New York City developer hunts for homebuyers squeezed by borrowing costs

Published Sun, Nov 13, 2022 · 04:16 PM

A NEW York real estate developer is trying a different tactic to sell apartments at a time of skyrocketing borrowing costs: an offer to pay down the buyer’s mortgage rate. 

Reducing a buyer’s potential borrowing costs – an incentive used by homebuilders this year as the market has shifted – is a more unusual perk for New York City’s competitive housing market. But Extell Development is seeking to spur sales at two of its buildings – One Manhattan Square and Brooklyn Point – by offering to buy down consumers’ mortgages rates by 2 percentage points annually during the first three years of their loans.

“We think that rates will come back down, but in the interim, we want to add to our competitive advantage,” said Gary Barnett, Extell’s founder and chairman. The buildings, which began offering the buy-downs in late October, will continue them through the end of the year. “It’s an important factor for people to try to bring down those monthly costs,” Barnett said.

The pandemic real estate boom has ground to a halt as the surge in mortgage rates – the average on a 30-year fixed loan hit 7.08 per cent last Thursday (Nov 10) according to Freddie Mac – sidelines potential buyers across the US. Sales have dropped off in cities including Phoenix as shoppers face an affordability crunch. New York hasn’t been immune. While the median price for all home sales in Manhattan is still up compared to last year, transactions are starting to slow. 

Barnett is using the buy-down offer to keep sales moving at a “reasonable level” as the pace has slowed from earlier this year. Just 57 per cent of the 814 units in the Manhattan tower have sold after seven years on the market, while 66 per cent of the Brooklyn building’s 481 units have sold, according to data from Marketproof.

“We do think it’s motivating people and is causing a pickup in velocity,” Barnett said. Extell’s senior vice-president of development, Ari Goldstein, said the two buildings have seen an increase in inquiries and appointments in the past two weeks with the new offer.

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It’s unclear exactly how borrowing costs will change in the coming months and years. Realtor.com’s chief economist Danielle Hale said last Thursday in a note about mortgage rates that buyers navigating the challenging housing market should avoid stretching their budget and think long-term about what they might need. 

Extell has turned to other incentives in the past to sell units in its buildings, including one deal where monthly rent would go towards an eventual down payment on the apartment. Most units currently on the market at the two Extell buildings are priced between US$1 million and US$4 million.

Extell will calculate its new offer based on a mortgage for 75 per cent of the purchase price. To incentivise cash buyers, the developer will credit the amount to their purchases, Extell’s Goldstein said. The median sales price on new developments in Manhattan, Brooklyn and Queens was down just 1 per cent to US$1.46 million in October from a month earlier as several large luxury units were sold, according to Marketproof. But sales are starting to slow with contracts signed for new units in those three boroughs – down 20 per cent in October from the previous month.

Other offers

Homebuilders have been employing rate buy-downs in recent months to drive traffic from interested buyers. DR Horton said last Wednesday that it’s turning to its lineup of incentives, which also include rate buy-downs, to address affordability concerns from potential shoppers. 

“It helps to differentiate a listing,” said Melissa Cohn, regional vice-president at William Raveis Mortgage. For buyers and sellers alike, it offers “a lot more bang for the buck” than a price reduction of the same amount since the savings are distributed over a couple of years rather than over the course of a 30-year loan.

Other developers, meanwhile, are unveiling more-standard New York breaks. In Hell’s Kitchen, the owner of Bloom on Forty Fifth is offering to cover one year of common charges and real estate taxes, while Front & York in Dumbo, Brooklyn, has a deal that would pay for two years of free common charges for any purchase that goes into contract before the end of 2022.

“For developers, you see the market, it’s very erratic and it’s better to address it now and clear inventory,” said Donna Olshan, president of Manhattan-based Olshan Realty. “Don’t wait around because it doesn’t really look like this thing is going to improve in the short run.” BLOOMBERG

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