The Greatest Real Estate Deal

Emily Zhu 7/25/2022

Friends are complaining that they can’t find a home in any suburbs, that traffic is horrible that the post-COVID real estate boom has ruined many sleepy upstate burgs.

Not here!! Manhattan is one of the only markets in the United States that is below its all-time peak pricing. It’s still 5-10% below market tops of 2016-2018. So I have to ask you- amidst all of the other noise – is it possible that the last great real estate deals in the US are right here in New York?

The Manhattan property inventor consists of 70 percent rental buildings, 20 percent Cooperative apartments and 10 percent Condominium apartments. With over 40% of our transactions happening without financing amidst the lowest lending environment in United States History, what happens now that rates rise? All-cash buyers will keep coming out of the woodwork to try and take advantage of lower prices.

If the mortgage rates go up, won't the price go down? This is the comment that I’m hearing more and more. In theory, it makes complete sense. But in practice, it’s more complicated than that. That is: how far do prices have to fall to make it worth the wait?

So here’s an example to use. Someone wants to buy a property around $2mm. Rates are rising, and that buyer thinks that if she waits, prices will subside to the degree where it’s an overall better deal. Let’s use 3.5% as an example mortgage rate. If they put down 25%, their monthly mortgage cost will be $6736. If they put down 50%, their monthly mortgage cost will be $4490. The expectation is when rates move to 5%, or 5.5%, that prices will drop so much that it’s worth waiting. Is it true?

Prices have moved up about 10% since the COVID bottom. So let’s say that drop even further down. So a $2mm property moves to $1.75mm. This is about a 14% drop. When that happens, and rates are at 5.5%, the results are as follows: With 25% down, the monthly mortgage cost would be $7452. If they put down 50%, the monthly mortgage cost will be $4968. So, even with a price drop that puts it below the most recently moment in the market that would have been the BEST CHANCE in a DECADE to make a buy, it’s STILL more expensive to wait. It seems pretty optimistic for prices to drop so significantly (20% or more) to make waiting sensible. How often does Manhattan condo price drop 20%? The answer? Once in the last 20 years. Are you willing to take that chance?

The Take Away:

Waiting may only make sense if you are not financing at all. Otherwise, you may be waiting for a price reduction, even if it’s HUGE, may not be enough to justify the wait for a price drop commensurate with rising rates.