Rising interest rates will harm ultra-high-end housing
Wealthy real estate investors will move their money out of ultra-high-end properties when better investment opportunities become available.
Rising mortgage rates hurt properties priced under $1.5 million directly because rising mortgage rates reduce the amount financed buyers can borrow and bid. What most people don’t realize is that rising interest rates (not necessarily mortgage rates) hurts the ultra-high-end real estate market too.
The market for properties priced over $1.5 million depend less and less on mortgage financing and more on the opportunities the wealthy have to park money and preserve asset value. The cash buyer of a $5 million property isn’t affected by mortgage rates at all, but that buyer is greatly impacted by the desirability of competing asset classes where they might earn a better return on that money. Some wealthy individuals will buy trophy homes for their consumptive value, but over the last several years, many wealthy people bought these homes as investments. Ultra-high-end properties don’t cashflow (see today’s featured property).
Over the last 5 years, the wealthy have enjoyed a 100% increase in the value of their equities holdings and a significant bump in the value of their real estate. Further, they enjoy a low 20% capital gains tax rate, so they can easily liquidate one investment class in favor of another. This means the wealthy have the money to buy real estate if they want it — and sell it if they don’t.
Also over the last 5 years, the federal reserve held long-term interest rates near zero. This policy nearly eliminated any cash returns on available investments: savings account pay just over nothing, 10-year Treasuries recently hit 2%, and bond yields are extremely low across the spectrum. Relative to these investment alternatives, high-end residential real estate — with it’s historically low cash returns — is a better investment; therefore, wealthy people buy expensive homes and inflate prices. Couple that with the dumb money flowing in from overseas, and ultra-high-end residential real estate is doing relatively well.
But what happens if real estate isn’t the best alternative? What happens with the rest of the economy does improve and investors find competing opportunities with better returns? Wouldn’t the wealthy sell investment homes to pursue these better alternatives? And wouldn’t that outflow of money put pressure on high-end prices?
Over the next several years, we are going to find out.
PIE IN THE SKY PRICES: Buyers are finding there’s wiggle room at the top of the luxury real estate market
It’s time to get real about real- estate prices.
Sellers of some of the city’s most expensive properties are dramatically slashing prices, even as developers keep trying to push the boundaries of the luxury market with pie-in-the-sky price tags of up to $175 million.
“Million Dollar Listing New York” star Fredrik Eklund and business partner John Gomes of Douglas Elliman are cutting the price on their ritziest listing — the stunning 7,061-square-foot penthouse at 11 N. Moore St. in Tribeca — by more than 25%. Initially, they were seeking $40 million. Now it can be yours for $29.95 million.
“We made a decision to get real and sell it,” Eklund said of his listing.
He and Gomes aren’t the only ones axing prices.
Embattled hedge-fund billionaire Steven Cohen, who heads the Wall Street firm formerly known as SAC Capital Advisors, recently reduced the listing price of his palatial One Beacon Court penthouse to $82 million from an ambitious $110 million.
And the owner of the penthouse at the storied Pierre Hotel on the Upper East Side has cut the listing price on the unit by almost half, to $63 million.
It’s not that these apartments aren’t top-notch — it’s simply that they’re overpriced. …
Many people have argued that a house is worth whatever someone is willing to pay for it, and at the ultra-high-end, that’s true because those buyers do not depend on financing. However, in the realm of financed purchases, a house is worth whatever the lender is willing to loan on it plus whatever cash the buyer might choose to contribute. Mostly, the price is determined by financing.
“Fredrik and I love, love, love to break records. That’s what we were trying to do here,” Gomes said. “We were treading new waters and trying to determine the limit for pricing for these one-of-a-kind penthouse apartments. We don’t actually know what the limit is.”
Who wouldn’t love to break records when doing so makes millions of dollars?
It’s the real-estate equivalent of throwing everything against the wall and seeing what sticks.
“At the beginning of the sales process, you have nothing to lose when you list your penthouse at a pie-in-the-sky price,” Gomes said. “You have a lot of time. You never know when someone will fly into New York City on a G5 (private jet) and just has to have your penthouse. Sometimes you get lucky, and when you don’t, quite frankly, you get realistic and you adjust the price to meet market expectations.”
And, sometimes, miracles do happen. …
That is the hope of every seller. It only takes one delusional fool to “fall in love” with a property to hit the lottery, but it’s a bit harder when properties are financed because the buyers and sellers have to cope with appraisers who aren’t “in love” with the property.
The string of high-profile price cuts is a bad omen for the luxury market, particularly … with a more recent dropoff in demand from the Chinese business magnates and Russian oligarchs at whom such pads are targeted.
A massive, 21,504-square-foot penthouse encompassing three full floors of the Sony building at 550 Madison Ave., is slated to come on the market for $150 million, and there’s a $130 million penthouse in a tower going up at 520 Park Ave.
A penthouse in one of the most buzzed-about new buildings in years, a glitzy skyscraper at 220 Central Park South, is rumored to be asking a jaw-dropping $175 million.
None of the properties have even been built yet, and if any of them sell for close to their asking prices, they would smash the $100.5 million record paid on Billionaires’ Row.
“Being a developer is kind of like being a character in ‘Star Trek,’ ” Haber said. “Sometimes you can bend the laws of physics, and sometimes you can’t.”
But those with boots on the ground, and listings currently on the market, say things are getting out of control.
“It’s starting to get to the point where it’s nauseating to people. It’s like, ‘Why don’t you just put a number like $250 million on it if you’re going to be ridiculous?’ The numbers are meaningless,” said Andrew Gerringer of the Marketing Directors, a new-development sales firm. “Unless your country is physically crumbling and you need to get your money out, or you’re getting ready to go to jail, I can’t think why you would put $175 million down for anything.”