NYC Housing Defies Odds

A: Housing on a national level is showing some serious weakness as the fourth quarter report from the NAR shows the largest price drop on record as markets with price declines now outpace those with gains. Also, Housing Starts tumble 14.3% in January, well below anaylsts expectations. Yet, Manhattan real estate seems to be very healthy right now. What gives?



I've said this numerous times and even wrote about it in a number of posts:

NYC Real Estate LAGS in a slowdown and LEADS in recovery's of housing cycles

I wrote about this in my post titled, "Why NYC Will Lag in a Slowdown", back in February of 2006. Anyway onto the numbers which are more representative of the national market than the New York City market!

Home Prices Slump

According to CNN Money article:

The slump in home prices was both deeper and more widespread than ever in the fourth quarter, according to a trade group report Thursday.

Prices slumped 2.7 percent in the fourth quarter compared to the fourth quarter a year earlier, according to the report from the National Association of Realtors (NAR). That's the biggest year-over-year drop on record and follows a 1.0 percent year-over-year decline in the third quarter. Vacation markets, where investor-buyers had driven up prices during the building boom of 2005, were particularly hard-hit.

No surprise here. Markets ripe with speculative investors and second homes are always the first and hardest to get hit after a long bull run.

Housing Starts Tumble 14.3%

This was a nasty number released about 15 minutes ago. According to another CNN Money article:

Housing starts plunged in January as the latest government reading on the battered housing market came in much weaker than forecasts.

New homes started in January fell 14.3 percent to an annual rate of 1.41 million from the 1.64 million pace in December, the Census Bureau reported Friday. Economists surveyed by Briefing.com had forecast a 1.6 million rate for January. Applications for new home permits, which is generally viewed as a measure of builders' confidence in the market, fell 2.8 percent to an annual 1.57 million rate from 1.61 million a month earlier, which was a bit below economists' forecast of a 1.59 million pace.

This is a number that is more true for the national market than it is for the Manhattan real estate market and should be treated as such. Nevertheless, this was a very weak number and could pose psychological problems to NYC's market if buyers get scared about what is going on nationally. However, I believe the effect if anything will be minimal on a psychological level.

So why is Manhattan real estate doing so well right now? Here are a few ideas:

1. Economy - The economy is very strong, especially the labor market, giving alot of people high paying jobs. Where there are good jobs and salary's, there are prospective buyers. Right now, the buyer pool in New York City is very healthy. With a strong buyer pool, sellers are experiencing a very good market right now and getting very close to their 'hopeful' purchase price.

2. Inventory - As the buyer pool remains very healthy and more apartments go into contract, inventory levels and the number of well priced products to choose from is shrinking. Quite simply, if its priced right it will sell within 4 weeks. I am noticing a shortage in good products to recommend to my clients and even when I do find one a bid of only 4% below ask is not getting the response that we hope for.

Expect Manhattan inventory levels to remain tight on the buy-side tipping the scale more towards a sellers market; that is, a market that is favorable to sellers due to tight inventory levels and a very strong buyer pool.

3. Lack of Speculators - We know that NYC is 75% co-op and as such is not as speculator friendly as many other national markets, such as Miami. A market like Miami is very speculator friendly and actually allows a buyer to buy pre-construction and sell before they even close on the property! Not so here in NYC. Most people wind up buying a co-op and have to go through an extensive board review process to make sure you are financially able to own the property. In addition, policies on subletting, parents buying with children, and property use as a 2nd home restrict many from even considering buying.

In the end, it all adds up to a lower level of speculative activity and as a result adds to the overall strength of the market in the face of a more widespread housing slowdown.

4. Demand - There is just a surge in demand to live in this incredible city! It's almost as if there is a new trend on two separate levels. First, I am noticing a trend with my buyers who want to live closer to where they work. Second, I am finding that more and more clients are either retired or semi-retired and are looking to move back into NYC; as they first lived here when they were younger and have been waiting to move back after their kids are out of college and settled. I would be very interested to know anyone that has data on this trend? All in all, there is no shortage of demand to live in New York City right now.

5. Rental Costs - With vacancy rates for rentals still hovering below 1%, landlords were able to maintain higher asking prices for their units. With the increased costs of renting and the shortage of inventory to choose from, potential renters are considering buying if its a viable option given their financial situation. As rental rates flatten out, it will be interesting to note any changes in trends. However, I wouldn't expect anything significant in the near future. Higher rental prices make the buy vs rent decision a tougher one for those financially able to purchase and who have a timeline to own of greater than 4 years.

UrbanDigs Says: I would expect the frenzy to last a few more months and then start to die down as we get into the summer months. This is the seasonal effect. I would also expect the national market slowdown to hit NYC at a lag, perhaps in a year or so, and especially if the housing slowdown leads to policy changes in lending; which is starting to happen. I still would like to go on record for saying that the biggest threat to NYC housing looking forward is tighter lending standards and job weakness towards the end of the year. For now, enjoy the ride and I'm curious to see how it all plays out!