I’ve been selling residential real estate for 35 years, and for the first time I hosted a business talk last week in my Living Room with a guest banker and an attorney. I had a script and an agenda, but we were an intimate group, and the setting was informal, so as I touched on the stats that impact the market, I encouraged Q & A from the buyers and sellers who had gathered. To set the stage for discussing whether now is the time to buy or sell, I offered an overview of current inventory, identified 3 distinct market segments, highlighted the rise of the condo product, and considered absorption rates.
For one thing, we’re predominantly a city of renters. According to “NYC Housing and Vacancy Survey,” residential units total 853,865, of which 70% are rentals (596,423) and 30% are owned (257,442) which is in sharp contrast to the nation’s ownership rate of 63.5%. According to Noah Rosenblatt’s Urban Digs, as of today, there are 5,230 homes on the market in Manhattan compared to 2009 when nearly 9,000 units were listed for sale. The number of residential properties for sale has been declining steadily. Current stats show that 50% of our inventory is priced below $2M. Of the total available stock, 2/3’s are condos and 1/3 are co-ops. At the same time, 3,786 pending sales are under contract, and 61% of these are priced under $2M.
At least three reasons explain the inventory decline. 1) There’s less discretionary moving and spending. The homeowner’s appetite for leveraging has grown smaller since the recession, and buyers are more conservative and more risk averse. 2) Since inventory choices are fewer, the situation becomes self perpetuating. Homeowners who need to buy and sell at the same time are in the precarious position of risking their ownership status if they sell first and are unable to find suitable replacements, so many remain in place. 3) Homeowners are residing in their homes longer—especially those who have a low cost basis and face substantial capital gains. When I started in the business, I calculated that Manhattanites moved an average of every 7 years. Before the tax laws changed, sellers might reinvest their profits and roll them into other properties. Today couples may deduct gains of up to $500K and individuals can deduct $250K. Consequently many would-be sellers are staying put. As an already thin supply of 4/5 bedroom apartments shrinks, the purchasing options of 3 bedroom owners seeking to trade up grows smaller, so in turn these 3 bedroom homes don’t come to market narrowing the choices for those who wish to move up from their 2 bedroom homes.
Three distinct sectors operate in today’s highly segmented marketplace:
- The best oiled is the first time buyers market loosely defined as under $2M. Fueled by high priced rentals, low vacancy rates and low mortgage rates, this segment represents nearly half of the island’s transactions. There’s heightened competition among this group and frequent competitive bidding. Often it takes losing a property for the first time buyer to understand this sector’s fast pace and strength.
- The “middle” market priced over $2M and stretching upwards usually involves the sale of a first home whose funds are needed for purchase #2. These sellers who are also buyers are more vulnerable, and they are hesitating. Trading in this category is lethargic as there’s little urgency to buy, so it’s taking longer to sell. These sellers are anxious, and these buyers are skittish.
- Defined as the top 10% of the market, the upper end is overbuilt and overpriced. This sector had a particularly strong run up from 2011 to 2014 with lots of press about Billionaire’s Row and foreign buyers seeking a safe haven for their money. However as the pool of international buyers dwindled, this sector became saturated. Prices here have been reduced from unreasonable levels with room for negotiating and further concessions. A count of the number of contracts signed north of $10M in the last 90 days yields 185 pending deals, of which an astounding 90% are condos (168 transactions) and the remaining 17 are co-ops. With respect to geographic distribution, of the 185 signed contracts, an overwhelming 71% are downtown with nearly 40% of these in Tribecca (52 contracts) and only 18 contracts on the Upper East Side and 20 are on the Upper West Side.
Clearly the condominium product has been besting co-op purchases as the supply of ground up construction and prewar rental conversions has been growing exponentially. Since 2010 when only 704 permits were issued for new dwelling units, there have been 5 consecutive years of increasing permits issued. Last year, these peaked, more than doubling from 5,435 in 2014 to 12,612 in 2015. During 1Q2016, only 297 permits were issued. This year’s total is expected to drop by as much as 75% largely because of the expired 421A program which gave tax incentives to developers, but will rise again in 2017 with the development of Hudson Yards.
From 2011-2014, Manhattan’s residential market favored the seller. In all 3 market segments, prices escalated and the pace of activity accelerated. Today’s absorption rate, defined as the number of months it would take to sell all active listings, is increasing—which means we are moving to a more balanced market between buyers and sellers. Historically, an absorption rate of 6 months signals a balanced environment. In October 2013, the absorption rate for all Manhattan was 4.1 months; fast forward to May 2016, the rate climbed to 5.4 months. To cite one geographic area as an illustrative example, the absorption rate in October 2013 on the Upper West Side was 2.9 months and was 4.3 months last May. Buyers today are gaining the edge.
So is now the time to buy or sell? In my view, the answer depends on your personal situation and on your plans that will follow the transaction. We know that real estate is cyclical, but trying to time the market—to sell high and buy low—can be paralyzing, wastes precious time and causes you to miss opportunities. Rarely have I heard anyone say they regretted making a purchase. More commonly, I’ve heard many say they were sorry they didn’t take action.
Today’s transactions are driven by need, motivated by the life stages of birth, marriage, death and employment. For the immediate user, the current market offers significant opportunities. Co-ops are sorely undervalued, and the Upper East Side is probably the best value play. If you’re buying and also selling at the same time, it’s important to do both in the same market. First time buyers are cautioned to look beyond the necessary down payment funds and also have enough in reserve not only to cover emergencies but to satisfy a co-op board’s post closing liquidity requirements. Investors who have a five year perspective will realize appreciation but this is not the climate to flip an apartment for a quick profit. For sellers, less yields more with respect to pricing. Happy summer!