Issue 89 – Big Fold or Big Opportunity?

To say it has been a wild start to 2023 would be an understatement.

Now that we are three years out from the start of the pandemic, it seems like life is back in full swing for NYC, even with alarming changes in our financial institutions literally taking place as we speak.

The real estate market is an interesting vehicle—it runs separately and sovereign from many markets, and yet it is often referred to as a reflection of our US financial markets. In this instance, as we see the demise of niche banks like Silicon Valley Bank which have become insolvent due to a lack of capital and liquidity, these smaller banks that have catered to venture capitalists and start-ups have undergone a huge amount of withdrawals by their clients literally overnight, resulting in huge losses embedded into them, in part because of the rise in rates. There is a lot of fear that other small, niche banks will have a run with customers pulling their money out, and will not be able to sustain their own capital and liquidity to fund.

What does this mean for real estate? This is what I am experiencing and seeing. Behind the genuine concerns and pullback by people who are seeking to be conservative and fiscally responsible, there is also a desire to be smart and take the opportunity when it presents itself in order to create inherent value long-term. With a drop in real estate inventory by 20.8%, it has sustained the conservatism that we have observed overall by buyers and sellers who are going to try to take full advantage based on this lack.

There is also the idea that when the S&P cannot provide the returns in a consistent fashion for people, then reallocating it into real estate that has adjusted sideways results in a very well-timed opportunity, and that ultimately will yield long-term for a growing family or a potential buyer who is looking to take possession as a pied-a-terre owner.

In the landscape of real estate, understanding buyers’ and sellers’ concerns and why they have them is very valuable information to understand the psychology and the tone of what is playing out for many in the domestic markets and other spheres of business. We have read about the mass exodus of tech layoffs that occurred earlier. Giants like Twitter, Meta, Lyft, Salesforce, Peloton, and others laid off more than 120,000 tech sector employees. Microsoft alone laid off 10,000, and Amazon was looking at the largest workforce reduction in its nearly three-decade history.

All this conformed into a massive ball of anxiety that the media took to great heights, making individuals feel like they were next in a long line of unemployment. Some could say this is a little bit of a skewed perspective.

In the discussion of inflation and a potential recession, unemployment must be insanely high—yet it is lower than what we have seen in a few years. To put it into perspective, NYC unemployment was 12.4% in 2020, 9.9% in 2021, and 5.9% in 2022.

In reality, those 10,000 employees Microsoft let go only add up to 4% of the tech giant’s total workforce (nearly a quarter of a million).

Taking inflation into account, 2023 may look similar to 2019. Overall though, I am seeing that all segments of the sales market have performed pretty much in line, if not pretty decently, compared with the last quarter of 2022 (perhaps because the buy-in and long-term gain become very interesting to investors in the context of S&P performance and investment).

I find it interesting that, despite all the talk of inflation and layoffs, we still seem to be having trouble getting a reservation at a restaurant. This reflects to me the power and resilience of New York at a time when crime, homelessness, and inflation rates are still not at their best. But what does that mean for New York real estate investment, ROI, long-term gain, and whether to take the plunge now or hedge? And how do we account for the sales strength that seems to still prevail? Simply put, adjustment on mortgage rates complemented by a lack of supply makes for a very interesting cocktail in a very moody market.

At the beginning of the year, I read the Goldman Sachs report that outlined a future of a declining real estate market, where people couldn’t afford and didn’t want to buy property in New York. Yet actual data today suggests that the market is more sideways than all the way down in value. In a nutshell, Goldman Sachs predicted on January 10 that U.S. home prices would fall by 6.1% in 2023. However, researchers at the investment bank now expect national home prices to end 2023 down just 2.6%. Not as gloomy as predicted, in my opinion.

While the prediction indicates things are holding, we currently see as of today that the fall of home prices in New York currently reflects (-0.3%). High housing inflation seems persistent in high-growth areas. Yet high interest rates alone are not the solution to high prices. Housing is an essential need, not a luxury. We need to build more, and higher interest rates will do the exact opposite.

Increased rates have cooled the market, but not to the level that one would think. I find it helpful to look at a 30-year fixed mortgage rate as a barometer to see what is really playing out. Currently, the average 30-year fixed mortgage rate is hovering around 7.37%. Those buyers who are looking to replicate the pre-interest rate hikes of last summer are now getting savvy in how to structure their loan in order to really make it work for them. A 30-year fixed can now be reduced to 4.25% from the previously mentioned 7.37%, which is substantial—meaning that you could purchase a $4 million property for $3 million. Buying down the rate with up-front points can work for you, if you plan on holding the asset for more than four years. It essentially pays for itself.

One thing is for certain, regardless of global economic and geopolitical uncertainties: life goes on. If one were to look back over the past several years and the cycles of how we have managed—albeit very stressful—moments riddled with uncertainty, one would see we still managed to find our footing and normalcy over time. We live in a very analytical world where everything requires accuracy and measurement. Maybe it is okay to be a bit more patient as we wait for things to come together.

Many sellers are factoring in their purchase the closing costs, additional costs of renovation, etc., but most are forgetting the most important cost to calculate: the cost of shelter, enjoyment, and the experience of having a home and the value it brings.

This is a very unique and opportunistic time to invest in New York real estate. All in all, New York is alive and kicking, and it will continue to do so—73% of NY-based buyers are looking to stay in NY. That’s New York for you, and I’m looking forward to seeing what 2023 holds!