Word has spread recently that the housing market is suffering a decline, or at best a shift from the strong seller’s market we have recently witnessed. Dozens of media publications such as Crains and Bloomberg have reported on the recent sales decline since last year. In Westchester County, the market felt a 3.4% decline in closed sales since last year. Indeed, the year started out on rough footing with a 20% decline in luxury sales the first quarter of 2018. In my personal experience, I’ve seen properties that would have gone to bidding war in the recent past sit on the market interminably without so much as a nibble from the prospective buying pool. And why is that? Well, there are a number of factors that play a role. In this blog entry, my first in several months (sorry, it’s been cray), we will discuss them all.
Many point to the changes to the SALT (State and Local Taxes) deduction as negatively impacting the real estate market in our region, where property taxes generally exceed $10,000 and median income and home values are among the highest in the nation. The SALT deduction, as modified, limits the property, state and local tax deduction to $10,000. In areas where the property taxes are well above that such as ours, it stands to reason that such a cap would render those properties that have taxes that are double or triple (and in some cases quadruple) that amount far less attractive. I would have to agree that the SALT deduction, or at least the perception of it’s impact on overall tax savings, is one of the key elements in a market decline, especially for the luxury end. For those unfamiliar with the new tax law that was put into effect as of December 2017, this article does an excellent job of summarizing.
The reason I say that it is only the perception of the new SALT deduction that is impacting the market is that it’s full effects have not and will not be felt until April 2019, when everyone files their taxes. In reality, the demographic most affected by SALT is also the one that stands to benefit from the revised income tax rate. In this sense, it is possible that the loss from the former will be offset by gains from the latter. If this is the case, then it stands to reason that the market slow down on the luxury end is only temporary and will pick up again once we’ve cycled through a tax season, and there is more certainty regarding the tax implications of these new laws.
Although they are not nearly what they were at the peak of the market, interest rates are the highest they’ve been in a decade, and all indications (economic growth, low unemployment rate) point to them steadily increasing over the next few years. This will most directly impact those home buyers that are marginally qualifying within their price bracket. Since it is nearly impossible to purchase a viable home for under $500k in southern Westchester, it is entirely possible that prospective middle class home buyers that just made the mark with interest rates under 5%, may now find themselves unable to get approved for a loan for the type of home and location they are seeking, and becoming effectively priced out of the market.
Low inventory has been epidemic in our region since 2014, yet many – especially within the real estate industry – are pointing the finger on this for the market softening. Of course, a dearth of inventory was also widely touted as the primary reason for the recent market upswing, in which home values nearly recovered to pre-crash figures. Do I think low inventory is the catalyst for a housing market slowdown? No more so than I think it triggered the most recent red hot market rise. While it’s a contributing factor, it is no more a single culprit than any of the others. But the reality is that inventory, while low, is not much lower than it’s been in recent years that the market has gained traction. It is only down half of 1% since last year.
Amidst fears of trade wars surrounding the most recent round of tariffs in China, many economists have predicted that a more conservative approach to capital investment decisions will ensue, resulting in the slowdown of commerce in general. There is much uncertainty about the Trump administration’s coming trade actions that may have prospective home buyers slowing their roll when it comes to pulling the trigger right now. Uncertainty in any form is a breeding ground for cold feet when it comes to making large investments, and for the average millennial in our region, buying a home may be the largest investment of their lifetime.
PROPERTY TAX EQUALIZATION
One by one, many municipalities within Westchester and Putnam have undergone town-wide revaluations. Mamaroneck, Scarsdale, Rye and Putnam Valley were the pioneers spearheading the 100% equalization movement, leading the way for the consortium of towns (Ossining, Greenburgh and North Salem) which followed suit in 2017, similarly undergoing town-wide revaluations. The goal of revaluation is to address the inequity in the manner in which homes are assessed by towns, and to make sure everyone picks up their equal share of the tax burden. It was most likely triggered by the widely fluctuating home values, first in 2006 with the bubble, then in 2008-11 with the crash, and most recently with the values elevating once more. 2011-2014 saw a flurry of tax grievance filings throughout the region as home owners’, whose property values had tanked, sought to lower their assessments and relieve their tax burden. Other elderly home owners failed to grieve their assessments because the tax burden was not felt due to large exemptions such as Enhanced STAR and Veteran’s. As the market gained traction in 2013 and property values recovered, assessments remained unchanged, because the towns did not conduct annual revaluations. As a result, there was a vast disparity between property assessments and their actual respective values. So town-wide revaluations did seem necessary. However, the result may have had an unanticipated negative effect on the market. Many properties that were taxed at a mere fraction of their value were suddenly hit with a substantial tax increase. The equalization would result in a third of properties’ taxes going up, a third going down, and a third remaining the same. However, it seems that the majority of those affected by a tax elevation were single family homes in the most common price bracket of $500k+. Some of the more popular areas targeted by home buyers for their affordability and relatively reasonable taxes were suddenly no longer viable options. For example, Watch Hill, a popular planned unit development (PUD) in Tarrytown once highly sought after for its low taxes and HOA fees, was hit in 2017 with a $3-4k (or more) per unit tax hike and, as a result, the market became saturated with Watch Hill townhomes for sale. These townhomes, once scarce and coveted, were now very tough to sell due to exorbitant taxes.
So what is the real culprit for the market softening? It would appear that all of the above are contributing to it. However, the market adjusts every decade or so, and we were due for a correction. As of the 4th quarter of 2017, we were at/near/approaching 2006 pricing for many areas within our region. The housing market was very much in favor of sellers and defined by low supply, high demand, and bidding wars abound, leaving many unhappy buyers rapidly becoming priced out of many towns. The market was due for an adjustment, as the pendulum swinging too heavily in either direction is neither balanced nor sustainable. The bottom line is, what goes up must come down.
There is one type of property that appears to be finding strength amidst the softening market, and that is coops. Cooperatives, which have lagged behind in the recent housing recovery, have always held their own in market downturns due to their affordability and often convenient locations. This downturn is no exception, as we are seeing prices on the rise for this type of property. Inventory is down 24% versus this time last year, while sales are up 7.4%. Additionally, cooperatives are selling 2.6% closer to list price on average, spend 6.7% less time on market, and the median sales price is 5.9% higher than last year. The average price for a coop in Westchester County is $165k, making it the most budget friendly housing option in the region. For those eager to purchase before interest rates spike any further, coops provide an excellent opportunity to do so, and it stands to reason that this property type would gain momentum in the current housing market climate.