Manhattan Inventory Holding Steady

Noah, great post! How do you see the sluggishness in real estate sales translate to the rental market (if you handle rentals or are privy to that data)? Nationwide, demand for rentals has been propped up by the: 1) fear of buying due declining home values (wait and see approach), 2)rising difficulty in obtaining a conforming loan, 3) foreclosures forcing people to rent. Do you see people renting more or less or the same in Manhattan? Or do you have evidence of renters moving away to the boroughs and NJ, due to economic uncertainty / turmoil on Wall Street?

Thanks!

Hey Maria - THX! Hmm, its a great question and Im sure it does have a bit of an effect on demand for rentals, HOWEVER, I find that when things slow, they slow across the board.

I do NOT do rentals so I really dont know whats going on real time, right now. I would think it has softened and that in most cases, managements and landlords are offering incentives, such as OP's for low fee marketing of rentals to prospective tenants, before they lower their rental prices.

However, a reduction in rental price will have most impact. I certainly dont see rents surging.

Noah, great info. As far as "anyone expecting levels to surge will be disappointed" is concerned. Have we ever seen inventory surge during late Q3 - Q4?

Billy - only in 2006 do I recall the 2nd half of the year picking up from a slower 2nd Quarter....usually it is slow during these quarters.

Noah,

Where do you see "proper pricing" in relation to prior years? i.e. at 2007 + 5%, at 2007 prices, at 2006 etc.?

People need to realize that there are and will be very few "forced sellers" in the NYC market. Lending standards have always been stringent in the city, and most owners should have a fair amount of liquidity and therefore not need to sell their house to put food on the table. Co-ops, which represent 70% of the market, are designed to ensure that the market doesn't tank if Wall St. has a bad year or two. Once everyone realizes that the world isn't coming to an end, more buyers (those who've been storing up cash for the past five years waiting for the market to crash) will come out of the woodwork and some supply-demand tension will be restored. Also, the real estate speculators who had been soaking up supply are not gone (and I would imagine have been gone for at least 12+ months) and inventory levels are still not that bad. Considering that we're in the 3rd inning of this cycle, the situation could be much worse. BTW, how many of you bears have been renting for the past three to five years and missing out on the tax deduction of interest?

J - good points but I would like to take the other side of a few statements.

J: Lending standards have always been stringent in the city, and most owners should have a fair amount of liquidity and therefore not need to sell their house to put food on the table. Co-ops, which represent 70% of the market, are designed to ensure that the market doesn't tank if Wall St. has a bad year or two.

N: Yes, but lets not forget house prices are UP about 100% in 5 years and I doubt incomes have risen at the same pace. So, there could very well be buyers in the past few years that bit off more than they can chew, and still passed the board. But yes, the percentage should be lower due to fact that we are not a speculator friendly market like Miami that is 80% condo and overbuilt. Also, there were tons of very pricey condos sold in past few years that could become problems for buyers that underestimated their job security or the appreciation rate.

J: Once everyone realizes that the world isn't coming to an end, more buyers (those who've been storing up cash for the past five years waiting for the market to crash) will come out of the woodwork and some supply-demand tension will be restored

N: Logical, but dont underestimate the power of the media should price reports come out showing drop in prices and all of a sudden buyers BACK AWAY as change of psychology takes hold and people may not want to buy an asset that is depreciating

J: Also, the real estate speculators who had been soaking up supply are not gone (and I would imagine have been gone for at least 12+ months) and inventory levels are still not that bad

N: true, but speculators are not as many as they were in past years! Many speculators are becoming sellers of properties they speculated on. Also, the foreign demand argument to me is BS as these guys bought up plenty of inventory keeping our inventory at these low levels now, well, what if these guys need to flip/sell or did not close yet?

J: BTW, how many of you bears have been renting for the past three to five years and missing out on the tax deduction of interest?

N: Love it. Ive been a bear since mid 2007 on our market. Sold my place in JULY 2006 after a 90% appreciation since April 2002. I dont feel so bad about renting and having that money elsewhere right now.

ALL IN ALL, great comment!

Pez - well if we talk hypothetical here, and generalize BIG TIME, I guess I can say soemthing like this:

2006 - +7%
2007 - +7%
2008 - FLAT!

If you keep your asking price AT last years comparable sales, and do not price in a 15-20% appreciation on top of recently solds, you should be priced properly. Counting in property features, sunlight, views, and renovations of course which makes pricing more of an art.

very hard question to answer, but most sellers take last comp, and immediately add on 10-15% because their property is better.

Correction to my last post. Second to last line should read:

Also, the real estate speculators who had been soaking up supply ARE gone (and I would imagine have been gone for at least 12+ months) and inventory levels are still not that bad. Considering that we're in the 3rd inning of this cycle, the situation could be much worse.

I had written that speculators are NOT gone.

Inventory will begin creeping up after Labor Day and crest above 8250. Fall season will be bad, and when the lack of bonuses are announced, q1 09 will be awful. Prices will come down another 10-15% from where they are today. As quality of life begins to erode due to budget cuts and new and incompotent leadership in the mayor's office, there will be a rush to sell which will push inventory above 9,000 beginning at the end of 09.
Foreigners will try to dump their units as they real from financial meltdowns and inflation in Europe. Wall Street will take years to come back, and during that time, Manhattan will be less desirable to live.
Noah, where do you see demand coming from, and at what price?

Also, interesting news on Bloomberg today. US housing starts, which were expected to decline in June, actually rose 9% BECAUSE OF AN UPCOMING CHANGE IN NYC'S HOUSING CODE. Keep on building!! 2010 should be VERY interesting.

mh23 - you know where I stand, and its close to your thinking. I also expect inventory to creep up again towards end of 2008, and 2009 as job losses and weak bonus season take hold.

The budget cuts and quality of life is a concern that we discuss here on the site. Jeff mostly discusses it.

As for demand, I dont see any new categories of buyers coming from think air to save the day, so to speak. It really depends on how our jobs market holds up, how lending market holds up, how sentiment holds up, and how deep this recession really goes. If stocks surprisingly rally, it wont feel as bad as it did a few days ago, when everyone was scared shitless. I dont think we are out of the woods, and this credit crisis clearly is coming in painful waves.

J - re: your argument that sellers don't need to sell. You need to consider that "biyers don't need to buy". Seems that you need to address that point if you're going to make your argument.

The question is then "who really NEEDS to do what?". I would argue that buyers have much less pressure to act, particularly in a soft market where renting saves you money. Why catch a falling knife when you can watch the carnage and pay 60% the carrying costs? In fact, I would argue that net net, with liquidity at a premium, there would be many more sellers who need to act than buyers.

Your other point about speculators being gone is also very bearish, despite your intentions. They're gone on the demand side, but not the supply side. They're still there - as OWNERS! If they're looking to sell, that's increased supply. If they're holding on and renting out their apts, that softens the rental market further.

Hi Noah,

I was just wondering that, based on everything that is happening in the economy, which seems to be worsening by the day, is now a good time to buy in Manhattan, or should one rent instead? Also, do you expect prices to decline or remain flat?

Donald,

Noah and I see continued softness in the Manhattan market over the next year, thereafter I think we may diverge in our opinions. I am not a believer that this banking crisis will turn into a full blown economic crisis. But it will hit Wall Street and NYC employment hard. I also believe that quality of life in NYC has peaked for the next few years - which I have written about in several pieces about crowded schools, budget issues and the loss of Mayor Mike. However, supply and demand are going to be in a downhill race the next couple of years and I actually see supply falling more quickly than demand and being more important. Unlike the NYC office market....the NYC residential market is supply driven. Once the pipeline of current development....which had to get in the ground before June to get remaining 421a benefits.....is exhausted in Mid 2010, there will be a huge new supply crunch which will be a big positive factor supporting prices. I would be staring to look around at neighborhoods now for bargains to be had in the Winter time, particularly in the boroughs.

Thanks Jeff. You do make many good points. As far as overcorwding in schools, I always imagined people whose top priority is education moving to the suburbs where class sizes are generally smaller and graduation rates/test scores are higher. I also find it interesting that you think supply will be going down, since I always thought the exact oppiste would happen due to the credit crunch.

I am not sure if you read it, but there was a great article in the NY Times a few days ago titled "Rich, but Rejected" about the possibility of buyers who work on Wall St. losing much of their buying power overnight.

Manhattan will always trend above most markets. To see the inventory holding steady is not surprising.

Manhattan will always trend above most markets. To see the inventory holding steady is not surprising.

Manhattan will always trend above most markets. To see the inventory holding steady is not surprising.

Manhattan will always trend above most markets. To see the inventory holding steady is not surprising.

That was bursting with such extraordinary insight, it was worth reading four times.

Sarcasm, anger's ugly cousin.
Jeff, where I disagree with you is in the rate of absorption of the new units being developed. I think there is plenty of demand for apartment $1.5 million and lower (although that may decrease as it takes longer for banking and legal youngsters to save enough to buy their starter apartments, thereby choking the buying chain), but I think the "luxury" mid to high-end (not 15 CPWish) market is just about saturated.

Three years ago many developments didn't even need to advertise, and were sold out soon after opening pre-construction sales. Today many buildings have resales occurring before the developer has sold out. I can't imagine how long it's going to take going forward. Because of the land bubble (and concurrent rise in labor and materials costs), much of the ongoing development needs about $1300 per sf just to make a profit, $1500 for a decent return. I think the days of the "1300 sf" (looking much like the 1150 sf of old) apartment for $1.6+mil is not long for this world. Of course, I could be wrong. We're just one bubble away from temporary asset appreciation.

I think the 1.5 number is a bit rosy. In 2003 I bought an 180o square foot two bedroom in what, at the time, was a great new development downtown for 1.5. 11 foot ceilings, poggenpol interior, etc. People told me I was paying too much, but I knew the area was only getting better, I was paying a fortune in rent, and I was able to secure a 5 year interest only for 5%, which meant that my monthly living expense, after tax deductions was about what I was paying in rent for a superior living space.
I recently sold that unit for an 80% profit after an 8% reduction in price. If I was in the same situation today, and my finances were the same, I would not be able to get a decent two bedroom for that price, I would have to put more down in equity, pay a higher mortgage rate, higher common charges, etc, which in a sense would mean a substantial premium above what I would have to pay in rent for a similar unit. In other words, it would be unaffordable, or undesirable at the current price with current lending conditions.
I just don't see where demand is going to come from for these units in the 1.5 range. Also, when rents are coming down, why would someone spend 1.5 on what will either be a great one bedroom or a crappy two bedroom, when what they probably want is a great two bedroom. In the old days, when people expected, and received, twenty percent year over year appreciation, it made sense to buy something with the goal to sell in a year or two. Those days are gone, so anyone buying a one bedroom has to expect to hold for several years.
I just think prices have to fall around 20-30%, and the local economy, i.e. Wall Street, needs to heat up, and the credit markets need to loosen up, before we see a return to a seller's market. That, in my view, is years away.