Why New York Luxury Real Estate Has Had a Bad Year
The New York luxury real estate market is faltering, according to a recent report from Douglas Elliman Real Estate and Miller Samuel, a real estate appraisal and consulting firm. In the Hamptons, for example – summer retreat of wealthy New Yorkers and home to some of the priciest real estate in the country – the number of real estate transactions plummeted 21%, from 706 in the second quarter of 2015 to just 561 in the same quarter this year. During the same period, the average sale price dropped 0.3% to $1.68 million. And looking at 2016 alone, the average sale price fell 11% from the first to second quarters of the year.
Although the broader real estate market across the country is showing strength, wealthy buyers have been slow to enter the luxury market. Here’s why New York luxury real estate has had a bad year so far.
A Volatile Stock Market
Stock market volatility is a key factor behind the New York luxury real estate market’s slump. Wealthy buyers often tap into their investment portfolios to finance luxury home purchases, either by cashing out stock or by borrowing against the portfolio with a non-purpose loan – a type of margin loan that is backed by an investment portfolio. When the stock market is volatile, as it has been for much of this year, luxury buyers gravitate towards a wait-and-see approach when it comes to entering the real estate market.
The Presidential Election
Mirroring the uncertainty in the stock market is the pessimism surrounding the next presidential election. It’s not so much that the election is affecting the real estate market right now. It's that buyers are aware that the next administration’s economic and employment policies will influence the real estate market – as well as the performance of the overall economy – over the next four years. And right now, of course, nobody knows who will be voted into office. As we close in on the election, many luxury buyers, already spooked by stock market volatility, have decided to hang back until November before deciding whether to buy any high-end properties.
A Glut of Pricey Housing
Another factor affecting the New York luxury real estate market is the glut of high-end properties. Contributing to the problem is a boom in luxury apartment construction, according to Robert Dankner, president of Prime Manhattan Residential. “We’ve simply had too much building of luxury products in the city,” Dankner told the Washington Post in May. “There’s a penthouse glut and now we’re seeing a penthouse correction.”
Indeed, Manhattan will see 5,126 newly constructed apartments, mostly for wealthy buyers, coming up for sale this year – the largest number in nearly a decade, reports Corcoran Sunshine Marketing Group. Even more are expected to come onto the market in 2017 – an estimated 5,740 apartments in more than 140 buildings. All this construction has left many Manhattan homes empty. “We’re now seeing thousands of very expensive new condominiums sit empty,” said Leonard Steinberg, president of Compass, a real estate services firm, in the Washington Post. “That hasn’t happened in years.”
Also happening: The soft market has forced luxury sellers to drop their prices. During the first three months of 2016, there were reductions in the asking prices of 861 Manhattan listings – amounting to 18% of the approximately 4,779 properties on the market – according to data from Compass. The average price cut was 10%.
The Bottom Line
Stock market volatility, election-related pessimism and the glut of high-end housing are all contributing to a bad year for New York's luxury market. Also at play is the retreat of foreign buyers, who have long been primary buyers of New York's luxury addresses. The decline has been triggered by the strength of the U.S. dollar, the drop in oil prices and sluggish economies abroad.
Additionally, in mid-January, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued “Geographic Targeting Orders” that will temporarily require U.S. title insurance companies to identify and report the actual owners behind shell companies used to pay all-cash for high-end residential real estate. Manhattan, for properties at or above $3 million, was one of the first two targets, along with Miami-Dade County, for properties sold at or above $1 million. On July 27, 2016, the orders were expanded to New York's other four boroughs, plus eight more counties in Florida, California and Texas (click here for the full list). While the new rule isn’t expected to discourage all foreign buyers, it will likely make them more cautious. (Read more in Buying Luxury Property: How Private?)