With Manhattan rents at historic highs, tenants are moving out of rental markets and into new homes.
Much of the new activity is taking place at the bottom of the market, as first-time buyers growing weary of the rental market buy studio and one-bedroom apartments.
Whereas rents continue to break previous records, the Manhattan sales market has shown stability, with mortgage and interest rates declining to all-time lows.
“Rents have escalated to a point where people who were on the fence are now looking to buy,” said Gary Malin, president at Manhattan-based Citi Habitats.
Rents reached an all-time record in July, with average Manhattan rents reaching $3,459, the highest since brokerage Citi Habitats began tracking the statistic in 2002; year-over-year, studio and 2-bedroom rents rose six percent, while one and two-bedroom rents rose five percent, the data shows.
Recent sales activity has taken place among studios and 1-bedroom apartments, which is “typically a renters market,” according to Malin.
As landlords continue to raise rents, young professionals, pied-a-terre purchasers, and parents buying homes for college-aged children are looking to become first-time buyers.
“Many of my sale listings have been purchased by parents who are purchasing for their children and want to avoid the high rents,” said Tim Cass, an associate broker and SVP with Corcoran Group Real Estate. “In one case a pair of grandparents purchased a studio in a full-service Midtown East building for their granddaughter who is going to school in the city.”
The market share of studio and one-bedroom apartments rose to 15.2 percent in the second quarter of 2012 from 12.8 percent a year ago; back in the second quarter of 2008, the number stood at 8 percent, said Jonathan Miller, president and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm.
Year-over-year median sales prices also fell 2.5 percent in the second quarter of 2012 to $899,000 due to this shift, according to data that Miller compiled for the Elliman Report.
The downgrading of U.S. debt from triple-A standing last year caused a “flight to safety” by global investors into the U.S. Treasury market, causing mortgage rates to plummet to record lows. When coupled with astronomical rents, this has fueled the rush into the entry-level Manhattan market, Miller said.
But, he noted, because mortgage lending and underwriting has not eased, it has actually prevented a housing boom of even greater proportions, with “lenders afraid of their own shadows.”
Experts also caution against buying on impulse, even in the case of a credit-worthy, financially stable buyer.
Potential buyers should assess their individual circumstances before jumping into a long-term commitment — especially if they don’t plan to settle down in Manhattan at least for several years.
The cost of renting vs. buying also depends heavily on the individual property. In addition to mortgage payments, maintenance fees and deposits (typically 20 percent of cost in Manhattan) should be considered when looking at a purchase option, said Kyle Funsch, a principal at Procida Funding and Advisors.
“There are many variables involved and that’s especially true in New York City, which is a world of its own,” said Funsch, who examined four Manhattan Upper West Side and TriBeca properties — two studios and two two-bedrooms — on behalf of Real Estate Weekly to determine the costs of renting vs. buying.
“Of the four properties, two I would buy, the other two I would rent,” he said. Funsch “bought” one of the studios and one of the two-bedroom apartments, but in all cases, the swing in monthly prices (comparing renting vs. buying) only fluctuated between five and 10 percent.
One of the studios, for example, did not make for a sound buy based on the $1,000 maintenance fees that would be tacked onto the mortgage, Funsch said.
But even when a decision to buy or rent makes sense in terms of pure numbers, “It really depends person by person,” he said. “If it’s a longer term plan, purchasing may be the right thing to do in the long run.
“For me, being from New Jersey, I can’t fathom paying that much in rent.”