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The Sutton Place bedroom was exceptionally large – really the size of most two-bedroom bedrooms – with a 22-foot-long living room and several walk-in closets. It was also well priced, at $649,000. And just as listing broker Amelia Gewirtz of Brown Harris Stevens predicted, it attracted a lot of interest when it hit the market this spring. But five offers and five months later, the apartment has yet to be contracted. “I had three contracts in the last 45 days, but nothing was signed,” laments Gewirtz. “They literally had pen to paper and panicked at the 11th hour. They couldn’t do it.
“It’s in this beautiful, serene neighborhood, incredible value, and buyers, they’re just, well, emotionally paralyzed is the jargon going around,” she adds. She empathizes with her colleagues about the phenomenon of buyers balking and backing out of deals after contracts are sent or, in some cases, even signed.
As properties continue to sell, it’s clear that the frenetic market of the past few years, with buyers making on-demand offers all in cash and foregoing contingencies like home inspections, is over. Rising interest rates, volatile stock markets and general unease have made buyers more wary, leading to an increase in failed trades. Nationwide home sales cancellations occurred at the highest percentage on record with the exception of March and April 2020 (the first two months of the pandemic), at 63,000, or 16% of all sales, canceled in July, according to an analysis by Redfin. This is slightly higher than the previous month, although New York has one of the lowest cancellation rates in the country – 7.1%, compared to 6.8% in June – probably due to the fact that shopping in the city is largely a game of rich people and almost half of all Manhattan sales are cash purchases.
While most buyers walk away from agreements between an accepted offer and the signing of the contract – the buyer can keep the deposit otherwise, although usually some sort of compromise is found – one broker says she works with customers whose buyer used the 30-day – closing clause in the contract as a pretext to withdraw from the deal. Never in her career had she seen a deal close in 30 days and buyers cancel the deal two days after the window ended and while the request was on the co-op’s board. (The clients had another broker at the time and decided to let the buyers off the hook because they feared litigation would delay the sale.)
“People are reluctant. Current conditions have removed the sense of urgency,” says Frances Katzen, broker at Douglas Elliman. She recently derailed a sale after potential buyers had the buyers of their apartment because of rising interest rates.
“The contract was almost done – they had completed their due diligence, everyone was thrilled, clapping and clapping their hands,” says Katzen. “But they were upgrading and they had to sell their flat to fill the gap. It was a domino effect. Once their buyer went down it ruined everything.
Brokers say most buyers who walked away from contracts were hurt by rising interest rates. A rate is not locked in until the contract is signed, and it can take months from when an offer is made to when the contract is complete; during this period, interest rates can fluctuate considerably. Over the past few months, they have: the average 30-year fixed rate mortgage interest rate was 3.79% in Januarybut at the end of August it climbed to 5.88 percent. “Where I’ve seen this happen is with first-time home buyers who need a mortgage and their jobs to pay their bills. Many buyers in the sub-$700,000 price range are already stretching,” says Gewirtz. Most New York buyers in this range buy from co-ops, which have stricter requirements than banks, making the rise in interest rates even more substantial. Co-op boards generally do not want buyers to have debt ratios above 30%; some set the number even lower.
Michael Holt, a Compass agent, was working with first-time buyers who, after losing several bidding wars, were thrilled to have their bid accepted for a two-bedroom, $1.5 million Upper East Side co-op . “When they started looking for apartments, the interest rates were 3%. The numbers were tight, but it was going to work. The apartment was a good deal, we negotiated well and the board agreed,” says Holt. “But then interest rates went up, as did their debt ratio and monthly port charges; buyers simply could no longer afford the apartment.
“They’re taking a break. Many buyers want to see how their purchasing power is impacted,” he adds. And “a 1% interest rate change can mean a different category of apartment” – whether the buyer can afford a one-bedroom apartment versus a studio, or a renovated apartment versus a unrenovated – says Gewirtz, who nevertheless recommends buyers get into the market as soon as they can, instead of dwelling on “what their friends had last year”.
Even some cash buyers were spooked by the cooling market. Kimberly Jay, a Compass broker, was working with cash buyers looking for an apartment worth around $5 million. They fell in love with a pre-war apartment in the Village and found themselves in a bidding war. “I was not surprised. It was a nice apartment – a three bed plus a desk, pre-war, completely renovated but not in a Above-contemporary way. We hadn’t seen anything like it. »
Jay’s clients bid $300,000 above the asking price, won the bidding war, and brokered a deal to buy some of the furniture with the apartment. They had already lined up with their real estate lawyer when Jay got an unexpected call: “They said, ‘Now is not the time for us. We’ve been through this in our minds and think now is just not the time to buy. ‘”
“Sometimes you can feel it, but I didn’t feel it,” Jay says. Buyers cited global uncertainty, war in Ukraine, inflation, falling Wall Street bonuses, upcoming layoffs and rising interest rates. Although they would not borrow money, they believed that prices would not rise for some time. “Just because you have a lot of money doesn’t mean you want to pay top dollar,” says Jay.
Of course, this isn’t the first time buyers have been nervous. In the first two months of the pandemic, Katzen says he saw buyers walk away from contracts, during the mortgage crisis, “and then again after the sugar spike of 2015” when prices peaked and prices sales have declined. It’s only a matter of time, she thinks, before the brutality of the rental market drives people to buy: “It looks bleak now, but there will come a time when the rental market will get so crazy that people will feel ripped off if they don’t buy.