the many conversations we’ve had since, this month we’re urging you to engage us if you are in any way considering entering the market as a buyer or seller over the coming months, especially as a seller.  With no further ado, our official headline is “Now is the time to engage your broker!”  There, we’ve said it quite explicitly.

“Why now?” you might ask. “I have plenty of time before the fall.”  It’s very funny for us to talk with clients as they tell us in a relaxed, sit-by-the-pool kind of voice, “we are more than 10 weeks away from Labor Day”, and have us respond in a pot-is-boiling-over voice “you are a mere 10 weeks away from Labor Day!”.  Same facts, different perspectives.

You see, our team believes in being prepared; we believe in doing our homework, being strategic, and doing everything in our power to hit the ground running successfully, selling your property of the highest price we can get you in the shortest period of time.  Doing so doesn’t happen in one week; being prepared takes time, research and planning.

The markets start significantly picking up with the pitter-patter (more often stampede) of buyer feet pounding the pavement, en masse.  We want to capitalize on that increased volume of demand to your advantage starting late-summer, early-fall, when prime listing season beings.  This means:

  • We need to begin talking to you about valuations and real-time trends and metrics we’re seeing.
  • We want to start creating tailored marketing plans that speak to your specific property, in your specific building, in your specific neighborhood.
  • We want an effective narrative that speaks to your target buyers, that’s relevant and impactful.
  • We need ample time to assess any repairs or requisite work that will, in turn, optimally position your property to achieve our objectives.

If you’re even considering upgrading a kitchen or updating flooring, this takes time.  You want to be in the market come fall, not working with contractors and running into the holiday season.

Luck is when preparation meets opportunity, and we like to think that we help our clients maximize their luck of finding “that all-cash buyer” who is looking to pull the trigger next week; or “that quirky family” who wanted that exact ratio of outdoor and indoor living space; or “those empty nesters” who really want that large living area for entertaining in their golden years and don’t care about the small bedroom size.  Real estate is made up of stories that seem anomalous, that seem like the stars all aligned in just the right way to make a deal happen; those lucky sellers!  We like to believe that we create our sellers’ “luck”, and are ghost-writers of such stories …  so long as we have the time and trust to do our jobs the best way that we know how – through hard work, research and preparation.

So let us help all of your stars be aligned and let’s have a conversation sooner than later about how to hit the fall listing season with a magical story of your own!

At The Core | Don’t Bet Against NYC

Times of transition are always tricky: for families, organizations, politicians and real estate market participants, alike. This time is no different: the NYC real estate market is undergoing a transition and is still settling into a new norm of sustainability. The linear upward trajectory we experienced a few years ago is behind us, as we predicted, and the market is finding its new norm, a steadier norm.

That doesn’t mean that the process of transitioning itself is clear, immediate or readily visible while in its midst. This injects a level of uncertainty on behalf of buyers and sellers who don’t see the broader market trends that real estate professionals do, day in and day out. In the land of imperfect or incomplete information, worries abound, often unnecessarily. And this is where we find ourselves today. People are worried that the market shock of a decade ago may rear its ugly head again, but we’re here to tell you: don’t bet against NYC.

This is not just because NYC is always in the top two destination markets for world-wide investors and high-net-worth individuals. This is also not just because NYC’s employer landscape is more diversified than ever, less embedded in the Wall Street reality than ever before. This is also not just because the number of businesses starting up and migrating to the city is on the rise. If you put all that aside and look purely at the supply and demand dynamics behind the NYC market… they are healthy.

We are not seeing an oversupply of property, nor a lax lending environment, nor a lack of demand from property buyers nor a dramatically escalating interest rate environment. None of the fundamentals appear at risk, as we debrief with Jonathan Miller and follow the numbers.

Indeed, transactions in the $1-$5M range, along with studios and 1 bedrooms, remain robust. We are seeing movements across the full price spectrum, fueled by sellers who recognize the market transition.   What this means is that the market is flattening out in the immediate short-term as it looks to build a new foundation from which to grow. This is the stage for “the new up”. Not broker babble, just asset pricing 101.   Headlines get eyeballs and sell ads, but this doesn’t mean that they’re true. Each developer and seller has his own opinion of where the market is going, and may have motivations beyond market timing (think expiring loans, personal cash needs, etc.). That’s the beauty of a fluid and liquid market, after all. But rest assured: the sky is not falling, the markets aren’t crashing and deals are getting done, with happy buyers and sellers, alike. So if you’re in the market, stay in the market, and if you’re not – it may be a good time to jump in during this new foundation-settling environment.

At The Core | A Second-Half Year

The Q1 2017 sales market reports are in and it’s time to dive in and get a sense of the NYC real estate market. Overall, the market is in a rebuilding phase based on the pricing readjustment we’ve written about over the past few months. While median sales prices have dipped slightly, sales volume managed to inch up, as sellers finally adjusted to market realities and priced accordingly. Further, much evidence points to a release of pent-up demand in the resale market, which accumulated before the U.S. election last November as uncertainty loomed.   That’s what accounts for some of the transaction pop we’re seeing, the impact of which actually overpowered the rise in inventory.

In terms of prices, as we look to a year on year comparison, last year’s numbers were excessively weighted in favor of new development closings, which skewed prices upward based on their ultra-luxury bias. The fact that prices have not dropped more significantly bodes well for what’s to come. The average sales price continues to sit above the $3M mark in condominiums and above the $1.2M mark for co-ops.

New developments are especially good at skewing data, as contracts are signed a good 1-2 years prior to close, meaning the timing attribution of those numbers is way off. As an example, new development legacy contracts cased median luxury prices to hit a record high at $6.95M this quarter. This same data shows roughly 2/3 of new development sales closing at list price. However, these are lagging sales … way lagging. The reality on the ground now is different, with marketing time and inventory both rising sharply as developers are looking to offload their goods before they become stale.

Indeed, and as we predicted last year, we believe that 2017 will be a “second-half year”. We are seeing significant pick-up across the board and are gearing up for a very strong Q3 and Q4. Of note, reports are always lagging indicators by 6-9 months. We mention this because we don’t anticipate seeing the full evidence of this market strength until the end of this year or the beginning of next year. This makes for a very dynamic market in which it’s easy to anchor to current (old) data. Make sure you talk to people on-the-ground to position yourself effectively, whether as buyer or seller.

At The Core | Data vs. Wisdom

Data and information are all around us. Big data, data analytics, now AI … information, especially with respect to real estate is more transparent than ever, with the likes of Streeteasy, Trulia and Curbed, and even more data-laden competitors coming online seemingly every month…it would make sense to assume, then, that such overflowing information would make buyers and sellers more savvy and wise about the market.  And yet this assumption would be flawed.  Repeat after us: data is only data. And more data does not necessarily equate into more wisdom; often the opposite is true. Without the context and experience to make it sing, it’s one piece of the puzzle at best and unconstructive noise at worst.  But boy is it addictive; and boy can it lead many down the wrong path.

Data does not equal strategy.  Data does not equal wisdom. 

Think about it this way:  the real estate market has become incredibly transparent over the last decade, with a growing number of sites and services all providing more information and data. If the premise that data = wisdom holds, then we should have seen a precipitous drop in broker-led transactions, along with an exponential spike in FSBOs and private transactions. But we haven’t. Why? Because having and owning the information is no longer the broker’s value add; it’s wisdom and its application to serve you. Even leveraging pricing algorithms or savvy market trends falls short of being able to know how and when to apply this information in a way that moves the deal forward.

It all gets down to People.

We can’t tell you how many people become attached to their numbers, the comps, and the research they perform. And the more research they do, the more attached they become (it makes sense, considering how much time was invested).  But this neglects the broader reality that:

  1. Real estate is still not hyper efficient.  Emotions and beliefs continue to play a significant role due to the personal nature of a home versus orange juice futures, as an example.
  2. Each property is unique in some capacity.  Whether the quality, exposure, or floor, no two properties are exactly alike. Which means that, technically, every property is unique; this is not a commodity product.
  3. The market is incredibly fluid.  One particularly positive economic outlook or one material stock market crash can impact mindsets, both on the buying and selling end – and things move fast, faster than ever, in fact.  Further, data points from a mere 6 months ago can already be stale and irrelevant. By the time the data is captured and analyzed, it’s often a lagging indicator of the market, not a leading one.

At the end of the day, the wonderful world of real estate goes ‘round based on one individual’s desire to sell matching one individual’s willingness to buy.  Our advice to our loyal readers: try to look at the bigger picture and the longer time horizon; make sure to balance a potential obsession with the dollars and cents with the 5+ year horizon ahead.  (We’ve seen buyers and sellers walk away from the table over a $10k difference price on a $2 million+ apartment more times than we can recall; that’s just silly.) All of this is to say that the data and numbers are important, but they are only one piece of the bigger picture. 

At The Core | Have We Hit an Equilibrium?

Ahhh, the sweet, sweet smell of equilibrium! (Ok, it doesn’t actually smell but it feels right.) What do we mean? For the first time in a very long time, it feels to us that we’ve reached a very nice equilibrium between seller and buyer behaviors.

  • Sellers are waking up to a new reality of more down-to-earth prices and adjusting their strategy accordingly. (Out-of-sync seller behavior usually looks like pricing above the market, thinking the property can sell in a few weeks, and refusing to engage with buyers looking to negotiate.)
  • Buyers, in turn, are back out pounding the pavement, actively looking for the right opportunity. (Out-of-sync buyer behavior usually looks like buyers giving up altogether, refusing to compromise on property desires, waiting things out endlessly for “the right apartment” to appear, or not moving quickly enough.)

Wouldn’t you know it: this equilibrium has resulted in a strengthening of the market. Even in a typically slow month, January came in with very healthy activity. This is in no small part due to the pent-up demand that built up during the uncertain Q4 releasing in January. So many people were holding their breath (and their wallets) … until they decided that sitting out of the game altogether was not in their best interest. And no, the sky didn’t fall. Truth be told, prices are softening a bit, but we need to remember that prices don’t keep increasing forever, especially not as steeply as they have for the last few years. We are in a far more sustainable new norm, and we welcome it!

At The Core | Resale Home Prices Decrease

It’s been quite some time since we’ve been able to write the following: resale home prices are falling.  That’s right boys and girls: the price of resale apartments is-a-goin’-down

So, while you let that sink in for a second, let’s share some disclaimers and add a little perspective:

  1. Real estate prices never go in one direction for too long – and our recent streak of 6+ years has been truly a long one. Everyone knew that the pace wasn’t sustainable; the question was when we would see the breaking point of this trend. Alas, now the proof is in the pudding.
  2. It’s not just that prices have gone up, but over the past several years, we’ve seen nothing but bidding wars, limited inventory and excessive seller exuberance. This has left many sellers with a bit of a God complex, and buyers with a lot more white hair (from the perpetual stress of competing for properties and losing out on bids) and foot blisters (from constantly pounding the pavement to visit open houses and see new property). If you’ve been reading the Apple Peeled for some time, you might have even gotten bored by the same narrative: “yes, inventory is tight; yes, it’s a seller’s market; yes, you need to move at light-speed, and ideally have all cash (or at least a non-contingent financed offer, to have a shot at grabbing that apartment.”
  3. We believe this is a natural correction to a crazy market that had to slow down and adjust to market realities. This doesn’t make it an easy adjustment by any means, especially to you sellers out there, but as Jonathan Miller, President of Miller Samuels, has put it: “Maybe we’re heading out of the period when there was no shame in overpricing your home. We’re moving away from that and into something more pragmatic: Do you want to actually sell your property or do you want to pretend? Part of selling is pricing correctly or being more negotiable.” The pendulum swings. The farther out it swings, the sharper the swing feels on the way back.

Now, for the silver lining. Buyers, you have some breathing room on your side, and we haven’t been able to say that for years. At long last, you don’t have to pounce on each and every fresh listing within a few days of it coming on the market.  You don’t need to study auction dynamics before placing your offer.  You can relax a bit, be more planful, and stroll into that open house instead of sprint.

That said: warning to the buy-side wise: properly priced properties that are of high quality will continue to move at lightning speed (note in the article that 14% of properties are still closing above their asking price.)  So if you come across an apartment that you feel has the right attributes, the right location and the right price, chances are other buyers will feel the same way.

Sellers, it’s been a great ride … nay, a phenomenal ride. You’ve been able to call the shots for some time now, and buyers have responded.  It’s time to take a deep breath and assess your real motivation for selling your place.  It’s time to be realistic and be flexible in how you look at comps as you price your apartment.

At The Core | Post Election Market Predictions

The election has come and gone … and whichever side you voted on, whatever your politics, what is for certain is that the NYC real estate market will benefit. No, this is not because of Donald Trump’s real estate endeavors; it’s merely because the uncertainty of who will lead our nation is gone. The unknown is behind us, and everyone is beginning to process what a President-Elect Trump will mean for our nation, our cities and our industries.   We therefore believe that the relative freezing of the markets that we’ve been experiencing will thaw and that 2017 will experience a pick-up in real estate activity.

Why aren’t we seeing this thaw now? Right away? Many factors come into play. First, the results are very raw on both sides, and it will take a bit of time to truly digest the implications of America’s decision.  Second, the first few weeks and months post-election will provide valuable signals as to how much election rhetoric is likely to translate into presidential policy.   Third, the holidays are-a-knockin’ on our door, with Thanksgiving right around the corner, and then Christmas, Hanukah and the New Year barreling towards shortly thereafter.  Not much activity usually happens during this time, unless there is some looming real estate related tax deadline that punctuates a calendar year end.

We therefore anticipate that it will be in Q1 and Q2 of 2017 that will see our anticipated uptick of transactions, leading to a continued growth of the NYC real estate market. This normalization is set to take place not just in terms of activity, but also in terms of prices, the latter of which have been greatly skewed by the material oversupply of luxury new developments. Their larger than usual market share of overall NYC inventory first put upwards pressure on prices and then had a disproportionate impact on their perceived softening.  Once most of these new developments move through the system and close in 2016, (having been in contract for the last 2-3 years as they came to completion), we believe we’ll have a far more accurate pricing base-line, a correction of sorts, that will allow us better gauge the state of the market.

Re-sales will play a more prominent role, therefore, in setting the overall market dynamic. We believe that their predicted activity will help bridge the growing gap between buyer and seller expectations, a gap that has been greatly exacerbated by luxury new developments, fueling sellers’ unrealistic expectations and leaving bewildered buyers out in the cold.  The more resale properties that close over the course of the next 4-7 months, the faster we can come to a shared buyer and seller narrative as a healthy foundation for future activity.  All in, we believe this will have a positive impact on 2017, especially as it pertains to our 2016 experience.

At The Core | Political Uncertainty and Real Estate

What do crashing stock markets and exploding office gossip have in common? They both feed off of and are fueled by uncertainty.  Indeed, today’s political and economic landscapes are both littered with uncertainty stemming from our upcoming presidential election, suspense only exacerbated by the highly polarizing nature of this one.  And what do we know in the absence of the known?  It makes people not want to take any amount of risk.  As uncertainty increases, so does one’s loss aversion.

In terms of real estate, political uncertainty means everyone is holding their breath. The election has become that looming, enormous, ever-present elephant in the room that dampens all activity.  People to the left and right all can’t wait for this election to be over, already, so that they can move on with their lives.  Buyers and sellers, alike, are questioning what will happen to real estate prices after the election and our answer is: “not all that much.”  We believe, especially as it pertains to NYC real estate, though in many ways applying to other vibrant urban centers, three factors are responsible for our answer:

  • First, real estate is local. Despite national indices and headlines, real estate always has and will be local, local, local. It has its own local market, its own local supply and demand dynamic, and its own local, living ecosystem.   This is why implications of the Case-Shiller only have a fractional impact on the reality of NYC real estate. In many ways, particularly in a country as large as ours, one could argue there is no such thing as a national real estate market.
  • Second, real estate is a hard asset. Unlike other “soft” assets that can more easily swayed by regulatory and political trends, real estate generally dances to the beat of its own drum.  It’s rather difficult to pass legislation affecting real estate nation-wide, thereby limiting the potential impact that any one election cycle would have on prices.
  • Lastly, NYC is one of the world’s premier real estate capitals. It is solidly planted on the international stage, buttressed by a diverse array of buyers from across the globe, and therefore buffered from the more dramatic oscillations that other markets may feel based on any one catalyst.

With all this said, there is one thing that uncertainty definitely brings for the savvy decision-maker: opportunity.  When uncertainty diminishes, things go back to normal and the relative paralysis experienced before hand dissolves.  Meaning: if you see an opportunity now, take it! The opportunity to list, the opportunity to purchase, no matter – there is much to gain when you act (armed with information and intelligent research, of course) while others are paralyzed by fear or indecision.  Pockets of arbitrage still exist and they will always be there for those more seasoned among us who recognize and are willing to pounce on them at the right time. Tic toc …