Research Note: Avoiding Two Common Real Estate Mistakes

Negative news and stats have begun to invade the airwaves. “Mortgage Rates Are Accelerating Faster Than at Any Point in History” headlines read. “NYC Price Growth May be Peaking” suggest others. Such headlines often protect consumers from financial loss, but they can also deter prudence by crystallizing fear.

I believe the headlines and industry narratives could potentially shepherd consumers down the path of the following mistakes. Hopefully, the awareness presented herein may lift the fog of fear and restore objective decision making.

MISTAKE #1 — CHASING THE PAST

It happens too often in the equities market. An investor sees the rocketship rise of an Amazon or a Bitcoin, the pain of missing out on gains kicks in and that investor purchases without realizing that their performance exists not in the past but in the future. Rarely does the equity repeat its prior growth and, worse still, the investor often purchases high and loses money on the trade as the stock price cools off.

I see today’s mortgage rate environment much the same way. Many buyers are trying to chase the past by hoping and waiting that rates return to their 2020–2021 all-time lows. Rates may never dip that low again and waiting while they race higher doesn’t seem wise either. As we suggested previously, one can always refinance if and when rates pull back. If that reasoning is not enough to silence the “ghost of mortgage rate past’’ haunting one’s consciousness, we should calculate the increase in monthly principal and interest payments that our not acting sooner has generated and subsequently ask ourselves, “Where can I generate that amount elsewhere?” According to UrbanDigs, Manhattan’s median sale price in April was $1,253,750 and, assuming 20% down payment, a past rate of 3.00% and a current rate of 5.00%, that monthly payment increase is $1,156. And how to generate that equity elsewhere? A well vetted NYC apartment is a great place to start, which also leads me to MISTAKE #2.

MISTAKE #2 — AN APARTMENT OF INTEREST AND THE AGGREGATE OF ALL NYC APARTMENTS ARE ONE IN THE SAME

Let’s lean on the equities market for the purpose of another comparison. For the past month, the S&P 500 has been losing market cap and, as of Friday, April 29, closed down -13.86% for the year. Does this aggregate index performance describe the recent trend and YTD performance of each of the 500 companies within the index?

Of course not.

Avoiding the obvious pitfall of using an energy company during a time of war to make my point, I’ll use The Hershey Company (HSY) instead, which has trended upward throughout 2022 and closed up +16.85% YTD.

So, HSY is a company within the S&P 500, yet not only does the aggregate index not adequately describe its performance, it is literally the inverse.

So, indications that NYC apartment price growth is slowing down and may soon reverse course altogether is in no way whatsoever a predictor for an apartment of interest. Maybe that apartment does mirror the NYC aggregate. Maybe the apartment’s performance is worse. Or, maybe, it performs far better.

Careful vetting and the prioritization of fundamentals and product quality can lead to capital appreciation, even when the market is moving in the other direction.

— Jason Thomas