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If you’ve been living under a rock over the last few months (or on a beach towel or in a margarita haze, as the case may be), you may not have heard that inventory in New York City is tight--size 00 tight--across both rentals and sales.
Below, a quick catch-up on what you missed this summer, plus the current state of affairs and what's in store if you're looking to buy, sell or rent this fall.
What you missed:
The summer was not easy for buyers.
Inventory was already sharply down in the spring, with the 2nd quarter 31.3% lower than the year before, making it "the lowest second quarter in the 12 years I’ve been tracking inventory in Manhattan,” says Jonathan Miller, president of appraisal firm Miller Samuel and co-author of Douglas Elliman real estate market reports.
The listings drought continued through the summer, producing a new normal of open houses crowded with dozens of people and over-ask bidding wars.
“Inventory traditionally rises in the spring in anticipation of the spring market and then falls a bit," says Miller, "but this year inventory moved sideways through May and then for the last two months has fallen. So for the month of July, compared to July 2012, co-ops and condos are down 29 percent. We never saw the uptick in supply that we should have seen by now."
A shortage of new and affordable developments coming to the market is partly to blame for the lack of inventory, says Andrew Barrocas, CEO of real estate brokerage MNS.
“We’re not seeing big buildings opening up. We're seeing more 50-100-unit condo buildings instead of the 400-500-unit condo buildings you saw in 2006,” Barrocas says.
Prices also rose this summer, but at a more modest pace in Manhattan than in Brooklyn and nationally, says Miller.
The last couple of months also brought an interest rate jump on the 30-year-mortgage, which now stands at 4.625 percent, up from 3.93 percent in mid-June and 3.6 percent last year around this time.
It didn't seem to put a damper on buying activity, says Robbie Gendels, a senior loan officer at National Cooperative Bank. "It feels like boards are being a bit more particular about prospective purchases, perhaps because rates are going up, although it's hard to speculate. But not everyone's getting approved."
Tight inventory will like continue throughout the fall. Buyers will also continue to face tough lending standards, and increasing interest rates too.
“It’s more of the same for buyers and sellers,” Miller says. “I don’t see a relief from low inventory in the near future.”
Miller also doesn't suspect that rising interest rates will bring relief from rising prices because there's such a lack of supply.
In theory, new development could ease the problem of low inventory. But not only are the new developments on the smaller side, they're also--problematically for mid-range buyers-- targeting the ultra-wealthy.
“In Manhattan, the luxury market--the top 10 percent of all prices during a period--over the last few years has been hovering around $3 million as an entry point--almost all of of the new development is above that threshhold,” says Miller. “At the moment it’s not cost effective for developers to construct something for the broader market. So that means there isn’t relief in store for vast majority of market.”
Even in the luxury market, though, condo inventory is not all that high.
“There’s not a ton on the market right now, but there’s a lot being developed for 2015 and 2016,” says Gary Malin, president of real estate brokerage Citi Habitats.
Another issue is that tight credit and rising interest rates are causing sellers to stay put.
“Before 2008, if you had a pulse you could get a mortgage, so there was insatiable demand. This time it’s just the opposite. Credit is historically tight and inventory is so low, which makes prices rise. In a bizarre twist of fate, tight credit is making houses prices rise,” says Miller.
National Cooperative Bank's Gendels emphasizes that an interest rate of 4.6 percent is still good: "I don't think people thought the 30-year-mortgage would get as low as it did. When I started in this business, it was in the 7s, that was 15 years ago, and it's been in the teens before. Everything goes through cycles," she says.
What you missed:
While sellers this summer were often rewarded with over-ask bids and packed open houses, the lack of inventory affected them too, since there weren't many options for apartments for them to trade up to either.
Particularly for those who bought during the peak of the last boom, their potential profits weren't high enough to warrant (or finance) a move.
“For many, it’s just money on paper, because you still have to qualify for a mortgage and that’s harder and harder to do,” says Miller.
That said, though, Miller admits that among buyers, sellers and renters “sellers clearly have had the most advantage in the market -- except that they have to buy or rent something else.”
Miller doesn’t expect huge changes in pricing or inventory to come from the interest rate increases.
“The thing is that rates were so excessively low for so long, that it’s not going to be a huge factor--an interest rate increase from 3.5 percent to 4 percent isn’t going to change things majorly,” he says. “What rising rates do is reign in some of the demand in a market that already has a lack of supply. That takes some of the froth out of the market.” (“Froth” refers to the presence of small, hyper local real estate bubbles).
“Those looking for something under $1.5 million are [most] affected by interest rate fluctuation,” Barrocas says. “But we probably won’t see a slowdown for higher-end properties--a .5 to 1 point increase in interest rates like we’re seeing doesn’t really affect them.”
On the bright side for buyers, Miller expects that tight credit will keep prices from skyrocketing in the near future.
“We were seeing year-to-year gains of more than 20 percent during the boom around 2004 and 2005," he says. "I’m skeptical that we’ll see that kind of phenomenon even with tight inventory because credit keeps some of that froth in check.”
Barrocas pointed to one subset of the market where prices are growing quickly -- Brooklyn condos.
“There’s a major shortage of inventory and not enough being planned to absorb the demand. There are very few developers coming in and building large-scale condo projects. There’s a lot of demand coming from local people and people from Manhattan who are getting priced out,” says Barrocas.
Owners of condos may need to decide if they want to cash out now or hold off for even higher demand -- which is always the name of the game.
What you missed:
As usual, this summer saw a busy rental market. According to data provided by rental search site Naked Apartments, the most popular neighborhoods for rental searches across New York City this summer were, in order, the West Village, Gramercy and Chelsea. The most popular sized apartments were one-bedrooms, followed by two-bedrooms and then studios.
Interestingly, according to a July report from Douglas Elliman, the number of new rentals in Manhattan dropped 7.7 percent this year as compared to July 2012, implying that people may have chosen to renew their leases rather than look for new rentals because prices are high and concessions are low.
“In rentals, you have logjam of people who would have transitioned to sales and either don’t qualify because credit standards are tight or can’t find anything because inventory is so low and are staying as renters,” says Miller.
The decision to stay put--thereby depleting inventory--may have helped push rents higher--an increase of 1.7 percent from the July 2012 average to the July 2013 average.
In addition to low inventory, "rents are rising as the economy’s improving. When employment rises, it puts more pressure on the rental market,” Miller adds.
Another thing we’ve seen over the last few months is the continued popularity of the uber-luxury new development.
“In order to make it feasible for a developer to do a rental, it has to meet certain criteria -- usually a price per foot. Developers are reaching for numbers that are agressive and they’re obtaining them," say Barrocas.
Typically, the rental market cools off a bit around October, but the hot season may last longer than usual, experts say.
“It used to be the case that if someone was starting a new job in the fall, they’d rent an apartment a couple of months in advance and get settled in, but prices are so high now that people are staying home longer and crashing on friends’ couches more,” says Malin. “People now start their leases right when they start their jobs, so the rental season may have more teeth to it in upcoming months.”
Malin expects prices to remain stable, with a slight, seasonal drop coming close to Thanksgiving.
“We won’t see a drastic drop in prices,” he says, “but we’ll probably see a few more incentives. Landlords know that if they don’t rent their places by Thanksgiving they may not be able to get them rented until after the new year, so they offer incentives--like one month free rent--to get people in.”
“There are always seasonal ups and downs,” adds Miller, “but prices will remain high as long as credit is tight" and renters can't become buyers instead. And Miller adds that he doesn't see credit easing for several years. "Banks are afraid of their own shadows,” he says.
Adding to the supply-demand imbalance in Manhattan, says Barrocas, is that there won't be many new rental properties hitting the market in the coming months.
“I think you’re going to see a lot fewer new rentals because it’s too hard to compete with a rental when condo prices are over $2,000 a foot--the condo market dictates the rental market," says Barrocas.
In Manhattan at least, Barrocas says, “We’re above where we were pre-Lehman for both rentals and sales. The best indicator is job growth and that’s happening. There’s no ceiling for where the prices can go, for rentals and condos even.”
The bright spot for renters may be Brooklyn--at least in terms of inventory, if not price.
“There’s a lot of rental inventory coming to Brooklyn," says Barrocas. "You’re still going to see increases in the rental rates but I don’t think it’ll be the double digit growth we saw over the last two years. That said, it'll still be on the high side as Brooklyn remains the coolest city, according to GQ," he says.