Playing NYC Housing With Credit Fears
A: First off, everybody needs to relax, take a step back, and re-analyze their own personal situation. Take a deep breath. The world is not coming to an end. The era of ultra liquidity is coming to an end. The era of stupid loans being made to buyers who never should be buying is coming to an end. The era of no doc loans, 100% financing, stated income, etc. is coming to an end. But Manhattan housing will always have value. While our marketplace is not immune to a recession, time and again NYC has proven to lag in housing downturns and lead in recoveries. Which brings us to to YOU!
Whether or not you should be buying or selling in the current New York City real estate marketplace is a decision tailored to your own unique situation. You should not make rash decisions about an article you read in the paper. You should not sell your home because Bear Stearn's announced that two hedge funds went under. You should sell your home if you find yourself in financial disarray due to a job loss and dwindling savings account. In short, take a step back, look at your own situation and then make an educated decision GIVEN the current environment we are in. Here are some tips starting with our current environment.
The New World - This is a changing lending environment where job security, salary, and credit actually mean something! The days of no doc, stated income, 100% financing are over! Lucky for us that really doesn't apply for us in Manhattan. Lets not forget that Manhattan is 75% co-op (down from 80% or so given all new construction) which requires a strict set of financial guidelines for prospective purchasers.
However, just how exposed our buyer pool is to wall street and interest rate increases is still yet to be seen. It's something to keep an eye on. For now, the credit crunch is hurting suburban markets and highly speculative urban markets (like Miami or Phoenix) way more than it is hurting us. In New York, there is just no shortage of qualified buyers who are fully capable of getting a loan! You can't even attempt to buy something here if you were hoping for no down payment and stated income loan. Forget about it. We never had those types of buyers here, nor did we have the level of speculative investing that other markets had. On the contrary, the current Manhattan real estate marketplace could be described as having limited inventory, plenty of willing and able buyers, high salaries, very limited rental alternatives, high and rising rental rates, and foreign buyers taking advantage of currency trends. Certainly a market that I would feel safer investing in and working in compared to many other local US markets when looking at the fundamentals driving it.
For Prospective But Nervous Buyers - Re-analyze your situation! Plain and simple. Stop trying to time the market or get caught up in all the headlines in the media. The media is enough to drive a man insane, especially if that man doesn't understand the current environment we are in and reads a doomsday article. Instead, focus on the four items that I talk about often here on urbandigs.com.
1. Job Security - Do you have a job? The word for today is Job! J - O - B! Before even thinking about buying a new apartment, you should be sure you are happy and comfortable with your current job and that there is very limited chance that you will get fired or relocated in the very near future! Job security should be viewed as a blanket of comfort.
1. Salary - Assuming you answered 'Yes' to #1, what is your gross salary? Is it high enough to provide you with a debt to income ratio of 30% or under? To do this, add up all your current monthly minimum payments (or debt payments you are required to pay) and add in what your total monthly costs of living would be with your new purchase. Take that # and divide it by your monthly gross take home pay. What do you get? Here is an example:
Minimum Debt Payments (Car, Credit Cards, Student Loans) = $750/Month
Mortgage Payment (including interest before tax benefits) = $1,800/Month
Maintenance Costs = $600/Month
Real Estate Taxes = $400/Month
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TOTAL MONTHLY COSTS - $3,550
Buyer Joe Shmo Earns $120,000/Year (including bonus) OR $10,000/Month Gross
To get the debt/income ratio divide $3,550/$10,000.
3,550 / 10,000 = 0.355
Joe Shmo has a debt/income ratio of 36%. Joe Shmo could be OK buying a condo but should make sure the bank will lend given his higher than hoped for monthly expenses. Some banks like to see a debt/income ratio under 28% and most co-ops like to see a debt/income ratio closer to 25%. In the real world, Joe Shmo could pull this off, especially if he does not live a luxurious lifestyle and is a bigger saver than spender! Joe Shmo could easily put more money down to lower his debt/income ratio to closer to 28% if he has the liquid assets. Lets get to that now.
3. Liquid Assets - You need to have some savings before you buy a new property. It costs money to buy or sell a home, so you need to take into account how much down payment plus closing costs will come out to. AFTER these closing costs, you should have liquid assets leftover to show the board, or if its a condo, for your own emergency funds.
For co-ops, a general rule of thumb is to have at least 1 years worth of maintenance plus mortgage in liquid assets after closing. Stricter co-ops can as for 2 years worth of assets.
For condos, its more up to the buyer's comfort level but 6 months of maintenance plus mortgage in liquid assets should be viewed as a minimum after closing. You would rather be closer to 1 years worth of assets, but if your salary is high, you could pull it off with less!
4. Timeline To Own - Very important. You should have a timeline to own of at least 4 years! Preferably 5 if possible! That way, you have enough ownership time to take advantage of tax benefits via deductions of interest and taxes, paying down equity and building wealth, and appreciation of the asset. If your timeline to own is 2 years or less, don't even consider buying. The transaction costs alone will make the investment hard to profit from. If its in the middle at 3 years, you have a decision to make; if renting out afterwards is an option then lean towards buying, if not then don't.
For Prospective But Nervous Sellers - Don't make rash decisions based on articles! This one is easy. Only sell right now while credit concerns is headline news if you are in:
1. Financially Disarray - If you lost a job, took a huge pay cut, or are using savings to cover living expenses than I would stop messing around and liquidate your biggest asset; i.e. sell your house! If you can't afford to live in your home then chances are you will be forced to sell at a later time, and that is a position that no seller should be in if they want to get top dollar at resale. Having a time pressure to sell forces you to aggressively lower the price of the property to move it quicker! Instead, sell now when inventory is so tight and buyers are still plentiful to avoid what could be a bad situation to sell in at a later time.
2. You Know 100% You Will Sell In Near Future - If you are completely certain you will be selling your property within the next year, and have options at your disposal to move in elsewhere or be relocated, then consider selling now. No one knows how these credit issues will ultimately play out and if you will be forced to sell in say 6 months but have a time pressure to close the deal by, then I would rather you sell now when you are not in any rush!
See the consistency here? I want you to avoid being a seller in a distressed situation and would rather you choose to sell sooner rather than later if you are in financial trouble or know for a fact you will have to sell in the very near future!
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Comments (4)
The loose loans are true for co-ops, but what percentage of condos do you think are purchased with these loose loans.
What % of condos are for speculative purposes (you could argue a huge % of foreign buyers are speculators). I have seen a few co-ops that allow ARMs which I found surprising....
Also more important, what has been the historical spread in price between manhattan and surrounding suburbs, if the suburbs do drop as expected, the spread would also have to adjust accordingly?
Posted by uwsider | August 7, 2007 10:45 AM
uwsider - hmm, not sure. I would have to guess. I would say 30-40% of condos are purchaesed with loose loans. Im seeing may buyers sticking to 30YR fixed loan products and not taking any chances these days.
Not sure about spreads in price between suburbs and manhattan. With Manhattan holding strong and suburbs having issues, Im sure they are widening. Manhattan lives by an entirely different set of rules. Like the matrix. People are flying everywhere and leaping from bldg to bldg.
Posted by Noah | August 7, 2007 11:04 AM
I don't quite agree that the NY market's number of willing buyers is proportionately higher than other markets. Markets tend to reach equilibrium. That means that if NY started with lots of rich people, demand shot up, thus increasing the prices. And this is exactly what must be true in the past. But prices continue to increase until it reach equilibrium, which is the point where the prices are already high enough such that demand has gone down to a low level. This means that NY like any market has only a certain level of capable buyers considering the current level of prices. So, at equilibrium position, any reduction of demand -- due to credit squeeze, for example -- will certainly upset all markets including ours. Result: price decline.
Posted by Bobby | August 8, 2007 12:01 AM
You are assuming the credit squeeze is going to impact the buyer pool of nyc. Noah's argument was that 90% of the units that are for sale require a huge downpayment. Those with big downpayments are typically higher credit score borrowers. Its the debate of the century, and only time will tell but New York city with a rental vacancy rate of less than 1% still has a huge amount of demand out there, and there isnt the speculative buyers that existed in other markets, it is just too expensive for an average Manhattan buyer to try to flip properties these days, and it they fail there is a rental community out there willing to pay a premium to rent it.
Definitely a tough call, my biggest concern will be how much the credit crunch impacts jobs in this area.
Posted by Mike | August 8, 2007 9:48 AM