"I" is for Inventory: NYC Still Very Tight

Posted by urbandigs

Thu Aug 23rd, 2007 10:07 AM

A: Readers often confuse statements that I make on this blog and interpret something I say as a prediction of future price appreciation. Not so. I rarely delve into that area as its way too hard to predict what short or medium term price appreciation will be in any given neighborhood of Manhattan. What I do strive for is to report to you what I see in this fast changing marketplace so that you can get a front row seat to any changes before mass media reports on them. I'll also provide my opinions and tips so that you see my opinions on handling the changing marketplace in the best way possible. When I state that 'because Manhattan is 75% co-op, we are somewhat protected from the subprime mess' it does NOT mean I am predicting an overly optimistic picture for future price appreciation. It means that this market is driven by unique fundamentals that if understood, will explain why we have not seen a correction thus far. Which brings me to today's post on inventory.

Inventory in the New York City real estate market is still very tight. My clients, who range in price point from low $300's (yes I still work with all buyers) to low $2M's, are still having trouble finding products that meet their living needs. Its not to say that there is absolutely nothing, it's just that options are very limited and what is available usually has more than one item that discourages them from bidding.

These clients are not picky either. They know that compromise is inevitable and that they will have to buy a property that has at least 'something' to it that they dont like. The key is, what that 'something' is. It's my job to make sure that the 'something' is NOT a permanent feature that will eventually limit resale profit potential. These 'somethings' include location, light, views, or raw space. This is where the problem is. Finding a property priced right in the perfect location, with good natural sunlight, at least decent views, and enough raw space to meet the buyers' needs. That is where inventory is limited.

Which brings me to today's market report. While the macro economic environment is still very uncertain, it is less uncertain than it was just a few weeks ago. Today, we know that:

a) The Fed is ready to step in when needed; although if stocks continue to rally on the assumption of a rate cut, that rate cut will never happen

b) The banking system seems to be reacting favorably to fed liquidity injections and cut in discount window

c) Major banks, like Bank of America taking a $2B stake in Countrywide Financial, are ready and willing to jump into buying opportunities for struggling smaller lenders

...this is helping to restore investor confidence and therefore stock prices. What is beneath the surface AND the ultimate economic side effects of this credit squeeze are still yet to be known. So we are not out of the woods yet. So what does this mean to NYC real estate that we know is so directly tied to wall street and wall street related jobs and bonuses?

It means that as long as NO MAJOR STOCK SELLOFF OR ECONOMIC RECESSION OCCURS, our marketplace fundamentals will NOT be so quick to change. Manhattan market fundamentals in place right now include:

* Tight Inventory - opposite of what is going on in most other local suburban markets
* Strong Jobs - jobs are still plentiful. There is only talk of job losses as a result of an economic slowdown from this credit squeeze; it did not happen yet.
* High Salaries - NY'ers are still making plenty of $$$. Again, there is only talk of a restriction in salaries as a result of any future recession.
* Bonuses - Umm, we are still only 800 points from record highs on the DOW. Who knows where we will end the year but if things pass over better than most expect and stock markets hold up, bonuses will not get hit as much as everyone expects. There goes that doomsday scenario.
* Weak Dollar - foreign buyers still see value in NYC real estate based on currency trends
* Lifestyle - urban lifestyle is still in demand as trend to live closer to workplace grows stronger
* Rental Rates Soaring - any change in this trend will be lagging from economic slowdowns. Soaring rents make buying more attractive options for those that can afford it, and as I mentioned above there are still plenty of buyers out there.

I see this recent headline from the NY Times story on Sunday that states "...Since June 2006, the national inventory of houses has increased by 12%, but Manhattan's apartment inventory has decreased by 32%":

manhattan-real-estate-nyc-brooklyn-inventory.jpg

The Manhattan Real Estate Slump That Wasn't (NY Times) -

Even the condo glut that so many real estate executives feared has turned out instead to be a boon of sorts. "If we didn’t have new development coming on at the pace we did, we'd have a chronic shortage across all sectors, and we’d see 20 percent price growth," said Mr. Miller, the appraiser.

To the extent Manhattan's housing market is threatened by a weak national economy and by declining bonuses, said Mr. Miller of Miller Samuel, "then the fact that we have a lower level of supply coming on would help keep the market from correcting."
Tell me where I am wrong here right now? I discussed the potential threats to jobs, salaries, and bonuses as the red flags are being waved; but doomsday hasn't hit yet. So far the fed has handled this credit squeeze admirably and Bernanke's actions seem to be working. That's not to say it wont get worse, because it may, but it hasn't changed any of the fundamentals yet; at least I am not seeing any changes.

UrbanDigs Says - As long as inventory remains tight, I just don't see how prices can come down as aggressively as some people think. That is not to say I expect 10% appreciation per year for the next two years! I don't. Rather, I see a sideways market for the near term. Corrections are perfectly normal for longer term sustainable growth, I've said this a number of times, so for now its important to continue to monitor the macro economic environment to see how that ultimately effects jobs, salaries, bonuses, affordability, rental rates, and ultimately inventory here at home!

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