Buying activity in suburban markets ‘plateaus’ as coronavirus pandemic drags on

Yahoo Finance’s Alexis Christoforous and Jonathan Miller, President and CEO of Miller Samuel Inc., discuss real estate amid the coronavirus pandemic.

Video Transcript

ALEXIS CHRISTOFOROUS: In perhaps a sign of the times, JPMorgan Chase has tightened mortgage terms on jumbo loans for co-ops and condominiums in Manhattan. Many lenders are following similar paths during the pandemic, raising maximum credit score requirements, requiring more cash reserves, even limiting or altogether eliminating home equity loans. Joining me now to talk real estate is Jonathan Miller, Real Estate Appraiser and Consultant with Miller Samuel. Jonathan, always good to see you.

JONATHAN MILLER: Likewise.

ALEXIS CHRISTOFOROUS: A number of loans in Manhattan are these jumbo loans. Did this surprise you to see what JPM is doing?

JONATHAN MILLER: Well, actually, initially, my response was I was encouraged, because we're actually seeing financial institutions practice risk management, which is not what we saw during the financial crisis. The other sense I get is since about 50% of the mortgages that are issued in Manhattan are-- or rather, 50% of the sales have a mortgage, the other 50% are cash. So this is not catastrophic or significant to the market, but it is, you know, another headwind that the market has to deal with. A market that's been pretty slow coming out of the lockdown period, unlike most other markets around the country.

ALEXIS CHRISTOFOROUS: Is Manhattan though an anomaly here, or are you seeing these kinds of things taking place in other large metropolitan areas?

JONATHAN MILLER: Well, at least now, it seems to be more of an anomaly, and I think it's because it's been the laggard nationwide in terms of contract activity responding coming back to life after the lockdown for COVID. In fact, when you look at, I cover about 36 different housing markets across the US, and all these markets are seeing sales well above last year's levels, and New York is still trailing, or Manhattan specifically is still trailing.

ALEXIS CHRISTOFOROUS: When you look at all of those places that you cover, are you seeing this exodus out of cities to the suburbs continuing, and continuing at the pace we saw just a few months ago when the pandemic was sort of, when we were in the throes of the pandemic?

JONATHAN MILLER: No, we're not. You know, when you look at the, I call it a rocket ship, essentially, from April or May up to about July, around the country, there was this surge in contract activity, and it was driven by two factors. One was just the fact that there was in the spring markets, everybody that was looking to buy or looking to sell during the normal spring, which is the most robust period of any housing year, was kicked, the can was kicked down the road into the summer.

So you had that combined with this outbound migration from urban markets out of concerns, you know, safety, close proximity to others. What we've really been seeing around the US has been since about July and August, depending on the market, is we're seeing suburban markets that were benefiting from inbound migration from urban markets are actually level plateauing or declining. Still well above year ago levels, but that sort of rocketship trajectory has not been able to be sustained.

ALEXIS CHRISTOFOROUS: I want to move from buying to renting for a moment, because a lot of those moratoriums that we saw are going to be lifted very soon, and folks are not going to be able to make good on those rent payments. When are we going to start to see this tsunami, if you will, and what will the domino effect be for the landlords who then in turn will not be able to pay off their mortgages?

JONATHAN MILLER: Right, it's not a good situation, and there's a lot of uncertainty tied to it, both the foreclosure, there's a foreclosure moratorium, and there's an eviction moratorium, both are expiring or set to expire at the end of the year. So unless they're extended, we could see a lot of difficulty, a lot of economic damage to the housing market beginning at the beginning of the year. So that's a real concern, and that would, like you had mentioned, that would bring on, you know, perhaps a lot of default rates, raise the default rate on small time landlords. In the US, about 50% of landlords are actually small businesses, they're not large REITs. And so they're particularly vulnerable.

ALEXIS CHRISTOFOROUS: But you know, we're seeing a lot of those rents fall right now.

JONATHAN MILLER: Yes.

ALEXIS CHRISTOFOROUS: Because people have been leaving cities. Are you seeing a sign that people are coming back into the cities now to take advantage of those lower rents?

JONATHAN MILLER: Yes, we are. One of the things that happens when you have inventory raised to very high levels, you have concessions very high by landlords, and you're seeing rents fall. At some point, you start seeing tenants come in or, you know, would be tenants or renters come in, and essentially, that's what we're starting to see.

It began in Brooklyn in New York City and seems to be spreading where you're actually having, you know, a break even or an uptick in activity from last year, which was unthinkable two or three months ago given how far behind the rental market is. Granted, pricing is at a much lower level in general than what it was, and one of the reasons for that is because rents are closely, you know, very reactive to economic conditions. And the unemployment picture in the US, although it's been improving, has been heavily skewed against lower wage earners, which tend to be renters versus homeowners and have been impacted disproportionately.

ALEXIS CHRISTOFOROUS: You mentioned earlier that New York City is sort of lagging other large metropolitan areas and bouncing back from the depths of the pandemic. Where do you see New York City real estate a year from now, because you know, we always talk about the resiliency of this market. You look at history as a guide after 9/11, after the Great Recession, the fiscal crisis of the 1970s, it did bounce back. It came back better and stronger. But this time, is this time going to be different? What do you see a year from now?

JONATHAN MILLER: Well, I think a year from now, we're just going to be in the vaccine distribution process. I really think that we still have a couple of years before we can start thinking about recovery. I think we're sort of, you know, we're going to be muddling along as a market until people feel comfortable coming back in, and we're not going to be where we were in the past because of Zoom, of the ability of workers to work remotely, so I think we're going to end up with a hybrid, and that's going to, you know, the city is going to have to adapt to that. One thing that is encouraging is that we're seeing a tremendous influx of younger consumers and, you know, we may end up seeing some sort of Renaissance that we can't really imagine at this point. I'm very optimistic about that aspect of the city's future.