Inventory Rules Manhattan Pricing
A: If I had a $1 for every time a client, a journalist, a fellow broker, or just a reader of UrbanDigs asks me about Manhattan real estate prices, you wouldn't see my sorry a$$ writing on any blog! I'd be rich enough to retire off the coast of Spain somewhere. I don't have the answers that many are looking for but I do have some thoughts on what it may take to effect the two fundamentals that are sustaining Manhattan real estate prices: THE BUYERS & THE INVENTORY!
It all comes down to the buyers when evaluating the strength of a local real estate marketplace. Are there buyers out there? Do they have choices or not? Do they have buying power? Do they have confidence in the local housing market? Are they motivated to buy? These are extremely valuable questions that I wish I had real data on, but I don't; so I'm left to speculate. The answers to these questions in large part will determine the effect on local inventory and pricing. And that is where you can stop and analyze a local market for its strength or weakness.
When buyer demand is strong, choices are limited, buying power is prevalent, confidence is high, and motivation is rising then I'm willing to bet that inventory in that local marketplace is very tight. When buyer demand is weak, choices are plentiful, buying power is limited, confidence is waning, and there is a lack of motivation then I'm willing to bet that inventory in that local marketplace is very high! Is my point getting clearer?Out of all the variables out there to analyze a local housing market, look no further than the buyer characteristics of that marketplace to get a solid sense of what inventory trends probably are. The two are most likely related!
Right now in Manhattan, inventory has declined 32% in the past 12 months and is only showing some signs of increasing in the past few months; but nothing concrete enough to make any trends yet. The reason very well be because of the healthy buyer pool that caused this restriction of inventory in the first place! Take a look at this Jonathan Miller chart that should help explain to you the relationship of rising sales volume and declining inventory (a trend that Manhattan is all too familiar with as a result of strong demand for local housing):
Notice how sales volume (an indication of buyer demand) rises resulting in a decline of inventory? Not rocket science but helpful for this discussion. Look at that relationship since the 3Q of 2006! It doesn't get much clearer as the green line (sales volume) and the pink line (listing inventory) move in opposite directions! A dataset showing a very strong local market. I can tell you firsthand that the housing market out in Commack, Long Island is exactly the opposite as my mother has been trying to sell her home out there for the past 5 1/2 months; which is a marketplace with no buyer demand and tons of sales competition!
Moving on, as long as inventory remains tight in Manhattan prices will be sustained! Which brings us to what may effect this trend. There are two things or a combination of these two things that can change inventory trends: RISING INVENTORY HITTING THE MARKET & DECLINING SALES VOLUME. Rising inventory is obvious and could be the end result of a weakening economy, speculative activity, or a change in living trends. Declining sales volume is more complicated as you need to dissect why buyers are not as motivated to buy (job loss, negative wealth effect, bonus restriction, prices too high, better rental alternative, etc); that is what I am more interested in. That is, what may effect buyer demand, their motivations or their confidence in the hopes of arriving at why sales volume may decline. Here are my thoughts on the topic:
1. Rental Rates Decline - Right now, rental vacancy rates are below 1% in an environment that is similar to the sales market. There is just very little inventory. As a result, rental rates have been steadily increasing for 3-4 years now; what in hindsight seems in lock step with the stock market surge since mid 2003. Three years ago a nice size one bedroom rental in a doorman building would run you about $2100 - $2300 or so. Today, the same apartment is getting between $3,200 - $3,600 or so depending on the area (in this case I am talking about one bedrooms in F/S buildings in the UES). So, landlords and management companies have experienced a 50% or so increase in rental rates in 3 years or so. Sustainable or no?
As a result, buying becomes a more attractive option for those that can feasibly make that decision. But what if rental rates start declining? The last time I saw this trend was in late 90's and 2000; in correlation with the stock market boom. Rental rates soared. Then the market crashed and rentals started a quick descent down! If you see rental rates top out and start a cyclical return to the norm (that one bedroom example above is now asking mid-high $2000's again) then all of a sudden you will see more buyers consider the rental alternative.
In short: Declining rental rates will result in taking would be buyer's out of the sales market. A consequence of this will be lower sales volume and increasing inventory. Which leaves us to what will bring rental rates down? Two things immediately come to mind; lack of demand due to rapidly rising rates or stock market correction / local recession.
2. Negative Wealth Effect / Stock Market Correction - Tough to discuss when stock indices are near record highs and the fed just cut rates aggressively to forestall adverse effects to the economy. But this is a forward thinking blog and we are discussing what may effect inventory trends here. Should the stock market correct (whether it be a result of a slowing economy, job losses, global slowdown, inflation, or deeper credit impact) you will see buyer confidence, motivation, and demand start to wane. This is a marketplace related to wall street; whether you like it or not. As long as stocks continue their rally, confidence will remain high, wealth effect will remain in place, bonuses will be fine, and most likely jobs market will be tight. It's the effect that a declining stock market will have on buyer demand that is the threat. Expect sales inventory to rise if stock market reverses course and falls significantly; a direct result of declining buyer demand and ultimately sales volume.
3. Natural or Un-Natural Disaster - I am not a doomsday personality at all. But leaving this topic out for the sake of this discussion is blind thinking. Should Manhattan get hit by a severe natural disaster (which is not too likely) or experiences some type of attack (which I hate to admit is probably more likely) then buyer confidence, demand, and motivation will all be effected in the sales market. As much as I pray that neither occur, if one does it will be enough to reverse inventory trends that have been in place for the past few years.
I don't buy into the rising dollar, new development inventory set to hit the market, or a economic depression as serious threats to the Manhattan real estate marketplace. If the dollar rises, it will only slightly effect foreign demand, new dev inventory has been selling and many units are in contract, and I just don't see an economic depression with the fed taking such aggressive preventative measures. Tighter lending standards and higher rates proved to be only a slight inconvenience for Manhattan buyers who for the most part shrugged those off, and continuing high prices here scaring away buyers to outer markets has had a very muted effect on the overall buyer pool. The real threats to buyer confidence, motivation, and ultimately demand are the three listed above. How that may change in the future is another story.
For now, Manhattan inventory remains tight and with the fed aggressively cutting rates, confidence will probably within buyers minds may rise a bit. I did report on a change in buyer psychology about 3 1/2 weeks ago, as the credit mess hit the media resulting in some caution on the buy side. This was a great example of buyer confidence waning a bit and how that may result in lighter sales volume. But with the fed easing and stocks rallying, I have a feeling that waning confidence could be limited and short-lived. In general the theory will go, as long as buyer demand is strong, inventory will remain tight. In the end, its the inventory that rules Manhattan pricing; and its the buyers that control the level of inventory!
