Buying New York

Do Buyers Have Increased Power in the Residential Market During the Summer Months?

If buyers do have more power, then total signed contracts per inventory should dip from the spring season.

Looking at the average overall Manhattan numbers over the past four years, there was a decrease of approximately 3% of signed contracts per inventory for the summer months when compared to the spring months. Therefore, there is more buyer power in the market during the summer. (Buyer power means that buyers have more leverage over sellers when making offers and negotiating)

Was this increased buyer power apparent in all price points?

For the condo market under one million, the average numbers of condo contracts signed per inventory had a very minimal decrease. This segment of the market carries over more seller power than other segments from the spring.

However, the co-op under one million market features a more significant change as it decreased approximately 3% during July and August.

The one to two million condo market seemed to clearly be more affected by the summer market than its under one million counterpart.

Like its condo counterpart, the co-op market for one to two million market also showed more buyer power.

The two to five million market for condos also dropped approximately 2 to 3% during July and August.

For the co-op two to five million segment, more buyer power is apparent as the contracts signed per inventory fell approximately 5%.

Both condo and co-op markets for the five to ten million market also featured more buyer power with the average percentage of contracts signed per inventory dropping to less than 10% in August for both segments.

For the ten million plus market, while both condos and co-ops feature more buyer power there is more buyer power in co-ops than condos during July and August.

CONCLUSION: Looking at the past four years of the data there is certainly more buyer power to the market in the summer months than the spring. Therefore, for most price points it is favorable for sellers to list in the spring or the fall. The most favorable segment for sellers during July and August is the condo market under one million. This segment shows a negligible difference between listing the apartment in the spring or summer.

April and May are key months to see where the market is headed. While the trajectory for the market was very good approaching the spring season, there was softness in the spring numbers. While inventory slightly went up in April, contracts signed showed approximately a 14% decrease, which is an exceptionally deep decline for this period of the year. Therefore, contracts signed per inventory dropped below 20% for the first spring month in recent memory. (The lower the percentage for contracts signed per inventory the more buyer power there is in the market.) Overall, this spring market is showing slightly more buyer power than one year ago.

Data from UrbanDigs

However, upon further examination, the co-op market has been holding up very steady for sellers. The amount of contracts singed per inventory held firm from one year ago. While co-op inventory was up, the amount of contracts signed is basically level with one year ago.

Data from UrbanDigs

Therefore, this softness that we are seeing is predominantly coming from the condo market.  While condo inventory had approximately a 12% increase from the middle of March to middle of May, the amount of contracts signed in April fell 23% from March which represents an alarming number. However, the May numbers were much stronger than April for contracts signed so the condo market did end May with an overall uptick for sellers.

Nevertheless, the amount of contracts signed for condos in April and May was still down 20% from one year ago, while the average inventory for April and May was up 8% from last year. In addition, the contracts signed per inventory dropped below the 15% threshold for April and May. This is well below the low 20%’s to 30% during the low inventory years of 2013 to 2015. As such, buyers continue to have more overall power in the condo market when making offers compared to sellers.

Summary: If you are considering buying a condo, now maybe the perfect time to maximize your leverage with sellers due to increased supply and decreased demand. So while the co-op market is holding firm, there is a definite disturbance in the condo market.

 What is causing this disruption in the condo market?

1. New Development Inventory– Lots of inventory has been hitting the market in the past few years that has led to an oversupply at the 2 million plus price point. There was widespread construction after the last recession.
2. Lack of Demand– Buyers are becoming unwilling to pay sky high prices
3. Cooling of International Buyers– A large part of NYC condo market demand comes from other countries and there has been lackluster demand from the rest of the world.

Data from UrbanDigs

Next, I wanted to examine this buyer power by price point. I started with the under $1 million market and while there is more seller power than other price points, buyers are at a major advantage than one year ago with inventory up and contracts signed down.

Data from UrbanDigs

Starting with the $1 to $2 million is where we start seeing more of the softness plaguing the condo market. Contracts signed for this price point fell approximately 9% from March to May while the average inventory number climbed by close to 13% for this same period.

Data from UrbanDigs

The $2 to $5 million market is the lowest price point where we see increased new development inventory having an affect.  A figure of 9.6% of contracts signed per inventory is an entirely different market than 24.17% in April 2015. This is a market where buyers have a vast selection of inventory and have overall power when submitting offers. While April did feature a lot more buyer power than previous years, this segment of the market had a favorable May for sellers as it almost matched the amount of contracts signed as one year ago.

Data from UrbanDigs

Similar to the $2 to $5m market, the $5m to $10m market has increased inventory from new construction.  Inventory in this price range has increased approximately 33% from two years earlier while contracts signed has fallen by roughly 28% during this same period.

Data from UrbanDigs

Last but not least, the $10 million plus condo continues to show further weakness as contracts signed per inventory dropped for April and May 2017 when compared to a year earlier.

Data from UrbanDigs

 

 

An Active Market

The first quarter has set the sales market off to a very positive start this year as inventory on the market had the biggest increase in two years. The first quarter was quite active and had a 6.3% year-over-year increase in Manhattan listings at the end of the quarter. The amount of inventory on the market at the end of the quarter is higher than previous levels in the years 2013-2016 and is a great sign for an active market throughout 2017.

Simultaneously, there was a 6.8% year-over- year increase in listings going into contract after five consecutive quarters of year-over-year decreases in the number of contracts signed.

There is a confluence of factors that led to a more active market. Consumers are no longer on the sidelines as increasing consumer confidence with the rally of the stock market and urgency created by the increasing Federal Reserve benchmark interest rate. In addition, many sellers who failed to sell in 2016, adjusted their expectations and pricing in order to sell.

The opening of the Second Avenue subway, and the reestablishment of Second Avenue to its pre-construction appearance, had an impact as there was a 21% increase in the number of contracts signed on the Upper East Side while Yorkville showed a 30% increase compared to the first quarter of 2016.

Condo inventory priced between $3M-$5M showed a year-over-year increase of 23%, that was driven mainly by new development listings with 15 Hudson Yards, 88 & 90 Lexington Avenue, 70 Charlton Street, and Circa Central Park as the main drivers of this category.

Despite the recent inventory bump, Manhattan is still under-supplied at 5.3 months of inventory. (Six-to-nine months is considered supply demand equilibrium.)

Downward Pressure

Use of concessions in Manhattan more than doubled to the second highest market share on record during the past quarter. The amount of increasing concessions has kept the vacancy rate from expanding on a year to year basis. In Brooklyn the amount of concessions went up to 16% from 6.6% a year earlier. New leases rose 33.5% in Brooklyn which is a combination of the sharp rise in new development entering the market and resistance to elevated rent levels.

New units flooding the marketplace in January has kept downward pressure on rents throughout the first quarter. Rents outpacing income for so long and the amount of new inventory has caught up to landlords.

A major issue for landlords going forward is offering a few month’s rent as an incentive and then ending up with a tenant who can’t afford the apartment when their lease is up and then having to offer a few month’s rent again in order to not show a decreased rent roll. Concessions are now felt through most price points with 64 percent of those incentives on units priced between $2,500 and $5,000 a month.

 

There are a few factors that I have seen which are overlooked when condos are purchased. These points will help any condo investor make an informed decision about a property to purchase and will help you to maximize revenue from your condo purchase.

1. Ask for a copy of the sublease application and look at the fees that will need to be paid. Some condos can be as low as $300, while others can be over $2000. With really high fees, it is very likely the owner will have to pick up some of the fees to find a new tenant.
2. Some management companies can be more difficult than others. A real estate professional can inform you about the reputation of the management company.
3. Some buildings can take a few weeks to a month to issue a waiver of first refusal while other buildings will waive this right away. A building that makes a decision faster will save you money in the long run.
4. Pay close attention to attributes that renters place as a priority. Closet space, dishwasher, washer/dryer in unit.
5. When deciding between neighborhoods place a priority on better neighborhoods. For example, a two bedroom condo to purchase maybe similarly priced between Upper East Side and Midtown but the Upper East Side will feature more demand than a similar listing in Midtown.

The New York City spring real estate market is always a frenzy with increased supply and demand. Many sellers will wait out winter to sell their home in the spring as they believe interest and action at open houses will substantially increase. I’ve been frequently asked what month in the spring is the best to sell, so I took a look at the data for an answer.

I used the number of signed contracts per month to measure demand, and active inventory on the market to measure supply. (The charts only include Manhattan data as it was inconsistent for the other boroughs.)

Surprisingly, the average number of signed contracts basically stays the same throughout these months. However, as I expected, the amount of supply does increase as we go from March and April into May

I also created a formula to answer this question: contracts signed per inventory on the market. A higher percentage below revealed a higher demand as a function of supply. Therefore, the higher the percentage, the better it was for a seller to list their apartment in that given month.

While the lower the percentage, the better it was overall for buyer power in that time period. While I made these charts to see if there was an advantage for sellers in a given month, you can see that certain years had higher percentages than others. For example, 2013 to 2015 was a better market overall for sellers. This period was a lower inventory market than 2010 to 2012. Last year showed a softer market overall and the numbers on the chart reflect more buyer power than 2013 to 2015.

Conclusion: March and April feature higher percentages overall than May and June, which show that it is slightly advantageous for a seller to list earlier rather than later in the spring season. Generally speaking, active inventory is lower in March/April than in May/June. I would recommend that a seller gets a head start on the competition by listing their apartment sometime between March 15 and April 1.

 

1. Neighborhood Options-There are so many neighborhood options in the rental market that have gained traction. From Bed-Stuy and Bushwick, to Crown Heights and Greenpoint. While outside of Brooklyn, Jackson Heights, Long Island City and Jersey City have become increasingly popular options.
2. Increase of Supply- Over 11,000 new apartments hit the market last year and another 13,000 are expected this year. When rents climbed in the years after the last recession, there were very few options for new rentals in the market. On the high-end of rentals, a lot of new product that was marked for condos changed to rentals with the softness in the luxury sales market.
3. New York City Unemployment- As rents climbed each year after the last financial crisis, the New York City unemployment rate continued to decrease. According to the New York City Department of Labor, the seasonally adjusted unemployment rate decreased every year from 2012 to 2015, but in 2016 this rate was flat. Job transfers to NYC and people moving from other cities used to be a frequent occurrence, but this type of renter is uncommon these days.

When does this end?

Not anytime soon. Interest rates would have to rise by more than a few increases to swing more potential buyers back to the rental market. More rental supply will be common throughout 2017. Since 421-A (a program that reduced property taxes for developers) expired in January 2016, new rental development has been stopped, but it will take a few years until this is felt in the market.

 

1. The sales market will have a very active 2^nd quarter as sellers act more pragmatic and buyers want to lock in rates before the three federal reserve policy meetings. This will be evident in the number of properties that sell at or above the listing price.
2. March active sales inventory numbers will be up from 2015. A lot of sellers held off or took the apartment off the market in fall of 2016 and will want to get a head start on the spring competition.
3. The luxury rental market ($6500 and up) will continue to struggle. Many apartment owners and landlords will struggle to get the rent previously achieved. Approximately 25,000 new luxury units will hit the NYC area this year, which will further dilute this market.
4. As such, the amount of rental concessions (shows softness) in the luxury market during the summer of 2017 will stay above 20%, which is way up from previous years.
5. The softness in the non-luxury rental market will still be seen until late in the second quarter of 2017, as there will continue to be a high supply on the market throughout the winter and spring.
6. The looming L train shutdown in 2019 will lead to a year-over-year decrease in rents for Williamsburg.
7. You will hear of more friends and family that are able to renew their lease without an increase in rent. Landlords and apartment owners won’t want to risk losing an existing tenant over price.
8. Astoria prices and rents will rise at a higher percentage than its surrounding neighborhoods. Ferry service from Manhattan to Astoria is slated to start in the spring. In addition, the city earmarked $30m to improve Astoria Park and is trying to push ahead with a streetcar service that would terminate in this neighborhood.
9. The Second Avenue subway will lead to higher prices and rents. The spread between 3^rd/Lexington Avenue and 1^st/York Avenue will be lowered and Yorkville will be one of the hotter NYC neighborhoods this year.
10. Mortgage credit will likely be more available due to looser lending standards and will help to prop up the first-time homebuyers market in the second half of the year.

A Tale of Two Different Seasons in One

The fourth quarter market in New York featured two different seasons in one. Before the US presidential election, all price points were experiencing softness. In the four weeks leading up to the election, 677 contracts were signed which represented a decrease of 33% compared to this period in 2015. Then in the four weeks following the election, 837 contracts were signed which represented a decrease of 5% compared to this time-frame in 2015.

Overall there has been a tremendous post-election increase in activity, giving the market great momentum heading into 2017 with the recent uptick in the US equities market. Buyer uncertainty has receded in the last six weeks of the year and there is a level of transaction activity that hasn’t been seen since the spring. Many properties reduced prices during the soft fall and after many months on the market it became common for a languishing property to receive bids during the last six weeks of the year, as open houses that were empty in October had a noticeable uptick in final six weeks of 2016. A tighter connection between sellers and current market conditions emerged during this period. The chart below shows that December was quite active with listings going into contract compared to October and November, as this year there was not a big decrease for December compared to previous years.

Source: Urban Digs

Looking ahead to 2017, rates are expected to continue rising in the second half of the year, which will impact demand for first-time home buyer properties, but mortgage credit will likely be more available due to looser lending standards and will help to offset the loss of demand in this segment. While there is a wild card with a new presidential administration, the sale of properly priced property should remain very strong in the first half of the year.

Overall Softness Not Seen in Years

The rental market usually responds favorably to a soft sales market, but that was not the case this quarter. All price points exhibited weakness. While overpricing and supply continued to be felt in the luxury market, even the non-luxury market was affected by these factors. This past fall it was common to hear of luxury rentals that were signing leases at 10 to 20% less than two years earlier. In addition, an incoming glut of luxury apartments will force more landlords and apartment owners to offer concessions and cut prices in 2017.  The amount of concessions offered this past fall (which show softness in the market) was the highest since fall 2009. The number of concessions doubled this past fall compared to fall 2015.

 

The pace of sales further slowed in the third quarter while inventory continued to increase in most property categories, but the market is still quite price-sensitive. The market below $1.5 million continues to be healthy as well-priced apartments for families or entry level studios and one bedrooms continue to be quite popular. However, the other segments of the market are showing a major lack of urgency among buyers. If a listing is priced incorrectly, a seller can go weeks without a showing as there is still a disconnect between what buyers are willing to pay and what sellers are willing to sell. Sellers who do not price precisely risk being irrelevant in the market.

According to Miller Samuel, only 17.4% of residential sales in the third quarter of 2016 were above the listing price compared to 31% at the same time last year. Most of these bidding wars are taking place in the under $2 million market. Inventory rose 8.2% during this period while signed contracts fell 18.4%. All of these factors together point to a softened market.

Reasons for this lagging market range from a highly polarizing 2016 presidential election, an unsteady US stock market, the fallout from Brexit, turbulence in the Eurozone, a slower Chinese economy, lower oil prices softening demand from Russia and the Middle East, and Latin America recessions.

However, the current weakness does present a real opportunity for buyers as we very well could be in the floor of the current market and an opportunity does exist for a more active market in the first quarter of 2017.

 

 

 

There is remarkable weakness in the luxury rental market (top 10% of the market which is approximately $6,500 and up) as we are seeing rents dropping 10-20% from what they had received previously. There have been a lot of high quality new construction luxury rentals that have hit the market and there are fewer tenants for this type of rental than a few years ago. Less expensive units remain in high demand, but the rest of the fall and winter will feature a lot more owner pay rentals on the market compared to one year ago. On a national scale, New York City has maintained its status as second highest in the US with average rents.

 

Q: When buying a condo for an investment, what are some unseen factors that will affect its investment potential?

A: It’s important to take a look at the building’s sublet application. A building with high application, processing and move in fees will turn off renters. In addition, certain buildings can have different pet restrictions and amenity access to renters.

Q: When buying a home, why does a real estate appraisal matter?

A: If the appraised value of the home is lower than the purchase price, you will need to make up the difference in cash. This can affect your amount of liquidity post-closing which can make a difference in passing the co-op board.

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