Buying New York

A Tight Inventory Market

Now that we are into the spring residential sales market, two words describe it “Low Inventory.” This is a low inventory market that we have not seen since the middle of the last decade. The past few months have shown more contracts being signed than the historical average.  Demand remains incredibly robust and above historical averages although it’s a rising interest rate environment. New supply is coming onto the market but it’s being absorbed quickly.

A sign of a tighter market is negotiability down. Those listings, which have been on the market for less than 60 days, have minimal negotiability.

Deals are taking a while to get to the closing table. Attorneys are busy trying to get contracts signed in tight timelines and managing agents are extremely busy and short staffed.

Tight Real Estate Market Emerging

The Manhattan residential market had quite the comeback in 2021 after reaching pandemic lows in the summer/early fall of 2020. Declining inventory and high demand drove the 2021 market. According to UrbanDigs, supply in the Manhattan market ended up down around 30% year over year, while pending deals, those in contract, ended up 150% over the same time period. The amount of contracts signed in 2021 reached a 14-year high. Last year 2000- 2300 apartments were listed per month during the peak-listing season. This number was so high as there were a lot of sellers who wanted to put their apartment up for sale but would not list during 2020.An incredibly busy spring market peaked by summer with a small dip in the fall. However, supply of apartments on the market recently broke below 5000 which is a low not seen since January 2018. The trends show that each listing season in 2021 hit its peak with inventory pretty fast and then reversed course lower towards this sustained lower inventory market.

Looking ahead to the rest of 2022, normalcy will return to the market with seasonality. However, the big issue facing the market for buyers is this supply problem.  It is also highly likely that prices will rise with a lower spring market inventory environment than past years and eager buyers with still historically low interest rates. Tighter supply conditions will mean a tougher market with low negotiability and price pressure upwards for buyers. For buyers, if you come across an apartment you like and the comps indicate it’s well priced; it’s best to act swiftly.

For sellers that have been on the market, reduce your price now to get ahead of the spring listing season surge. If something is not selling then might be a price issue. Many of the apartments that remain on the market are those that are unrenovated. Construction time and costs are up with supply chain effects and labor shortages. As such, the pricing spread between renovated and unrenovated apartments has increased in the current market.

While the supply/demand undercurrents are similar to the market of 2015, the market remains about 10 to 15% off its peak during 2014 to 2016. While buyers are eager, there are sellers who are looking for these peak prices and the market is not there yet as prices have only recovered back to 2019 levels. While the market quickly recovered its covid discount, it has not experienced a pricing boom similar to other markets around the country. The macros of the market are different here with no to little tourism, lack of foreign students and buyers, a badly hurt commercial office sector, a retail sector that is still rebounding and an incredibly hot rental market. It will be some time until foreign buyers make a dent in the market.

While the sales market had a robust year, the rental market became historically tight in the summer and into the fall and winter as available apartments became increasingly competitive and it was common to see bidding wars. A tight market remains in place throughout the winter, which means price increases when rental spring and summer rental season hits the market.

Here is a snapshot of the current market relating to supply and demand trends during Covid-19 for Manhattan in the Residential Sales Market:

Supply in Manhattan seems to have bottomed out at a little north of 5000 listings.  Since April 18, there have been between 5025 to 5100 listings on the market, which compares to approximately 7500 listings one year ago.

Our best measure of demand is contracts signed. This number has steadily declined to a new weekly low of 36 for the past week. The contracts currently being signed are likely sight unseen in person and due to virtual video tours. This time of the year should be averaging about 250 to 275 contracts signed per week.

This was taken from the Halstead Open House Index. The data is showing that there are many low offers coming in but very few are being accepted. However, it does give an indication how much negotiating room there is in the current environment.

1. The average difference between ALL offer prices and ALL ask prices was 13.79%. (105 replies)
2. The average difference between offer and ask in deals that were ACCEPTED was 6.78% (40 replies)
3. The average difference between offer and ask in deals that were REJECTED was 18.10% (65 replies)

1. The Bronx – the difference between offer and ask was 4.26%. And no, this is not a trend because we received just one reply from the Bronx area. And it wasn’t accepted.
2. Brooklyn – the average difference between ALL offers and ALL asks was 9.09% (23 replies)
3. Brooklyn – the average difference in deals where offer was ACCEPTED was 4.93% (13 replies)
4. Brooklyn – the average difference in deals where offer was REJECTED was 15.08% (10)
5. Manhattan – the average difference between ALL offers and ALL asks was 15.59% (76 replies)
6. Manhattan – the average difference in deals where offer was ACCEPTED was 7.25% (26 replies)
7. Manhattan – the average difference in deals where offer was REJECTED was 19.92% (50)
8. Queens – the average difference between offer and ask was 9.82% (6 replies, 5 were NO and 1 was YES)

1. Single Family/Townhouses – the difference between ALL offers and ALL asks was 14.58% (13 replies)
2. New Developments – the difference between ALL offers and ALL asks was 11.77% (6 replies received, all were rejected except 1). Guys, this is not a trend, based on just 6 replies. I am sure if we received more data from new developments, that negotiability factor would have been much lower, keep in mind.
3. Co-ops – the average difference between ALL offers and ALL asks was 12.61% ( 52 replies)
4. Co-ops – the average difference in deals where offer was ACCEPTED was 6.42% (26 replies)
5. Co-ops – the average difference in deals where offer was REJECTED was 18.42% (26 replies)
6. Condos – the average difference between ALL offers and ALL asks was 15.64% (34 replies)
7. Condos – the average difference in deals where offer was ACCEPTED was 5.04% (7 replies)
8. Condos – the average difference in deals where offer was REJECTED was 18.29% (27 replies)

Sellers are facing as difficult conditions as we have had in recent memory even amid a declining interest rate market and a rising US stock market. The sales market continues to remain quite soft. According to UrbanDigs the average number of days on the market for properties in Manhattan hovered between 87 to 109 in the second quarter which is way up from between 62 to 85 days during the second quarter of 2018. When a listing has been on the market for 90 days without a price drop, it is clear that the market has spoken. The amount of inventory on the market this past spring reached highs that we have seen since the spring of 2011. While contracts signed in Manhattan had a 15% increase in year-over-year contracts signed for April, the May and June numbers were very lackluster. These two months both had approximately an 8 to 9% decrease in contracts signed.

The second quarter also contained the reaction to the increased mansion tax for properties at two million and above. This mansion tax created motivation for buyers and sellers to enter into contract in the early part of the spring and close by the end of June. However, the year-over-year contract signed numbers below do not show a material impact.

While Related’s Hudson Yards project and Vornado’s 220 Central Park South are continuing to create a lot of buzz and selling quickly, there continues to be glut of new construction properties on the market. In fact, the new development market recently reached a high for supply that we have not seen since November 2010. With a high supply and developers facing time-sensitive pressure to close deals to pay down loans with looming maturity dates, developers are faced with the realities of giving away concessions such as paying for a year’s worth of common charges or giving buyers flexibility in the interior design of the units.

However, a new construction shutdown is far down the line such as 2021 and 2022. Currently there are much less files for new development then in past years so eventually with the slowdown of new supply and absorption of current and near future inventory, an equilibrium can return. In addition, the new rental laws enacted make condominium conversions very unlikely in a rent-stabilized building with 51% of current tenants having to agree to buy their apartments before a building can be converted into a condominium or a co-op, which is up from 15% before this law was passed. A property owner will now have to be at the mercy of the majority of tenants agreeing upon terms and pricing instead of the landlord setting the terms for the conversion which makes such conversion improbable.

While the sales market continues to remain soft, that is not the case in the rental market as it was a very robust rental market this past spring with vacancy rates showing record lows. It is a great market for apartment owners and landlords with rents back on the incline. Owners who want to try the sales market are advised to adapt a dual strategy of placing the property on the market for sale and rent at the same time. With a strong rental market that will mean more eyeballs on the property and it’s possible that someone may want to purchase the property who saw the listing for rent.

A consequence of the new rental laws is that lower priced free market apartments will become increasingly more expensive with property owners no longer being able to take apartments off rent control. Given this new law, purchasing a condominium that translates to a rent slightly above $2775 is a great idea as this was the old threshold landlords needed to clear to remove an apartment from rent stabilization and place it into the free market.

Another long-term positive sign for the rental market is the increase in the national trend of people saying that renting is more affordable than owning. According to a new survey from Freddie Mac, a record 82% of renters say renting is more affordable than owning which is up from 67% just a year ago. A trend like this continues to create downward price pressure on the co-op market with local residents bypassing the strict rules of co-op’s in favor of renting. It does make it a great time to purchase a condo as local residents have to live somewhere and when combined with the new rental laws there will be much less new competition in the years ahead.

Given the soft sales market and a very strong rental market, now is the time for domestic and international investors to buy property in New York City with extremely favorable conditions.

In the sales market, we continue to experience a buyer’s market.  

The chart below demonstrates the very favorable conditions for condominium buyers. Looking at different neighborhoods and price points, one can see the year over year increase in supply and the low percentage of contracts signed relative to the amount of inventory on the market.

With an increase in inventory over the past year, and with apartments remaining on the market longer, there is maximum negotiating power for a buyer. This is especially true if a property has been on the market over 90 days without a significant price drop.

The Manhattan rental market is strong. Therefore, coupled with a soft purchase market, it is a great time to invest in Manhattan real estate.

1. The most important item for buyers to understand is closing costs. Attorney, title, mortgage and transfer taxes will add thousands of dollars to the purchase price. It is imperative for a buyer to understand this in order to properly plan their budget. When buying in a condo assume 2.5 to 5% of closing costs based upon the purchase price or set aside 1.5 to 3% for buying in a co-op. Buying in a co-op has fewer closing costs since there is no title as you are buying shares in a corporation.
2. If you are purchasing a co-op, you want to make sure that you will have 24 months of mortgage and maintenance in reserves post-closing to pass a co-op board.
3. Do not make large purchases such as car, furniture or appliances or change your job right before securing a mortgage. This can have a negative effect on your bank financing. The lender will recheck your credit score and employment status right before the closing.
4. Do get pre-approval as soon as possible. This makes you a credible buyer. Without the pre-approval, you cannot receive an accepted offer from a seller. The pre-approval will also give you a firm number for a maximum budget, so you do not waste time viewing properties that you cannot afford.
5. Know your debt to income ratios. Banks will not loan above a 43% debt to income ratio. In addition, it will be very tough to get approved in a co-op above a 28% debt to income ratio.
6. Banks will look at your last 60 days of bank statements. Banks will go line by line over incoming cash. They will ask where it came from. So any non-employment cash items may affect your financing. Any funds received prior to the last 60 days are now considered your funds, regardless of the source.
7. Hire a knowledgeable and experienced buyer’s broker. Do not try to do a friend a favor that just started out. This is a major purchase decision. An experienced broker will know the right questions to ask, how to market you to the seller and negotiate on your behalf and will have plenty of mortgage, attorney, architect and contractor contacts to establish your team. In addition, the buyer’s broker will work with you on the board package and if it’s a co-op, the board package will need to be pristine to pass the co-op board.
8. When making an offer write a letter to the seller explaining why you want to purchase their home and mention your background. These letters can help save you money and can make the difference in a bidding war.
9. Understand the timeline for purchasing a home. The timeline can be very different depending upon financing versus all cash, single-family versus condominium or co-op. From the day you receive an accepted offer, it will take approximately two months to close on a condominium and three to four months to close on a co-op.
10. Spend significant time in the neighborhood that you are thinking about purchasing. Visit neighborhood restaurants and stores so you can imagine being a resident in that neighborhood.
11. Find a real estate attorney before submitting an offer. The process can move very quickly after you submit an offer. In addition, make sure you hire an attorney who specializes in real estate transactional law. They should also charge a flat fee. It is a red flag if they want to be paid by the hour.