How Much Higher Can Rents Go if Manhattan Wages Keep Falling?

According to the US Labor Department, employment in Manhattan increased, but wages have fallen because fewer jobs were added back in the finance industry. Overall private sector wages fell 3.3% in Manhattan.  

What does this mean for the crazy rents that we see throughout Manhattan? And the crazy home valuations? It could mean bad things. Sure, there are still tons of foreign buyers snapping up townhouses and condos in Manhattan; but that's still a small fraction of the people who live on the island. So... eventually... either we get a new extreme high wage-paying industry to employ lots of people.... or finance resurges in Manhattan.... or rents are going to have to come down.

It has been a strange year in Manhattan so far. Rents slipped quite a bit in November to a new 7 year high, which is par for the course, but Manhattan landlords were introducing incentives as late as February 2014.
According to Elliman's monthly report, May 2014 vacancy rates were just a tick lower than May 2013, and actually .13% higher than April 2014.  Some articles made mention that Brooklyn rents and Manhattan rents came close to equal during this time, suggesting that many Manhattanites are decamping to Brooklyn. But ultimately, it may simply be that rents are just too damn high, especially since the people who could afford the sky-high rents, and all the amenities, are less and less likely to be working in Manhattan.

I'm not saying that rents are going to fall off a cliff. New York is still the place to be and many people from all over the world locate here. And there is still a housing shortage, albeit an affordable housing shortage. The first developments to be squeezed will be the mid-range developments, those renting for $3500-$7000/month. The danger is that we might start to see more high end rentals than affordable developments, for the same reason that high end condo developments have proliferated in this city over middle class ownership housing: the middle class is getting squeezed, wages are falling, and the rich are the ones we can count on to have money.

But the 1% is only a single percent, so eventually rents will have to fall a little. Or even a lot. At least until New York finds its next big wage paying industry.

How Much Should You Borrow Based on What You Want to Pay Monthly

So you hear a lot about relative cost to rent versus cost to buy, but really, you're thinking... What can I afford?  Or, more likely, how much can I borrow but still pay the same amount in mortgage as in rent?  Today I want to show you a quick and dirty way to figure that out.

First, take your monthly amount of rent. Let's say $3000 for a round number.

Then, you need to subtract something to represent the maintenance (for a coop), or common charges + property taxes (for a condo) that you might be paying. This amount varies a great deal based on the size of the property that you are looking at. Common amounts are $500-$800 for a one bedroom or $800 - $1000 for a two bedroom, and go up from there. 

Let's say we're looking at a one-bedroom and want to be conservative, so we'll take $800 as the number. $3000-$800=$2200.  Notice we didn't include insurance. This is because homeowners policies are not a very big jump from renters insurance policies, so we'll assume that cost remains the same. (If you don't have a renter's insurance policy, you should seriously consider getting one up - your belongings are not covered by the landlord's insurance policy if they are stolen or destroyed).

So we have a principal and interest payment of $2200. Now, we look at the current interest rates. Your bank's website can provide those to you. Keep in mind two things: 1) interest rates change daily and 2) when the economy is good, interest rates tend to move up.  So if you are doing this exercise for a future purchase six months from now, you might want to add .25%-.5% just to be safe. (of course you can always buy the interest rate back down if you have the cash and the desire).

At the moment I am writing this, I just clicked over to the Bankrate.com website. Bankrate is an independent web site that publishes information about mortgage rates across many banks and regions of the US. Keep in mind that New York rates may be different from the national average. Coop loan rates are usually higher, as are condo loans, though somewhat less so.  Indeed, Bankrate gives me a range of 3.97%-4.89%, while the national average is listed as 4.29%.

Let's again be conservative and use 4.75% as our rate. Now, we flip over to http://www.realestate-calc.com/Mortgage_Calculators/Mortgage_Amortization.asp, where we find a nicely laid out table of the cost per $1000 borrowed. Scroll down to 4.75 in the first column, then slide your finger over to the 30-year column (all the way to the right). The number is $5.22. That means for every $1000 you borrow at 4.75% interest rate, your monthly payment is $5.22 for a 30 year self-amortizing loan (meaning when you hit the last payment of the 30 year loan, you have paid off the loan).

Ok, so now we take your monthly rent payment less allowance for monthly maintenance fees (remember that? $3000-$800=$2200), and we divide $2200 by $5.22. So in other words, we are seeing how many thousands of dollars we can service with the $2200 we already pay.  The answer? 421.456. Just multiply that by $1000 (or  move the decimal over 3 places) and you'll get $421,456, which is the amount of mortgage you can carry, plus maintenance charges and (if condo) property taxes.  

Now let's take that one step further. You generally need a 20% down payment to get a mortgage. Most coops require that at least 20% be put down. Condos might only require 10% (some coops do as well, but banks have become more stringent since 2008 and it's harder to get a 90% mortgage on a coop than it once was).

The amount of mortgage that we figured, $421,456, represents 80% of the total cost of the property that you can purchase. This is the maximum loan to value ratio (or LTV) that most loans allow. Dividing that number by four tells us what 20% of the total price must be. Answer: $105,364.

To get 100% of potential purchase price, we multiply that number by five. (because 5 x 20% = 100%). So $105,364 x 5 = $526,820.

So, the total purchase price that you can likely afford while still keeping  a similar housing payment to what you pay in rent is $526,820. This assumes a down payment of $105,364 (the 20% number we calculated earlier).

In the hottest parts of Manhattan, this will get you a studio or a small one bedroom. In northern Manhattan, this will get you even a two bedroom. Even in Brooklyn, you can score a very nicely sized one bedroom or even two bedroom depending on area (though probably not in Williamsburg, alas).  So if you feel you can't afford to buy, think again. You can afford to buy if you can afford to rent at Manhattan's prices.

What's a Non-Conforming Coop?

You're searching the Internet for your new home to buy.  You find a property - a coop unit - that looks really, really good. You read through the description and you are loving the way it sounds. The photos look great too. Then you see at the bottom of the listing "Non-conforming building - cash offers only (or preferred)." Huh. What does that mean?

You Google the term "nonconforming building". The returns define it to be a building that doesn't conform to existing zoning laws. But in New York City, it's more likely to mean that the building's financials and/or owner occupancy do not conform to guidelines set by Fannie Mae (FNMA) and her compatriot, Freddie Mac (FHLMC), the two entities that purchase loans on the secondary market from the banks that originate them.

So you Google "nonconforming loans".  This search just gives you a lot of information about jumbo loans, which are a type of nonconforming loan, because the amount of the loan is higher than Fannie Mae conforming limits.

But this property is asking less than the published conforming loan limits. Are there other issues that can put a property into nonconforming territory?

Answer: yes there are. One of the big ones is owner occupancy. This refers to the number of units in the coop that have been sold by the sponsor to individual owners and are occupied by those owners and their families. Units that are owned by individuals but sublet to renters do not count, but individually-owned vacant units do. Sponsor-owned units also are not considered owner-occupied (a sponsor unit is one that continues to be owned by the original landlord of the building who created the coop, or their successor).

FNMA/FHLMC requires 51% of cooperative units to be "owner occupied". Not 50%, but 51%. This was a big issue back in the 1980s and 1990s when sponsors owned more than 50% of units in many coops that had just been converted. The sponsor ownership is less of a problem these days, but smaller coops (under 40 units) can still slip into this nonconforming status if they have a significant percentage of sponsor ownership (ie, 25-40%) and if the coop allows too many owners to sublet in addition. When that happens, the coop falls into non-conforming status.

In the olden days, it was possible to get something called a "waiver" on nonconforming buildings. This literally meant that the owner occupancy issue could be waived, and a bank could get you a conforming loan. Since 2008, however, that is practically impossible, according to mortgage lenders that I have considered. Whereas waivers were practically a given before the mortgage crisis (for a small fee), now each application for a waiver is scrutinized and takes weeks to process. Few are granted.

So that leaves us back to this beautiful coop in your price range. You don't have cash, but you see it's a bargain. What can be done?

First, realize that while many mortgage programs are not going to be available for that particular unit, some loans might be. These loans are called portfolio loans, and they may be given by banks or mortgage lenders.  A portfolio loan is a loan that a bank cannot sell to FNMA/FHLMC. The bank has limited choices - either the loan must be held and collected by the bank until the end of the term, or the loan can be sold to an investor who will deal in nonconforming loans.

Unfortunately, that translates to a slightly higher interest rate for the borrower.
But such a property may present an opportunity. Remember, every coop is different. Some may be primarily investor-owned, while others may simply be one unit from conforming.  Ask your agent what the situation is.  If the situation is just one unit, then you might have an opportunity to get a little pop in value when that one unit does finally turn the owner occupancy ratio over 51%. You have the option of refinancing into a conforming loan once the building is conforming as well.

So, all in all, don't leave those gems in the dust. Nonconforming coops can present an opportunity to the person looking for a below market opportunity for a long term primary residence.

2 Digital Maps to Help You Know New York City and How to Use Them

The IS department of the City of New York has some beautiful map tools available for use by the general public. If you're searching for a home, you might be interested in a couple of them:

1) The NYC Crime map shows how many and what types of crimes occurred throughout the city. You can look by precinct, by graduated point map (which shows how many crimes occurred in a specific spot that you can drill down by zooming in), and by heat map (where changing colors indicate a larger number of crimes). You can even specify which kinds of crimes you would like to see information for. 

One thing you won't see too much of is murder. Thankfully, as former Mayor Bloomberg pointed out, NYC has had very few violent crimes given how large the city is over the past few years. This tool is great for people moving to the city who want to understand what happens in different neighborhoods, and residents who what to keep track of what is happening in their particular area.

2) The NYC Business Atlas shows a variety of demographic information about population and business density. It shows businesses by heat maps and also the number of different types of businesses in a specific area, as well as what types of businesses have started up recently. Prospective residents might find this information useful as they evaluate various neighborhoods.  http://maps.nyc.gov/businessatlas/

Enjoy!