Aspiring investors may be tempted to view the city’s recovery and the gains reaped by a handful of buyers as evidence that only a major bounty comes from owning a home in the city. However, for homebuyers with speculative aims — including foreigners seeking a place to park their money, wealthy shoppers looking for a trophy apartment, and the substantial portion of condo buyers who immediately list their purchases for rent on StreetEasy — the financial wisdom of buying up New York City real estate is much less evident.
Substantial gains in the years after the financial crisis have largely been limited to those who managed to catch the upturn in the market. Those who bought at the top of the last market and have resold in the intervening years have fared less well. Only half of those who bought in the two-year period leading up to the collapse of Lehman Brothers and have since resold earned the 10 percent necessary to offset the costs of buying and selling. Among those buying between September 2006 and September 2008, the median annual return was just 1.7 percent — a dramatic 5.8 percentage points less than those who managed to buy just after the crisis.
Homes bought shortly before the crisis and resold since the crisis were priced similarly to those bought post-crisis: the median resale price for these units was a modest $635,000. Unlike homes bought during the recovery, however, their gains were much lower: roughly $60,000 on the median home resold. This Midtown South studio co-op is typical of homes bought pre-crisis and sold during the recovery. It was purchased for $575,000 in June 2007, and it sold for $635,000 in 2015, a gain of just $60,000, or a 1.3 percent annual return.
Even for those who did manage to time the market well, the numbers are less attractive when compared with other investments. While the 28.5 percent increase in city home prices since November 2011 outpaced the cost of other goods and services, NYC real estate dramatically underperformed the stock market. The S&P 500 more than doubled over the same period, increasing by 125 percent since the housing market bottomed out — an annual return of 13 percent relative to the 3.8 percent offered by NYC real estate. This number also excludes some of the most dramatic gains following the crisis: from its true nadir in early 2009, the market has since returned a whopping 283 percent.
With prices now beginning to fall in both Manhattan and Brooklyn, a cycle of swift growth in New York home prices seems to be coming to an end. A large number of those who bought after the crisis appear eager to cash out: the number of homes for sale on StreetEasy hit its highest level since the recovery in the second quarter of 2018. Of the more than 13,000 homes listed for sale on StreetEasy in that period, more than 35 percent were bought since the September 2008 collapse of Lehman Brothers.
The perception of gains from the recovery seems to have pushed the expectations of current sellers beyond reason. Though overall sales of units bought since the financial crisis have returned a median 33 percent over their previous purchase price — or 7.5 percent per year — sellers listing their homes in the second quarter of 2018 are asking for a 41 percent premium over their previous asking price, making for an average return of 7.6 percent per year. Only 11 percent of the units listed in this period appear to have sold as of late August. Those that did went for returns roughly in line with historical precedent: a 29 percent median total gain, or roughly 5 percent median gain per year. Of those sold, more than half went for below their initial asking price. Only a quarter of those homes sold so far went for 40 percent or more above their purchase price.
These asking prices reflect a belief among sellers that the pace of price appreciation since the crisis is sustainable. However, it appears that price growth in most parts of the city is rapidly running out of steam. According to our July 2018 Market Reports, sale prices in both Manhattan and Brooklyn have begun to tick downward. At the same time, new inventory continues to sit on the market, with another surge in inventory likely to hit the market this fall. Academic research indicates that homeowners are reluctant to set realistic prices when selling in a weakening sales market, a phenomenon that fits well with these market dynamics.