The New York City Real Estate Market Has 2017 Challenges To Overcome

For more than seven years, the only way to describe the New York real estate market is to use the word, “insanity.” Real estate professionals have used terms like “the market has no ceiling,” “it’s a seller’s market,” and “it’s a crazy ride,” to describe what is going on in New York City. But in 2016, terms like cooling off, softening, shifting, stabilizing, and correcting were the new buzzwords to describe the market. There are reasons these new words are in vogue in the real estate business now.

The luxury sector of the New York City market is in trouble. Agents say in 2016 there was a surge in sales in the luxury market, especially in units priced at $4 million and above. But the surge was due to a price reduction of 11 percent or more because the properties sat on the market for more than 311 days. As one real estate agent so eloquently put it, “there’s some crazy stuff going on in the New York market right now.”

The city’s real estate market has to adjust to the supply and the demand for of luxury properties. The supply far exceeds the demand. Developers saw a chance to make more money in years past, so they raised prices faster than a speeding bullet. But buyers’ wages didn’t keep up with the increases. Wage increases stayed in the two or three percent range over the last three years, and rents went up by eight percent or more every year. The luxury sector of the New York real estate market is softer than a New Jersey soft-shell crab, and there’s little chance it will get stronger in 2017.

But there are other issues facing the real estate market in 2017. The fragile stock market is one of them. Trump’s win created a bullish market, and that surprised some real estate and stock investors. But there are signs stocks are cooling off. The stock market dropped by more than 240 points recently. The drop was due to the issues facing Trump’s healthcare plan, his stand on immigration, the Russian debacle, and a general distrust of his ability to lead the nation in a way that is acceptable to most citizens. Trump’s approval rating is in the toilet, and theirs is little chance that rating will improve unless Trump can pull another trick from his bag of unusual alternative facts.

If the confusion, mistrust, and incompetence continue in Washington, the stock market will feel the brunt of those issues. And if the stock market takes a hit, the real estate industry will too, especially in New York City. More than 20 percent of potential real estate buyers will postpone buying if the stock market goes into bear mode. The other fly in the real estate ointment is the recent interest rate hike. Fed Chairman Janet Yellen said more increases are on the way in 2017, and those future interest rate hikes will impact the mortgage industry. Even though there is an unusual amount of cash sales in the New York market, most buyers need a mortgage to handle a $2 million one-bedroom apartment purchase in Manhattan.

But there is also a conflict of interest issue lurking in the real estate shadows that could impact sales in New York City. The common practice in New York and across the United States is to allow agents and brokers to represent a buyer and a seller during a specific transaction. Some industry experts say that is like letting one lawyer represent the plaintiff and the defendant in a lawsuit. Because of the real estate slowdown in New York, some developers are offering broker incentives. Developers are willing to pay 50 percent of the commission upfront or a higher commission if brokers bring buyers to their new condo and apartment projects. If a broker is steering a client to a condo project just to earn an extra, or an upfront commission, then a conflict of interest is in motion, according to some investors like Arthur Becker.

Becker is a high-profile tech and real estate investor. Becker has more than $500 million invested in New York real estate through his company, Atlantic Investors LLC. The former husband of Vera Wang is familiar with the double-dipping that goes on in the market. Many investors say there is room for concern about this one representation practice going forward because of the market slowdown.

But even with all the challenges, the New York City real estate market still attracts buyers from all over the world. Some foreign investors want to own a piece of New York at any price, and they are willing to use any means necessary to close the deal. That may sound like good business, but there are ethical concerns. Stricter rules may not be what brokers want, but just like the appraisal business, more rules may be necessary to protect real estate ethical standards.

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