A co-op or condo apartment in Manhattan is the gold standard of real estate, in many eyes, guaranteed to kangaroo ever upwards in value. The past decade has been particularly golden, right? Wrong, according to a new report from Douglas Elliman Real Estate, which shows that the median price of a home rose from $955,000 in 2008 to $1.14 million last year, Crain’s reports. That’s an annual return of just 1.8 percent before closing costs, taxes, maintenance and mortgage interest. Put another way, values have acted more like a tortoise than a kangaroo. You would have been better off investing in Certificates of Deposit.
This counter-intuitive bit of news is the result of several factors. Let us count the culprits. First, there is the mortgage. Most Manhattanites finance their home. In 2008 the going interest rate was 5 percent on a 30-year mortgage with a 20 percent down payment, though owners likely would have refinanced at some point, making a 4 percent a safer bet. But this leveraging delivers greater returns than an all-cash purchase only if the home value grows at a faster rate than the mortgage interest rate being paid. That has not been the case for most Manhattan borrowers.
Then there are property taxes. Martha Stark, a former city finance commissioner, crunched the numbers and arrived at the most conservative estimate: $56,000 in total property taxes paid by the median homeowner over the past decade. As for closing costs, listings website StreetEasy estimates them at up to 5 percent on the buying side and up to 8 percent on the selling side. For the median Manhattan home bought in 2008 and sold last year, that would add up to roughly $139,000.
And last but not least, there are the vagaries of the real estate market. The fact that home values did not significantly rise is largely attributable to the market peaking in late 2007, taking a nosedive, and slowly ratcheting back up since then. “People tend to forget that prices dropped in 2009,” says Grant Long, senior economist for StreetEasy. “And while the rate of recovery has been impressive, it hasn’t been outstanding.”
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