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.

Being Green Means You're a Good Risk?

Found this very interesting article on Inman News that highlights a finding that owners of energy efficient homes are significantly less likely to default on their mortgages. Significant as in 32% less likely - that's one third safer than your typical borrower!

The group that conducted this study - The Institute for Market Transformation, a group I've never heard of before but I'm glad I discovered - states that given the statistical significance, the energy efficiency of a property should be considered as part of the risk evaluation when making a mortgage. In other words, it should be easier to get a mortgage on an Energy Star - rated home. This could mean several things for buyers - a lower interest rate or perhaps qualifying for a mortgage amount that you couldn't have qualified for before. For IMT, that translates to a hope that buyers will look more favorably on greener homes, not just for the lower energy bills, but perhaps for a lower cost of living in the long run, even if the purchase price is higher than a non-Energy Star rated home.

While the talked-about study only surveyed new purchase mortgages, the finding could also impact considerations for refinancings, particularly if the property in question has had green retrofit upgrades as well.

For home builders, there have been incentives such as tax credits for building greener housing for a long time, but the longtime budget impasse threatens these credits. Being able to offer homes that qualify for lower rates, and knowing that consumers will be seeking these homes out, may be the market-based incentive we need to keep building green housing.

This study only surveyed single family homes. Here in New York, even most of the single family housing dates from 1900 or before, and not much more is being built. However, I found another item on the IMT website showing Fannie Mae is taking a similar mortgage-friendly tack to get multi families on board with green retrofits. This building program relaxes debt service ratio requirements for landlords who are refinancing buildings and intend to put in green retrofits. Essentially, they can take out extra money to do the retrofits that the bank wouldn't have allowed them to have before.

I'm glad to see that amidst all the angry fingers pointing at "big government mandates", there is a market-based incentive (do something, get/save more money). And I'm even happier that it is aimed at multi-family buildings. Again, in NYC, many of the housing stock was built in the 1930s and 1940s and therefore doesn't have HVAC, and has oil or natural gas burning boilers, as well as often falls in the shadow of taller buildings that block out solar potential. This is something I want to know more about.

FHFA Says Fannie, Freddie Will Not Reduce Mortgage Balances | Realtor Magazine

So the holder of millions of mortgages has decided that reducing principal payments on underwater homes isn't going to be a good solution. I am a tad disappointed. It would seem to me that most of the people who walked away from their underwater homes have already done so. The rest of underwater people are paying their mortgages, even as they calculate how they will not be able to move for years unless they go through a very painful, very slow, very adversarial short sale process.

I think the government is looking at this completely wrong. Why not institute a principal reduction program for underwater homeowners who are current on their mortgages? Think of it as a reward to all those hardworking middle class homeowners who have managed to hang onto job and home by the skin of their teeth. These are the people who didn't take crazy risks and who would be more productive and able to productively contribute if they were a bit more secure.

Here is how I'd structure the program:

1) Homeowners must have a loan currently owned by Fannie or Freddie

2) Homeowners must be current on said mortgage

3) Homeowners must be using home as primary residence at least 2 years

4) Homeowners must apply for principal reduction and pay for an appraisal to prove that the home is underwater.

5) Homeowners would be eligible for principal reduction of half the underwater portion. In other words, If they are $200,000 under water, they would be eligible for $100,000 principal reduction. This way the homeowner still shares some of the burden.

6) Loan amortization schedule is recast so that payments are spread over the remaining life of the original loan. This drops homeowners' payments immediately.

I'll admit this might not really feel like much of a "stimulus" but it will have that effect. People need to feel secure in their lives to do the kind of consumption this economy needs. If they can't get a leg up on income, then helping them with the largest ongoing expense they have is a good way to go. Much more than a one-time handout, this will have a gradual and long lasting effect.

FHFA Says Fannie, Freddie Will Not Reduce Mortgage Balances | Realtor Magazine:

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New York Foreclosures Inversely Proportional to Delinquencies

Saw an article this week on New York State foreclosure and delinquency rates. The gist is that delinquency rates of loans (that means loans that are 30 days or more behind) have fallen as a proportion of all mortgage loans in New York State. Foreclosures, however, have risen during the same time. 

That may sound ominous but for the projections mentioned in this article regarding New York City Foreclosure and delinquency rates published in October 2011.  To recap, the article states that actual foreclosures in New York City (where the property goes to auction and is sold or taken by the bank) fell by 69% in third quarter 2011. However, experts cited a virtual moratorium on actual foreclosures forced by scrutiny and fallout from the robo-signing debacle. This earlier article states that the number of loans 90 days late was the same as in previous quarters in October 2011.

So, between the October 2011 article and this week's article... PROGRESS! It was predicted in October that a spate of mortgages currently in default (90 days late) would move through the foreclosure process, thus raising the number of foreclosures from the abnormally low number achieved in the 3rd quarter. So according to February's article, that happened. Foreclosures rose.

BUT, according to the February article, the number of delinquent loans fell. (Delinquent loans are loans that are 30 days or more late; this includes loans considered 90 days late which were previously defined as "in default").   30-day late loans fell as a proportion from 8.12% of outstanding loans to 7.98%. So, maybe New York State is starting to work its way through the housing crisis.

.14% of loans may not sound like much (and indeed may be somewhat accounted for by the number of loans that finally were foreclosed and therefore removed from the loan pool). So clearly New York has a long way to go. But every little bit helps. The February article puts the current levels of delinquency and foreclosures in historical perspective (5% of total loans go delinquent and .5% go to foreclosure), as well as national perspective (New York ranks 26th out of 50 in total delinquencies - right on the median). 

With the stock market, as a leading indicator, having been mostly positive from early 2010 through now, it follows that the real estate market would start to improve as a traditional trailing indicator. "Stopping the bleeding" in New York is one of the first steps.  It's nice to see some progress back from the brink.