A record number of cash offers show that New York real estate is only for the wealthy

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More than two-thirds of New York home sales last quarter were cash purchases, a record high, as high interest rates on mortgages deter all but the wealthiest buyers.

With mortgage rates hovering around 6 percent, nearly 70 percent of New York City homes purchased in the fourth quarter of 2023 were purchased without a mortgage, according to Pamela Lipman, CEO of Corcoran Real Estate Brokerage. Cash purchases jumped from just 55 percent of transactions in the same period in 2022.

“High mortgage rates create a real vacuum for people who do not have the strong financial resources required to buy with cash,” she said in an interview with the Financial Times.

“It pushes people who would buy homes in New York to rent.”

The Corcoran report found a 4 percent increase in new leases in Manhattan and Brooklyn in January of 2024 compared to the previous year, while rents rose to an average all-time high of $3,950.

“That tells me that people are not willing to take on a certain level of mortgage debt,” Lipman said. She said the high cost of borrowing for homebuyers had created a “vacuum in the middle” of the property market, with the rich getting richer, while buyers who couldn't pay cash were sidelined as rents in the city continued to rise.

“Part of it is psychological, because everyone thinks interest rates are going to go down. So they'd rather pay cash now and refinance later,” she said.

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The average sales price for a Manhattan apartment was $1.15 million in the fourth quarter, according to real estate agency Douglas Elliman. That was up 5 percent from the same period a year earlier, and close to the record average sales price of $1.25 million reached in the second quarter of 2022 — just when the Fed began raising interest rates.

As a result, purchasing in the city slowed. Lipman compared the market to more affordable cities like Charlotte, North Carolina, where she said homes sell in days, often in a bidding war. But in New York, some of the best properties that go on the market now stay there for months. Last year, the United States saw fewer than four million real estate transactions, down from the pandemic peak of six million, which is “not good,” Lippman said.

Thomas Ryan, a real estate economist at Capital Economics, said that despite the uptick in transactions in January, the housing market across the United States “remains practically frozen,” with transactions far lower than Average of 5.1 million in the 2000s.

Cash purchases were already on the rise in some competitive markets in the U.S. before interest rates started rising, said Erin Sykes, a real estate agent in New York and Miami and an economist at Nest Seekers.

“A lot of them had cash before because they needed to win bidding wars, and emergency loans weren't possible,” Sykes said. “So they would buy with cash and then get the loan.”

But cash purchases in a high mortgage interest rate environment were more opportunistic, she said. “The people who are aggressive enough to make transactions now are people who are liquid or moving against the market. They are not afraid because they see the opportunity to make trades and enter at a lower price.

The challenges facing buyers in New York have been exacerbated by a chronic housing shortage that developers have blamed, in various ways, on regulations that have limited landlords' ability to raise rents, as well as the lapse of decades-old tax incentives that have supported many new buildings. . Permits for new residential construction projects also fell sharply last year, according to the New York City Partnership, down 55 percent in the fourth quarter of 2023 compared to the same quarter in 2022.

Among other solutions, Mayor Eric Adams has supported the idea of ​​converting aging office buildings into residential towers. But this is a technically difficult and expensive endeavor that could result in a limited number of new apartments, according to architects and developers.

New York's real estate supply crunch has seen vacancy rates fall from about 4.5 percent in 2021 to 1.4 percent, below the pre-pandemic rate of 3.6 percent, according to the New York City comptroller.

“Affordability in New York is tough right now,” Lipman said. “It takes a lot of people out of the market.”

Additional reporting from Joshua Oliver in London