Real estate investment and housing make up a very important and critical component of the U.S. economy. Housing averages roughly 15% to 18% of the Gross Domestic Product (GDP) annually. The National Association of Home Builders (NAHB) explains that the contribution of real estate and related services to GDP occurs in two ways: (1) “Residential investment (averaging roughly 3-5% of GDP), which includes construction of new single-family and multifamily structures, residential remodeling, production of manufactured homes, and brokers’ fees” and (2) “Consumption spending on housing services (averaging roughly 12%-13% of GDP), which includes gross rents and utilities paid by renters, as well as owners’ imputed rents and utility payments.” [See https://bit.ly/3ZjOrqa].
Real estate, in one way or another, affects almost every aspect of an individual’s daily life. In 2023, it will be important to track developments in the real estate industry as they relate to increased Federal Reserve interest and mortgage rates, inflation, availability of housing supplies, and legislative initiatives.
The Negative Impacts of Inflation And Higher Interest Rates
As of November, 2022, the inflation rate came in at 7.1% and while the short-term trend seems to be falling, the Federal Reserve is still raising the overnight borrowing rates to combat decades-high inflation. On Dec. 14, 2022, the Federal Reserve Board raised rates by a half point, increasing the targeted range to 4.25% to 4.50%, which is the highest level in 15 years. As one would imagine, the real estate market significantly slowed in the second half of 2022.
In January, 2022, the average 30-year fixed mortgage rate was 3.22%. On November 10, 2022, the average 30-year fixed mortgage rate hit an intra-year high of 7.08%. For example, payments on a $500,000 30-year fixed mortgage went from $2,167.81 to $3,353.42 per month. Annual interest paid increased from $26,013.72 to $40,241.04. During the week of Jan. 5, 2023, the average interest rate for a 30-year fixed mortgage was approximately 6.48%. While, historically, interest rates in the 6.00% range are still relatively low, psychologically, younger prospective purchasers of real estate have not seen rates at this level in their lifetimes. As a result, they have decided to wait, hoping interest rates will fall back to pre-2022 levels. Unfortunately, this will likely not occur in 2023. However, if rates do stabilize, the real estate market may see a modest increase in sales, with prices stabilizing or falling a bit.
The cost of rents and utilities have also increased dramatically over the past few years. One main reason for the rise in rent is that the supply of rental housing and residential real estate available for purchase are at historical lows. According to the National Association of Realtors, “Home prices continue to rise to record highs, eroding affordability. Since 2019, home prices rose nearly 30%. As a result, a typical home is about $80,000 more expensive than pre-pandemic. Meanwhile, inventory of homes for sale dropped significantly in the last couple of years, reaching record lows in 2021. In fact, there was a housing shortage even before the pandemic hit in 2020.” [See https://bit.ly/3GxJvpo].
Many purchasers have elected to rent rather than purchase for the time being, also driving up rental rates. According to a recent Harris Poll, as reported by Inman [see https://bit.ly/3QsseT6], 71% of Americans are hesitant to move forward with the purchase of a home due to the “uncertainty about economic conditions including inflation and the prospects of a recession.” Additionally, Inman points out that 61% of individuals “felt priced out of the market.”
Historically, owning real estate rather than renting was the preferred goal, so that an individual could build wealth and equity. In recent years, the focus has shifted to renting, in part due to the increased cost of real estate and, in part due to the limited purchase supply. However, renters should be aware that they are not afforded the ability to deduct annual expenses (i.e., interest, real estate taxes, etc.). In 2023, there should be a shift in focus back to home ownership.
The State of ‘Good Cause Eviction’ in New York
Over the past few years, several municipalities, including Albany, Poughkeepsie, Beacon and Hudson, to name a few, have passed local legislation requiring landlords to establish “good cause” before being able to evict a tenant. In July, 2022, a Supreme Court decision in Albany County invalidated Local Law F [see https://bit.ly/3Rt4yOa] in Pusatere v. City of Albany. The decision was the subject of an article in this column [see https://bit.ly/3ItromZ]. The decision of the Supreme Court was ultimately appealed by the City of Albany and the New York State Association of Realtors (NYSAR) filed an Amicus Curiae brief in support of the plaintiffs in Pusatere.
While we await the decision of the Appellate Division in the appeal, ultimately it will provide some clarity as to the ultimate fate of “good cause” eviction legislation. The Appellate Division’s decision will affect whether other local laws will be invalidated and may have an impact as to whether the State Legislature will attempt to enact “good cause” legislation at the state level [see https://bit.ly/3XeFj4l]. It will be important for the real estate industry to keep a close eye on the outcome of this appeal in 2023.
Pending Legislative Initiatives
NYSAR has also prepared a detailed report on a variety of legislation that has been introduced over the past few years which need to be carefully followed by those in the real estate industry. [See https://bit.ly/3Iy4M4A]. While some of the legislation is clearly positive and welcome, some will have a negative impact on the real estate market in New York.
Co-op Transparency Legislation
One important piece of legislation that has been introduced at the state level, but has not yet passed is Senate Bill S2846 [See https://bit.ly/3iqT2X9] which would ensure fairness and transparency in the cooperative housing purchase process. This legislation would establish a finite timeline for a cooperative corporation board to respond to applicants and would also require a reason for any denial of an application in order to help combat illegal discrimination.
Environmental Legislation: The All-Electric Building Act & The Climate and Community Investment Act
The All-Electric Building Act would prohibit the use of gas or oil in all new residential, commercial, and mixed-use construction statewide by Dec. 31, 2023. Senate Bill S6843C [see https://bit.ly/3X2tSxe] provides “that the state energy conservation construction code shall prohibit infrastructure, building systems, or equipment used for the combustion of fossil fuels in new construction statewide no later than Dec. 31, 2023, if the building is less than seven stories and July 1, 2027, if the building is seven stories or more.” The costs to implement these changes will be considerable and will certainly affect the ability of real estate owners to comply with the requirements of this legislation.
The Climate and Community Investment Act [See https://bit.ly/3GOpiN3] makes a priority “the allocation of public investments in disadvantaged communities; addresses climate change challenges through the expansion and growth of clean and renewable energy sources; adopts best value requirements for the solicitation, evaluation and award of renewable energy projects; establishes a community just transition program; establishes a climate pollution fee and a household and small business energy rebate; creates the climate and community investment authority.” The legislation would impose new carbon emissions taxes and additional fees on homeowners and consumers.
While many believe that reduction of greenhouse gases and pollution is a laudable goal, passing such legislation and implementing onerous requirements without addressing the possibility of feasible alternatives, introducing longer and more reasonable transition goals, substantial costs relating to same, and most importantly, whether or not the state’s electrical grid would be able to support the transition to renewable forms of energy without the necessary upgrades, is not acceptable.
Legislation Imposing Additional Real Estate Transfer Taxes
There are also various bills that seek to increase transfer taxes in connection with the sale of real property, such as Senate Bill S4199 [See https://bit.ly/3vOGxaW] (which would impose a Pied-a-Terre Tax), Senate Bill S5376 [see https://bit.ly/3Gl1hfg] (which would impose an additional real estate transfer tax on properties in New York City that are sold within two years of their prior purchase and a tax on the transfer of certain properties in NYC sold for $1 million or more), and Senate Bill S1461 [see https://bit.ly/3GMNcJ4] (which would authorize cities or towns to impose additional real estate transfer taxes on sellers and would authorize municipalities to create community preservation funds to preserve open space).
Consumers and real estate professionals alike should be aware of these aforementioned legislative initiatives, as well as others, and should make a concerted effort to contact your local representatives to make their voices heard.
While 2022 may have brought its fair share of challenges, it is exciting to know that 2023 will be an exciting new year that will bring its fair share of opportunities. Keeping up with all market and legislative developments will provide everyone with key opportunities to advance economically, socially and personally.