Record number of cash offers show New York property is only for the rich

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More than two-thirds of home sales in Manhattan last quarter were cash purchases, a record, as high rates on mortgages deter all but the richest buyers.

As mortgage rates hover around 6 per cent, nearly 70 per cent of Manhattan homes purchased in the final quarter of 2023 were bought without a mortgage, according to Pamela Liebman, the chief executive of real estate brokerage Corcoran. Cash purchases jumped from just 55 per cent of transactions in the same period in 2022.

“High mortgage rates are creating a real void for people who don’t have the strong finances that are required to buy in cash,” she said in an interview with the Financial Times.

“It’s driving people who would be home buyers in New York into renting.”

A Corcoran report found a 4 per cent increase in new leases in Manhattan and Brooklyn in January of 2024 compared with the previous year, while rents rose to an all-time median high of $3,950.

“It tells me that people are not willing to take on a certain level of debt in mortgages,” Liebman said. The high cost of borrowing for homebuyers had created a “void in the middle” of the property market, he said, as the rich got richer, while buyers who couldn’t pay cash were sidelined as rents in the city continued to climb.

“Part of it is psychological, because everyone thinks rates are going to come down. So they’d rather pay cash now and refinance later,” she said.

The median sales price for a Manhattan apartment was $1.15mn in the fourth quarter, according to real estate agency Douglas Elliman. That was up 5 per cent from the same period a year earlier, and approaching the record $1.25mn median sales price reached in the second quarter of 2022 — just as the Federal Reserve was beginning to raise interest rates.

Buying in the city has slowed as a result. Liebman contrasted the market with more affordable cities such as Charlotte, North Carolina, where he said homes sold in days, often in a bidding war. But in New York, some of the best properties coming to market are now sitting for months. Last year, the US had fewer than 4mn property transactions, down from a pandemic peak of 6mn, which is “not a good thing”, Liebman said.

Thomas Ryan, property economist at Capital Economics, said that despite a slight uptick in transactions in January the housing market across the US was “still practically frozen”, with transactions substantially lower than the 5.1mn average in the 2010s.

Cash purchases had already been on the rise in certain competitive markets in the US before interest rates began to rise, said Erin Sykes, a real estate agent in New York and Miami and economist for Nest Seekers.

“So many were in cash before because they needed to win the bidding wars and you couldn’t win with the loan contingency,” Sykes said. “So they would buy in cash and then get the loan afterwards.”

But the cash purchases in this higher mortgage rate environment were more opportunistic, he said. “The people aggressive enough to do a transaction now are the people who have liquidity or move counter to the market. They’re not afraid because they see the opportunity to make deals and get in at a lower price.”

Challenges facing buyers in New York have been exacerbated by a chronic shortage of housing that developers have blamed, variously, on regulations that have limited landlords’ ability to increase rents as well as the lapse of a decades-old tax incentive that underpinned many new buildings . New residential construction project permits also fell sharply last year, according to the Partnership for New York City, down 55 per cent in the final quarter of 2023 from the same quarter of 2022.

Among other remedies, Major Eric Adams has supported the idea of ​​converting obsolete office buildings into residential towers. But that is a technically challenging and costly endeavor that may yield a limited number of new apartments, according to architects and developers.

New York’s property supply crunch has brought vacancy rates down from almost 4.5 per cent in 2021 to 1.4 per cent, below the pre-pandemic rate of 3.6 per cent, according to the New York City Comptroller.

“The affordability in New York is rough right now,” Liebman said. “It’s taking a lot of people out of the market.”

Additional reporting by Joshua Oliver in London

This article has been amended to clarify that the cash purchases record was set in Manhattan, not across all of New York City