February heated the hell out of the New York City real estate market.

Anecdotally, several of our clients were operating with a heightened sense of urgency because they found themselves bidding against several other parties. It seems like less than a month ago when nobody bid up to asking price, but now multiple bidders are coming in over asking price. It’s really a tale of two cities.

The numbers tell the same story. Everything looked bleak in Manhattan throughout most of 2020. Then in January there were real signs of life. Now all the charts look completely different. What’s even more surprising is that it’s even happening in the ultra-luxury market with prices at $4Million and above, according to The Luxury Market Report from Olshan. The publication documented 40 contracts at $4 Million or higher were signed in the last week of February. There haven’t been 40 such contract signings in a single week since 2016. There were at least 30 contracts signed over $4 Million in each week of the month. There haven’t been 30 such contracts signed for 4 weeks in a row since 2015.

All of that is very promising for the owners of Manhattan real estate.   

Douglas Elliman’s own contracts signed report looked shiny and new in February too, for the most part anyway. The average sales price increased for coops to $1,429,657 from $1,251,043 and for condos the number average price increased to $3,070,396 from $2,751,257. We found it interesting, especially when factoring in the numbers from the Olshan report, that coop transactions under $1 Million decreased to 53% down from 64%, but transactions over $1 Million increased to 47% from 36%. Comparatively there are very few condos below $1 Million in Manhattan, but transactions under $1 Million pushed up to 23% from 19% last month.

What’s up With Rates?

If you were thinking about buying an apartment and you’re wavering because 30-year fixed rates are 3.125% instead of 2.875%, don’t shed another tear. I know you were emotionally attached to the number 2, so it’s hard to let go. But what if I told you that it was possible to reconnect the two of you?

How do you get that rate in the two’s if rates are in the three’s?

You can buy it.

Or better yet, you can have the seller buy it for you.

It’s a rate buy-down, AKA paying points.

How does it work?

Scenario: A buyer wants to purchase a condo for $1 Million and make a 25% down payment, taking a mortgage for $750,000. When their search began, rates were at 2.875%, resulting in a principal and interest payment of $3,112. But now the rate is 3.125%, pushing the payment to $3,213 an extra $101 per month. The buyer knows they’re getting a great deal on the apartment, but it irks them that it’s not the best possible deal they could have made. If only they found the place a month earlier, then, they would have timed the market perfectly. A hundred and one dollars per month – that’s a lot of scratch-off lottery tickets. Or you could save it. Or invest it. Or pay down your mortgage faster. Or you could spend it on something frivolous that makes you temporarily happy.

Over the life of the loan, at 2.875%, the borrower would have paid $370,210 in interest payments. But at 3.125%, they’d pay $406,614 in total interest, more than $36,000 difference. When you think of it that way it kind of stings a little more than the $101.

Show me the math

One point is equal to 1% of a borrower’s loan amount. For example, if a borrower took a loan for $750,000, 1 point is $7,500. A point is a fee that is paid at closing. It is considered pre-paid interest, and therefore tax deductible.

As a general rule of thumb, for every point paid up-front, a borrower can reduce the note rate on their mortgage by about .25%, although it’s not an exact science. If today’s rate is 3.125% with zero points, it would likely cost a mortgage applicant 1 point to buy the rate down to 2.875%.

How can this save the day? Some buyers are extremely payment sensitive and even disciplined enough to not exceed their budget. Sticking with the example above, if that buyer only had room in their budget for $3112 and didn’t want to move forward if the principal and interest payment was $3,213, they’d need to ask the seller to drop their price by $25,000. Perhaps the seller is unwilling to offer $25,000. But it might be more palatable to offer $7,500 toward the buyer’s closing costs. That credit could cover the cost of the rate buydown and bring the payment back down to the buyer’s range. Problem solved. Everybody’s happy!

Other buyers might be perfectly willing to move forward, even if the rate moved to 3.125%. After all, that’s still a historically low mortgage rate. But there are occasions where a higher monthly payment could push someone debt-to-income ratio higher than what the program guideline allow for. Instead of lowering the loan amount by $25,000 in order to qualify. But down the rate for $7,500. Lower the payment. Reduce the ratio. Qualify for the loan. Problem solved. Everybody’s happy!