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To develop foresight, you need to practice hindsight

Emily Zhu 10/11/2022


Activity declined modestly in September, but the new development market appears healthy and continues to perform better than resale markets. With mortgage rates now hitting 7%, buyer demand could taper off in the entry-level tier[1], but there are plenty of investors shopping around at that price too. It’s logical to ask, ‘what do I know’ and ‘what should I do’?


The answer completely depends on who is asking it. First-time buyers are thinking of one-bedroom apartments; sellers are concerned about how mortgage rates impact their potential buyers; homeowners are thinking about what to upgrade in the next 12-24 months; investors are thinking about opportunities at this moment in the market cycle. In a nutshell, it’s a personal question that demands a personalized answer.


a) Small Apartments (Studios and One Bedrooms)

This is the sub $1mm market. Mortgage rates are impacting this segment more than any other even in New York City. The first-time buyers, who are more likely to need a loan than any other segment of New York buyers, face the steepest rates.[2 ] What will be the impact? Small apartments will see a significant slowdown. If you are a cash buyer – there is a LOT of opportunity in this segment. If you have access to the family help to purchase, it may be a good time to get out there, too.


b)Medium Apartments (Larger One-Bedroom Units to Small Three Bedrooms)

Priced in the $1-$2.5mm range is a tricky part of the market. Developers are not building a lot of inventory in this segment, thus these properties are likely to continue to appreciate in the long run. These are bread and butter properties that are usually in cooperative buildings. Right now, these are the in-demand units that many buyers want and need - pied-a-terre buyers, and empty nesters selling in the suburbs and moving in the city. Because the demand is so high in this segment, and inventory remains relatively low, values will hold up better here. Even if rates have risen and buyers’ assets have been hit by stock market, this ‘need to have’ segment should endure better through tougher weather.


c) Larger Apartments (Three-to-Five Bedroom Units)

This WJS article[3] does a remarkable job of summing up the mindset of sellers in this segment. They have a big house or apartment that they’d like to sell. The market in the suburbs has softened, because a higher percentage of buyers rely on mortgages – and they can’t offload their homes. Or, they are paralyzed because the mortgage rate at which sellers are currently borrowing – below 3%, will double if they sell their home and buy a new one. Therefore, unless they are not taking a mortgage on a new, smaller home, the financing cost of the new place may be the same or higher than the old, larger home! You can see why, then, sellers in this boat are not flooding the market with inventory. Other well-capitalized sellers are taking a wait-and-see approach. This segment of market isn’t frozen, but it’s relatively small. The combination means that buyers don’t have much to choose from in New York City. Well-priced, renovated homes will be well-received. But sellers will be hard to find, and buyers should not be shocked at competition for good apartments. The opportunity is here NOW for all-cash buyers, buyers ready to do work, and those who believe that mortgage rates will go down in early 2023. Lock in a great place at a great price right now.


d) Luxury Apartments (New Development and $10mm+)

These are buyers, generally, who are more immune to a bear market in stocks. And these are buyers who made a lot of money in the past 2-3 years. This is a WANT-to-have, not a NEED-to-have group. Unfortunately, there are fewer New Development units available today than buyers expected. Worse, the pipeline for what will be available in short-and-medium-term is rapidly shrinking. Therefore, those who are searching in this segment may be a little disappointed either (1) not to find a lot of varied options for what they want; or (2) pricing a bit higher than they hoped. While waiting has paid off many times for patient buyers, I don’t expect patience to be a virtue in this segment of the market today. There may not be much to replace what sells in the next 6-12 months.


[1]Please refer to the ‘What’s Happening in Each Segment’.

[2] If the loan you seek is below the current conforming limit is $647,200, your mortgage rate is going to be much higher than that of a ‘jumbo loan’.

[3]See: https://www.wsj.com/articles/after-years-of-low-mortgage-rates-home-sellers-are-scarce-11663810759.


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