CommentaryMarket April 11, 2019

A Tale of Two Real Estate Markets- in the Same Place

My son’s sketch of a home we recently sold in Ossining

It might seem contradictory to say there are two distinct markets in the same geographical footprint, but what we’re seeing in Westchester and the surrounding counties is in fact two entirely different markets. I know that there are tons of market reports out this time of year (the beginning of Q2, that is), but I’ll summarize thusly: 

  • Starter homes are overheated due to low inventory
  • High end is softer than pizza dough

To be clear, starter homes have always had a faster absorption rate than more expensive properties due to supply and demand, but when tax policy and low inventory collide, the markets have become caricatures of themselves. 

Why are more affordable homes in such short supply? I have several reasons. 

First, we are reaping what we sowed when rates were manipulated by the government years ago to stimulate a sluggish market. Folks who refinanced 5-7 years ago at 3% aren’t too excited to pay that off and buy another home at 5%. So, the people who might otherwise sell -especially empty nesters- are holding on longer and dealing with mowing lawns another year or two to milk that low rate a little more. 

Second, there’s always a lag with consumers being savvy to the the actual market conditions. We saw it in 2008 and 2009 when sellers couldn’t get their minds around the fact that it was now a severe buyer’s market. Then again in 2013-14, buyers were often caught flat footed to discover that after 5 years of having sellers over a barrel, they actually had competition to purchase a home they liked. 

There are other reasons too (a significant shadow inventory no one wants to talk about being one), those two facts alone are significant. 

Why are higher cost and luxury homes not selling? 

Tax policy has put that sector into a tailspin. In Westchester, where million dollar homes are relatively commonplace, tax laws have changed to neuter the advantages that once came with the mortgage interest deduction and the ability to write off property taxes. For a home that costs $1.1 million for example, the purchaser has to pay an absurd “mansion tax,” has a lower amount of interest they can deduct, and their property tax deduction is capped at $10,000. That has created a “wait and see” attitude among would-be purchasers, inventory has piled up and gotten stale, and the dynamic is the exact opposite of starter homes- it is in fact very much a buyer’s market in most (not all) places. 

So, if you’re selling a starter or affordable home, it’s the best of times. If selling a more expensive property, it’s the worst of times.