In late February, Edmond Franco and Jeremy Gregg bought a new multimillion-dollar condo apartment in Midtown Manhattan, going over their original budget by more than 50 per cent.
“Yes, it’s much more than we planned to spend,” says Franco, who works as a financial adviser, but he considers the home to be one “we will never find again” — a good long-term investment.
“My instinct is that this is an inflection point for property in New York: US economic growth is very good; unemployment is low; the stock market is up,” he says. “The city feels as vital as it has ever been: we wanted to be ahead of the curve; we didn’t want to get into a bidding war.”
Three thousand miles away in San Francisco, a home purchase has never felt further away for Michelle and her husband. The couple, who work in tech, were both laid off last summer. Michelle’s husband is still unemployed and Michelle worries that her new job is not secure.
When their lease expires in June, they plan to cut their rent by a third by moving from their three-bedroom flat in Oakland, on the east side of San Francisco Bay, to a smaller home.
“There is no way we will be extending ourselves with a purchase at the moment. Mortgage rates are too high and so are prices, and with our sector as it is, there is no safety net. It’s hard not to be pessimistic,” says Michelle, who declined to give her surname.
In the US right now, it’s a tale of two housing markets.
For the majority, grappling with high mortgage rates, the market is stuck in a rut. In January, the annualised rate of second-hand home sales hit 4mn, 38 per cent lower than in January 2022, according to the National Association of Realtors.
But at the top end of the market, sales are surging: in January, sales of second-hand homes above $1mn were 27 per cent higher than a year earlier, with many buyers benefiting from the 34 per cent rise in the S&P 500 stock market index over the past year.
“This time last year almost everyone was predicting a recession and buyers were more cautious, [saying] ‘Maybe I don’t need that second home’”, reflects Chen Zhao, head of economic research at Redfin, a US property portal. “Now with this sense [the economy] has achieved a soft landing, there’s been a sentiment bounce in the luxury market.”
Nina Bhela and her husband have certainly felt it. The couple, who live near San Francisco, were ready to buy a second home early last year, but it was not until December that they completed a purchase, buying an apartment in the Residences on Yerba Buena Island, just over the Bay Bridge.
“Last year, mortgage rates were really climbing, interest rates were going up, there were these fears about the economy,” she says. Now the atmosphere has changed. “People are travelling, the restaurants are full. I mix with a lot of very affluent individuals and they are feeling comfortable.” The way she sees it, she can always refinance when mortgage rates fall, “but there won’t be another chance to get a unit like this.”
“Recent stock market gains have enhanced the purchasing power of higher-end consumers,” says Jonathan Miller, professor of residential real estate at Columbia University in New York. “They are now confident of future interest cuts and are buying to get ahead of the price gains they anticipate these will cause,” he adds.
“In the wider market, by contrast, higher mortgages are holding back sales because many people still can’t afford a purchase.”
Outside of the US luxury home market, buyers face a litany of obstacles. Uppermost among them are stubbornly high mortgage costs.
On Monday, the average 30-year fixed rate was 6.87 per cent, according to the website Mortgage News Daily, down from the 8.03 per cent peak in October, but a world away from the low of 2.75 per cent in January 2021.
The result is that many homeowners feel trapped where they are. “Even if you really want to move, it’s hard to swap a 3 per cent rate for one at 7 per cent,” says Joel Kahn, deputy chief economist at the Mortgage Bankers Association.
For many families, running a home has become a lot more expensive. In 2019, a family on the median income typically spent nearly 50 per cent of their income on mortgage and childcare costs, according to property portal Zillow. In January, that had climbed to 66 per cent.
At the end of last year, Scott, who works in tech and is the sole earner for a family of four, bought a home in Orinda, California, in need of renovation. Including mortgage payments, mortgage insurance and property taxes, he pays $3,500 per month more today than what he spent on rent at the family’s last home. Together with his living costs, this eats up all his salary; renovations have to wait for each time the stock options he has in the company he works for vest. On top of that, his insurer has just told him it is pulling out of the local area, which is at risk of wildfire.
“It’s challenging: I’ve got a high mortgage rate and a big property tax that I didn’t pay before [as a renter],” says Scott, who declined to give his surname.
Widespread lay-offs in his sector, which have increased the pressure at work, add to his concerns about the family’s long-term financial security — even after his wife, who is taking a break from her job as a teacher following the birth of the couple’s second child, returns to work.
“Today, working in tech has gone from: ‘high income, high creativity, take risks’ to a bit more ‘don’t screw up and you better be a top performer’”, he says. “I used to be a teacher, too; even back then on a much lower salary, I never had to live hand to mouth like this.”
Many are opting to sit out and wait. Kristin Carlson is planning her first home purchase near Boise, Idaho, where she currently rents.
She feels more secure in her digital marketing job than she felt a year ago; and, she says, with the worst of inflation over and the prospect of interest rate cuts stimulating her sector, she is more confident about affording mortgage payments in the coming months.
But she is waiting for the Federal Reserve to cut interest rates, so that her mortgage will be cheaper.
“I could make it work now, but I wouldn’t be able to travel or go out for nice food as much. Ideally, I’d love to see my rate at sub-5 per cent. It will take patience and maybe a little bit of gambling. But I’m holding out,” she says.
When it meets next week, the Fed is expected to keep rates unchanged at between 5.25 and 5.5 per cent, and detail how many cuts it is planning this year. Most analysts predict the central bank will make its first rate cut in either June or July.
Jared Halpern, of Douglas Elliman in New York, has been telling customers that if they take out a mortgage now, they can refinance when rates are lower. “[But] buyers simply can’t afford to carry a mortgage right now, or they can but are waiting for rates to drop,” he says.
For many, it’s not just the mortgage rate that needs to come down. Since January 2020, the price of a single-family home in the US has increased by 46 per cent, according to the S&P CoreLogic Case-Shiller index. With gains of 5.5 per cent in the year to December. According to Zillow, the average home price in the US is now nearly $348,000.
In the luxury market, where recent stock market gains have helped drive a surge in cash purchases, high mortgage rates are a less pressing concern.
In the last three months of 2023, the number of homes in Manhattan bought in cash increased by 18 per cent compared with a year earlier, according to Douglas Elliman. They now account for 68 per cent of all sales — a new record.
In December, Jennifer Barckley and Rahul Bhaskar bought their first home together, a condo apartment in Manhattan’s South Harlem neighbourhood. They had been looking in earnest since 2021; in that time, mortgage rates rose significantly, increasing the monthly payments they will have to make. But a far greater financial impact on their purchase has came from gains over the years in US stocks, where they had invested most of the money for their down payment.
Their requirements for a home were strict: they wanted the conveniences of a new-build condo that retained some of the qualities — such as high ceilings, a small number of units in the building and a warm community feel — that they had so enjoyed about their Upper West Side rental. But with well-paying jobs and a significant savings pot accumulated over many years, they could afford to take their time.
“This was a long-term investment, we wanted to find something that was right, it wasn’t about chasing mortgage rates,” says Barckley.
Franco and Gregg are watching mortgage rates closely, but not because they worry about meeting their monthly payments.
They will finance their new home purchase by selling the Greenwich Village co-op where they live now, on the market for $2.95mn, selling some financial investments, and by taking out a mortgage for a third of the home’s value.
“With interest rates high, we might not get as much on the sale as we would,” says Franco.
But since he is buying a significantly more expensive home, purchasing now — before interest cuts by the Fed stimulate Manhattan’s top-end market further and prices climb — feels like good timing, he says.
“We may be a little ahead of the curve, because interest rates haven’t come down yet, but we think cuts will come soon. Another offer [for the home we bought] came in the following day to ours: we felt if we wanted this apartment, we had to act now,” he adds.
Still, for many super-rich buyers, current high mortgage rates hardly register.
Last year, Alan Jay Wildstein bought a home in Bentley Residences Miami, a new waterside development in the city, which will be completed in 2027. It is the latest of four homes he owns, all of which he bought with cash.
Speaking to me via video call from one of those in the Porsche Design Tower Miami, designed by the same architect as his new Bentley home, he pans his camera out from his desk to show me five supercars parked in formation, part of a collection so large he can’t tell me the number of vehicles it contains. I catch sight of a McLaren Elva, of which only 149 were made, he tells me. “That’s not my most expensive car.”
“Interest rate climbs affect a lot of things in the world, but my home purchase is not one of them,” he says.
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