Manhattan Q1 2018 Market Report
The Manhattan real estate market experienced a significant slowdown in the first quarter of 2018 due to rising mortgage rates and the negative impact from the new federal tax bill.
Closed sales transactions were the lowest in the pat 6 years and were down 25% y/y. New development closings (12% of all sales) were down 54% y/y while resale deals were down 18% y/y. Average price per square foot was down 19% y/y hurt by tough comps due to high prices in legacy contracts that closed last year and lower prices in the new development market. Medium sales prices were relatively stable and down 2% y/y. Given the weakness in the market, listing inventory increased 4.4% y/y and months of supply jumped 38% y/y to 8.4 months. The number of bidding wars was also dropped to 9.4% of the overall market, the lowest in the last 5 years.
We expect 2018 to be a choppy year for the Manhattan real estate market given the headwinds we are facing. That said, with a stronger economy and job growth, the real estate market should should stabilize later this year with trends improving moderately from the 1Q18 levels.
Co-op market held up better than the Condo market as buyers look for more value.
The average sales price for co-ops at $1.36m was relatively healthy and increased 10% y/y. Average price per square foot for co-ops was down 5% vs. down 22% for condos in the March quarter. At $1,389 per square foot, the average co-op sold was 32% cheaper than the average condo sold. The number of closed deals for co-ops were down 17% vs. down 33% for condos. The months of supply in the co-op market is also lower at 6.7 months vs. 10.7 months for condos.
Negative impact of the new tax bill on the New York real estate market
The reduction in real estate tax deduction to $10k max per year and the reduction in mortgage interest from $1m to $750k will have a negative impact on the market. The higher cost of owning a home will reduce demand in 2018 as we have seen in the first quarter.
While the standard deduction has doubled to $24,000 for married couples, the deduction for state and local taxes ("SALT") has been dramatically reduced. Taxpayers can now only deduct up to $10,000 for property,income, and sales tax. The average SALT deduction for taxpayers in Manhattan is $60,400 and about 45% take these itemized deductions according to the IRS. As a result, the average tax bill for New Yorkers will likely increase by a few thousand dollars despite the slightly lower tax brackets.
The mortgage interest deduction has also been limited to $750k while existing mortgages are grandfathered at the $1m current limit. Interest on home equity loans or lines of credit is no longer deductible.
Mortgage rate increase in the past year is a headwind for the real estate market
Due to a stronger economy and higher inflation, mortgage rates have increased in the past year and is currently at a 3-year high. The current 30-year fixed rate is up about 43bps since Dec. of 2017. With the outlook for higher inflation and a strong US economy in 2018, it is unlikely that mortgage rates will drop. The federal reserve is expected to raise rates by another 50bps in 2018 after the 25bps hike i March 2018. The mortgage rate is likely to stabilize at current levels as the rate hikes are priced in.
Despite headwinds from higher taxes and higher mortgage rates, a strong pickup in the US and local economy should help stabilize the NYC real estate market in 2018
Bullish consumer sentiment bolds well for a pick-up in overall consumer spending and in the housing market. Consumer sentiment has strengthened due to improving trends in the labor market and income levels. The Conference Board's consumer confidence is now at an 18-year high.
A strong US and NY job market has also helped spurred growth in home sales in the NYC market. US job openings are currently at a 16 year high at 6.3m The US economy added 313k jobs in Feb. 2018 with the unemployment rate remaining at 4.1% the lowest in the last 17 years. New York City employment rate is also at an all-time high with total jobs up 20% since 2009. Private sector jobs in NYC rose over 75k or 2% y/y to 3.9m in Feb. 2018. The city's unemployment rate was 4.2% in Feb. 2018, down 0.4% y/y.