Dear Clients and Friends,
For this edition of the Novack Team Update we thought it would be helpful to dive into some of the most top-of-mind factors for those reflecting on the current and future NYC market…
- What do we see as the effect of rising interest rates on the pricing trajectory for NYC real estate? Firstly, it may be useful to add a little historical context. During most of the 1980’s mortgage interest rates fluctuated between 10%-16% and it was not until the later portion of the 1990’s that they fell below 6%. In other words, even as rates continue to rise, they still remain well below historical levels. That said, we are witnessing (and expect) the following:
- The desire to achieve the most favorable financing terms will create urgency for buyers and sellers to lock-in deals in the next ~6-12 months. Taking a more nuanced look, for the lower price points (and specifically in instances where buyers’ debt-to-income ratio is at the border of what they can afford to meet their space needs) we expect a neutral to downward effect on real estate prices.
- For the mid to higher price points we expect a short-term spike to get deals done at the best financing terms and a medium to long-term net neutral effect on prices.
- Much has also been written about how robust (some might even say ‘over-heated’) rental prices have become, which has only been exacerbated by relatively low inventory. While it may appear as if Manhattan rental prices have increased upwards of 30% in the last year or two, in truth this is a misleading statistic. During ‘peak COVID’ of 2020 the rental market was disproportionately hit (for obvious reasons) and landlords signed 1-2 year leases that were 20-25% below pre-pandemic levels. Now that NYC has opened up again we are seeing a normalization in pricing. So, a nominal ~30% increase in a lease that was originally negotiated during peak COVID actually represents a net increase of 5-10% disregarding the pronounced temporary dip. Going forward we expect more measured annual rental increases. We do not anticipate the recent rental pricing adjustment to be highly impactful on consumers’ decisions to rent or buy at the medium to higher price points, since those purchasers tend to be more driven by the expectation of future sale price appreciation as well as a flight to quality and space in light of having spent more time at home over the past two years. Certainly, though, rental prices increasing would only favor the decision to buy vs. rent for both end-user purchasers as well as investors who will then lease out their acquired units.
Market Pulse – Supply/Demand Dynamics:
- The current market pulse (contracts signed as a percentage of new listings) is still in the mid-70%’s, which indicates that we continue to be in a seller’s market for fairly priced homes. Since the beginning of 2Q22 we have seen the level of new listings posting increase somewhat (which is typical of the Spring season) which has provided a partial level of relief for a market where demand has far outpaced supply. That said, while supply has risen, demand — and most importantly the readiness of buyers to actually transact — has remained even higher. With more than 300 contracts on average being signed a month in Manhattan, we are still seeing a uniquely advantageous climate for sellers if they price appropriately.
- Negotiability for luxury ($4M+) contracts has hovered at ~5% or less for most of 2022, and in fact went as low as 0% in mid-April for the first time since 2014. While this relative lack of negotiability is linked to the robustness of the market and buyers’ desire for larger and higher-quality space, it is also partially skewed by the disproportionate amount of new development trades which comprise this category. Many of these developers have taken the strategy of pricing their units at market with no spread for negotiation and then continuing to raise those prices as their buildings draw closer to completion and market fundamentals strengthen.
- Looking forward we anticipate that prices for NYC as a whole will increase over the next ~5+ year period, though this will likely not occur in a completely linear fashion given the various global and financial developments which are not all moving the needle in the same direction. We do expect international and reurbanization demand for homes in NYC to increase as travel becomes more feasible/comfortable and New York has more of the dynamic cultural, retail, entertainment, and professional venues open and in full swing.