As Shockwaves Hit The US Housing Market, Expect a Muted Immediate Impact in New York City

I just wrote a long post discussing the potential fallout from the recent settlement between the National Association of Realtors in a class action lawsuit. The plaintiff’s $418mm payday is impressive, but the impact to the National housing market will be long-lasting, ugly, and will probably result in a system that looks similar to what exists now. You can read about it here. It’s worth reading that first, to understand what might be rolling out across the country before you read below. It’s not guaranteed that the settlement will be accepted by the court, nor that by July 1st, we won’t see a bunch of more concrete steps taken to mitigate what I do think the fallout will be.

But once you’ve read that, though, you will surely be wondering: How will the changes impact New York City? Will it turn everything upside down, as you might expect it to in cities everywhere?

I’m not convinced. And I’ll tell you why.

New York City isn’t Springfield (Massachusetts, Illinois, Arkansas, California, Florida, Georgia, or Idaho, for that matter)

No one thinks that New York City operates like the rest of the United States, do they? Sure, people wish they had big grocery stores, and cause pandemonium when their dreams come true. It’s probably more accurate to say people lost their minds when Wegman’s came to town.

People also wish that they had bigger spaces to live in, of course. To that end, people spend half their free time complaining and dreaming about real estate. That’s not a scientific measurement, but it is based on every cocktail party I’ve ever been to. So maybe they’ve dedicated more time than half their waking hours chatting about properties?

When it comes to residential real estate, Manhattan and Brooklyn’s markets operate differently, too. The NYT takes a shot here. I’ll try to lay out a few reasons why we won’t see a fundamental shift in the way real estate transactions happen here, compared to everywhere else.

The Cooperative Apartment Building

First, and foremost, don’t forget that 70% of all New York’s housing is co-ops. These are little fiefdoms, country clubs, exclusive enclaves hiding in plain sight. Listing agents may love to make more commissions on direct sales, but they also love buyer agents who qualify prospective buyers and shepherd them through the co-op process.

I speak from deep experience. Buyers need representation to know any number of things about these buildings. Do they financially qualify for them? Do they have enough pre-closing assets for a hefty downpayment, and enough post-closing assets to pass muster? Is their situation appropriate for co-op living? If they want to use the property as an investment, probably not. The list of questions that a buyer must answer is long. And the potential for blind spots is vast.

I simply cannot envision a world in which buyers can navigate the cooperative building and board process without help. The potential for massive disappointment, false starts, frustration, rejection and more is enormous. That was true before the NAR settlement, and it’s true now.

There are exceptions to this rule. And I’ll discuss one now.

What About Cooperatives Keeping Prices Up

Speaking of which, I would also refer you to the lengths to which co-ops have gone to keep sale prices stable. I’ve been ranting about it since 2019 (take a look here). I think of it as fraud, but you can decide for yourself.

What happens if sale prices in these buildings suddenly drop by 2-3% because buyers are paying buyer-agent commissions themselves? Will the co-ops reject these deals, despite the obvious reasons for price drops? My gut says that they may either demand that sellers cover these costs instead. That would be a better outcome than to keep pretending that sale prices are higher than they actually are. But I wouldn’t put it past these boards to simply expand their fraud to make up for these lower prices, too.

Sophisticated People Operate As They Do

I realized long ago that not every buyer needs a real estate agent. Imagine, if you would, a wealthy couple. One person works, while the other doesn’t. The non-working person could become something of a real estate expert over a period of time. That’s not to say that the person will become a negotiation expert, or anything resembling a masterful real estate professional. But they can learn what they like and get a good sense of what value is in particular buildings. It’s not a perfect situation, but in the case of a price range that exceeds, say, three-to-five million dollars, I have seen buyers navigate the buying process on their own.

At price ranges below $1.5 million, diving into these waters is mostly a disaster for unrepresented buyers. Between $1.5mm and $3mm, too, I have seen buyers make huge mistakes and lose out on properties when they don’t have guidance. But there is an area of the atmosphere where buyers network amongst themselves, buy properties off-market from friends, and have the potential to strike a deal in which they don’t overpay by too much.

Of course, I can also point out the cautionary tales. Case in point: I was speaking with a prospective seller for a number of years about the value of their home. Ultimately, through their network, they found a couple who bypassed representation and purchased this property for $3mm and proceeded to do a $750,000 renovation. The seller who didn’t hire me managed to keep more of his proceeds and moved onto his country home out of the US. The buyers weren’t so lucky. They now own a property with a gorgeous view that might be worth the $3mm they paid.

So success is hardly guaranteed for even the most savvy buyers. But some people will take a shot—as they always have.

Wealthy People Pay For Service

Let’s not forget that wealthy New Yorkers they are accustomed to paying for service. Think private tutors, therapists, private chefs, drivers, and every other kind of vendor you can imagine. People see value in hiring experts. In the case of buyer representation, I believe that most wealthy people in New York City will still find value in real estate agents to guide them through the buying process, for the reasons above and below. They may pause and try to determine who is the right fit for their needs, and may even negotiate slightly. But in the end, that’s a good thing. Great real estate agents know their value, monetarily and otherwise. And wealthy people know the price tag for peace of mind, and for saving money, too. So in the absence of the status quo (as of March 2024), buyers will not stop hiring agents. Just like they don’t stop enrolling their kids when the cost of private school is $60,000 per year, or taking trips when the cost of flights or hotels goes through the roof.

Real Estate Developers Are Savvy, Too

I got to thinking about the part of the New York City real estate market that makes the most headlines—New Development properties. These are the highest-priced, tallest, best-view buildings scattered across Central Park South, 57th Street, Park Avenue, and Central Park West, not to mention the West Side Highway. They are fetching astonishing prices per square foot—and they need the cooperation of the brokerage community.

To do that, they might offer four percent to a buyer’s agent to incentivize their participation, or some number that is well above what resale apartment sellers might offer. Again, there is no standard commission percentage, but you will often see new developments making themselves stand out by offering more. In 2022 and 2023, One Highline, a Chelsea new development, offered to pay cooperating real estate firms’ agents 50% of their commission at the time of a buyer singing a contract to purchase a unit, and the other 50% at closing. When the closings might be a year away, that’s a pretty tantalizing offer.

The reason for all these carrots is because these deals are hard to put together, and these qualified buyers can go anywhere. Is there a scenario where these developers suddenly believe that they don’t have to pay buyer agents?

And further, if re-sellers stop paying buyer agents, there will be a obvious gap between this product and the new development market. Think about it: How will $10 million buyers respond when they know that there’s an added cost to the tune of $200,000-400,000 on top of their purchase price if they buy resale luxury product versus new? It will put pressure on resellers to strongly consider staying the course, and offering commission to buyer agents as well, rather than try to adjust their prices down to accommodate for this new paradigm.

Busy New Yorkers Tend to Stay in Their Lanes

The reason why New Yorkers hire people to do stuff for them is simple: They are better at what they are doing than that thing. They know they don’t need to become experts at everything. They make more money and have more freedom when they stick to their knitting.

Think of the attorney who bills by the hour. Never mind that she is hired in the same way that future real estate relationships are structured. Will she decide to become a real estate expert, and waste countless hours that she could be billing her client? Will the designer go nose-down, figuratively speaking, into the real estate book to learn that process? Or will these professionals keep working, and outsource their search to people they trust?

Again, this may not be the case almost anywhere else except major cities like Los Angeles, Chicago, New York, etc, or in the most expensive and exclusive zip codes in places like The Hamptons, Santa Barbara, Windermere FL, Jackson WY, or Aspen. But come on. The reason successful people are successful is that they stay in their zones of genius. I don’t see that changing anytime soon.

Could the business model change? Could a class of “family office real estate consultants” pop up? Yes. But they already exist. They’re known today as luxury real estate agents.

The Investor Class in New York City

Let’s not forget those buyers from around the country and the world who buy properties in New York City for diversification and investment. Based on my experience working with them and negotiating against them, I can tell you, with 100% confidence, that they will always need buyer agents to represent them. Sure, they make terrible enough buying decisions because they often hire bad buyer agents. But they will continue to need more guidance than nearly any other buyers out there. Ideally, some of the truly crappy agents out there will wash out with the receding tide of easier brokerage money, and investors will only benefit from seeing who remains—and will hire them.

Cocky New Yorkers are Their Own Worst Enemy

You know the type—the overconfident New Yorker. Everything they like is the best. They can’t wait to make recommendations for where you should go and what you should do. I mean, who is this guy who writes recommendation newsletters every month and emails them to 25,000 people, anyway? The nerve of that guy, Scott…

Well, this brash attitude works well, until it doesn’t. And often, this ignominious demise happens around real estate. I’m thinking of the all-cash buyer who believes his financial strength means that he can muscle a seller into submission. Unfortunately, this is a mistake.

Here’s how you know: In an environment of 2-3% interest rates, all-cash deals in Manhattan were still 40-50% of all transactions. Today, 60-70% of all deals are all-cash. So that cocky New Yorker who thinks his cash means big negotiability is simply in for a surprise. No one really cares, buddy.

This misconception can extend to every element of the negotiation. When a buyer has no representation, every move can be mismanaged. They anger the agent, the seller, and if they get to the board package process, even the board. I’ve seen many transactions fall apart when overconfident buyers have no one to guide them.

Will more people try to go on their own? Possibly. Will buyers continue to sabotage themselves without representation? Absolutely. Will stories of their failures circulate? Guaranteed.

Buyer-Paid Commission and the Mansion Tax

Disclaimer: I’m not giving tax advice. But it’s worth noting that for the purposes of the State of New York calculating the much-hated “mansion tax,” all buyer-paid fees are added on top of the purchase price.

When the negotiated sale price of a property hovers anywhere near the different tiers of this graduated tax (see the tiers here), buyers paying the buyer agent commission directly better be careful navigating this properly, or trigger paying the next tier up.

Take a $2,950,000 deal, for example. If the buyer paid, say $73,750, or 2.5% of the purchase price, to the buyer agent as commission, New York State would consider the all-in purchase price to be $3,023,750. Then, the mansion tax would go from $36,875 to $44,250, an increase of $7375. Not chump change.

Under $1 million, there is no mansion tax. So a buyer might be shocked when they trigger a 1% tax of approximately $10,000 by accident. Painful. As you can see in the chart, the cost of going from a $9.99 million sale to a sale over $10 million will cost a buyer over $100,000. Buyers: Tread carefully. I can just see the lawsuits now getting filed over careless mistakes.

And in a situation where properties are at the boundaries of these price tiers, what will happen? I can imagine that buyers will want to push sellers to pay buyer commissions to ensure no mistakes are made. Again, it just gets very messy.

The Hit to New York City’s (and New York State’s) Tax Revenues: Lower Transfer Taxes

Will there be a hit to the tax revenues of New York City? If so, how will the NYC Department of Finance react? A two-to-three percent reduction on sales prices as a result of the NAR or copycat lawsuits and its structural changes to the current business model may seem negligible, but it isn’t. I’ll explain.

First, there could be slightly higher mansion tax revenues, as discussed above, because any commission buyers pay directly will add to their purchase price. That small difference will be taxed at the 1-3.25% rate, based on the bracket in which the purchase falls.

However, the vast majority of real estate deals are below the $1mm threshold in New York. So the city will likely lose revenue on that front. That is, the buyer-paid commissions won’t add much revenue to the coffers. It will, in fact, take revenue away in the aggregate.

BUT, any buyer-paid commissions would be guaranteed to take away from transfer taxes that sellers pay.

Here’s the deal: Sellers pay transfer taxes on the sale of all property to New York City and New York State:

Whatever is removed from the sale prices will not be taxed. I believe the net effect will be lower taxes collected by New York City and New York State.

What will these taxing authorities do? Will they raise taxes overall to make up for the shortfall?

New York Is Rarified Air

I am not covering every element of the NAR settlement. But there’s bound to be a tendency to do what works, certainly in the case of people—powerful, successful people—who want to move forward in their lives. These are the same people who sell at massive losses so they can do whatever they want to do. Or who can put their equity to work in other arenas, and quickly make up for the losses. Or lose money on their real estate because it’s not an investment at all for them. They just love New York.

As much as I do.

I feel very fortunate to do real estate in this amazing city. With amazing clients. And with incredibly interesting people all around me. There will be changes swirling all around us. But my advice to you, whether you’re buying or selling, is this: interview agents until you feel you have found a good fit, in terms of personality, energy and expertise. And know that their value will be there, regardless the noise in the media. You get what you pay for. And in the immortal words of one William de Britaine: “he who will be his own Counsellour, shall be sure to have a Fool for his Client.” Buyer representation isn’t going anywhere soon. Certainly not in New York.