Your $100,000 Down Payment Is Now Worth $80,000

Photo-Illustration: Lined; Photos: Getty

In August, Becki Danchik, a Coldwell Banker Warburg broker, listed a $385,000 Upper West Side studio. Within ten days, he was under contract for more than the asking price. The housing market was cooling at the time – the interest rate was around 4% in early August – but the apartment was in a sought-after line in a doorman building and New York didn’t have much to offer. inventory in what passes for the starter-home category.

But in the brief period between the signing of the contract and the buyer’s mortgage application, the mortgage rate had shot up to 5% – it was soon climb to about 7 percent — and it wouldn’t lock in until the co-op’s board gave the buyer the go-ahead (a process that takes about a month at best). Although the bank had pre-approved the buyers, they decided they weren’t comfortable issuing a mortgage at the higher interest rate, which would mean hundreds more payments each month. “The buyers were self-employed, the difference was more than a few hundred each month, and if the bank feels they can’t make up the difference, they will report it,” says Danchik. It was the first time, however, that a deal fell through because of a refusal by a bank rather than a board.

With the average interest rate on a 30-year mortgage now in the high 6% range, brokers say buyers, especially first-timers, are finding they can’t afford apartments that were available to them only a few months ago. A two bedroom, two bathroom apartment in Prospect Park South, for example, asking for $700,000, had monthly carrying costs of $2,809 in March when the interest rate averaged 4.4% on a 30-year fixed-rate mortgage. In October, when the interest rate had risen to 6.6%, the monthly port charge would be $3,582, according to a StreetEasy calculation. A buyer with a 20% down payment and good credit with a budget of $700,000 in March would need to cut it to $549,000 in October — $151,000 less — to keep monthly costs the same. The decline in purchasing power for entry-level apartments, which StreetEasy defines as one or two bedrooms between $400,000 and $800,000, ranged from $90,000 to $170,000, according to StreetEasy economist Kenny Lee. . In New York, monthly maintenance fees in co-ops and condominiums make the difference in purchasing power even more pronounced since owners must pay both mortgage payments and monthly maintenance fees which typically exceed $1,000. $.

And for the most part, sellers aren’t lowering prices to make up the difference, brokers say. “Inventory is still low, the labor market is strong, and sellers who have secured low interest rates have even less reason to sell,” Lee says. “In the spring, the market was really in turmoil. Now it’s simmering.

Victoria Vinokur, an agent for Brown Harris Stevens, says she advises her salespeople not to push the market, which she defines as trying to get 10 or 15 percent more than nearby comps. But that’s about all. “Can I say the market is down X%? No I can’t. Where you see price reductions this fall are properties that the owner really wants to sell or that were too expensive to start with.

The options for buyers are to wait for interest rates to drop or to pay more now and hope to refinance later. Some swallow the higher rates, painful as they are. An Upper East Side buyer called Lauren Cangiano, broker for Brown Harris Stevens, panicked when she found out that her interest rate, which was 5% at the start of the summer when she signed a contract on a Madison Avenue T2, had risen to 8.3. percent when the interview with the co-op’s board was scheduled for this fall. “She said, ‘I don’t think I can afford this apartment.’ The interest rate scared her. She was about two seconds away from bailing out. Cangiano told the woman that if she walked, she could lose her deposit and reminded her that although her monthly payments were significantly higher, renting a room in her daughter’s school district would cost between $4,500 and $5. 000 dollars per month.

“I told her she should go ahead and refinance next year,” Cangiano says. “She had a little panic attack but then thought, What are my alternatives? I can rent for a high number and it’s not mine. Or I can move on. And the price she got was very good, just under $700,000. But she was scared.”

Cangiano adds that it’s the buyers in this lower range who are feeling the brunt of rising interest rates. “People in the higher price brackets do everything in cash, or at least more cash, and it doesn’t affect them as much. I have a few listings that have been on the market for a while, in the just under $2 million range, that are also candidates for first-time buyers, and they’ve been hard to sell. There’s still a bit of fluidity with interest rates, but it’s not 3.25% to 3.75%, it’s a 100% year-to-date increase.

Maria Daou, broker at Coldwell Banker Warburg, said she was baffled by the lack of interest in a three-bedroom Upper West Side apartment she recently put up for sale for $2 million – a price competitive. But that didn’t bring in any buyers, so they just lowered it to $1.8 million, which got unusually few calls. (The three bedrooms under $2 million tend to be very popular, and this one is being renovated.) “I called colleagues from other companies and asked them what was going on,” says Daou. “They said that happens with their rosters as well.”

And sellers willing to lower prices to meet new market realities are the exception, she adds: “Sellers are always the last to get the memo. And the market was so high in January, February and March that everything on the Upper West Side sold with seven bids above demand. Of course, salespeople want to get those numbers.

Daou also works with buyers who have cut their budget – one was looking to spend up to $1.95 million on a three-bedroom in the neighborhood, but has since cut it down to $1.7 million at the light of rising interest rates. But it’s also a rarity: Few sellers are willing to cut their budget, especially since at market lows, a $100,000 drop may mean settling for a two-piece this spring or taking a a dark ground floor apartment when they could have had a bright and airy one a few months earlier.

“Personally, I haven’t had any buyers willing to lower their budget,” says Vinokur, Brown Harris Stevens’ agent. “The reality is that in New York no one really likes what they can afford in the first place. Even someone who spends $20 million is upset because they want a better view or can’t put a swimming pool on the roof.

And the price increases of the past few years have already meant trade-offs for entry-level home buyers. By August 2022, the median footprint of a first-time New York home (costing between $400,000 and $800,000) had fallen 9% — to 900 square feet — from three years earlier, according to a StreetEasy study. In Manhattan, it’s 686 square feet. There were also fewer entry-level listings in 2022 than in 2019 – 4,500 citywide compared to 5,300. Unsurprisingly, the number of sales also falls.

There are still buyers, brokers say. But not necessarily the same as three months ago. Danchik, who put the Upper West Side studio back up for sale after the deal with the first group of buyers dissolved, held an open house last week. The list still generated a lot of interest, but it was a different crowd than in August. “It’s an entry-level apartment, but they weren’t first-time buyers,” she says. “They were people looking for a place to stay.”