Michael Holt | October 7, 2022
The New York City 3rd Quarter market report for sales in Manhattan has just been released. I am going to break down the important highlights and give you insight into where the New York City real estate market is headed.
The Manhattan Q3 Market Report is telling of the current market shift as high-interest rates are deterring buyers, especially at lower price points. The market pace was going 100mph in 2021 with the number of signed contracts hitting 10yr highs nearly every month so we were due for a slowdown which is being magnified by high-interest rates. The days of high buy-side urgency and record levels of deal activity are behind us.
History has shown us high inflation translates to higher rates which breed lower asset valuations with real estate trailing the stock market performance. During these volatile times with forecasts of decline, real estate becomes an attractive diversification for investors especially when lower asset values are combined with high rental rates. I forecast that the market is headed for a decline. Interest rates will continue to be at their current level or higher until inflation starts to decline significantly. The FED's inflation target is 2% and we're at 8% so I don't expect any relief in interest rates until this gap becomes closer.
While overall sales were down, transactions for apartments priced between $5M and 10M and those above $20M were up. What do you attribute this to? Why are the ultra-wealthy continuing to buy?
Answer: The ultra-wealthy see real estate as a hedge with benefits from the volatile stock market. Uncertain times call for an emphasis on diversification.
The inventory of new listings to come on the market in Q3 was down. Why are sellers holding off on listing? What are you advising them?
Answer: Many sellers are starting to become fearful of their ability to achieve their target selling price and are additionally concerned about the high-interest rate they'll have if having to buy elsewhere. This makes the process very unattractive until you see a drop in prices which eventually leads to the "trading up" phase in the market. I am advising my sellers to be very strategic in pricing and sensitive in how homebuyers and realtors are receiving their listings (everything from direct feedback from realtors in the big apple to buyer traffic, including the comparison of the average prices & price per square foot for similar residences in other neighborhoods.
Answer: I do believe prices fall. Our local market is being impacted by macro-level factors which can be summed up into three words — high-interest rates. These rising mortgage rates will continue to be high if not higher until inflation decreases significantly. Keeping a strong economy with an aggressive approach to lowering inflation is essentially a catch-22 as drastic interest rate increases generally lead to a recession.
Answer: Investors are strategically buying properties that have strong historical sales supported by higher rental rates. Sellers who are overpriced and/or have dated properties have been attractive targets.
The real estate market operates in cycles that can be measured by looking at local and macro-level current data and comparing them to historical trends. These cycles are one of the benefits of real estate investing as they can be better managed to avoid sharp volatility as we see in the stock market. I've inserted a Bloomberg article showing the steady growth of real estate values vs the volatility of the equity markets over a 15yr period.
According to the latest quarterly Manhattan residential data, the market is starting to become more normal after being very active in 2021. People are still interested in buying homes, but high-interest rates and record inflation are making it harder for people who want to buy more affordable homes. However, people are still willing to pay a lot for a home if it is priced correctly.
While overall apartment sales were down 9.3 percent year-over-year, sales over $20 million increased. 21.1 percent compared to last year, indicating that most buyers are taking a wait-and-see approach. In contrast, ultra-luxury buyers who often purchase with little or no financing are willing to buy quality homes for their historical appreciation.
As mortgage rates rose, condo sales declined the most. The average sales price for all apartments was $1.9 million, up 5.2 percent from 2021 but down 8.7 quarter-over-quarter. The average condo sold for $2.75 million, and the average co-op price traded for $1.3 million. Overall, condo sales declined 15.7 percent compared to last year, and co-op trades jumped 21.9 percent compared to last quarter, strong indicators that most buyers are looking for more affordable apartments. Contract activity shrank sharply, foreshadowing an evolving market.
Contracts signed dwindled 37.3 percent year-over-year and 38 percent compared to Q3. Whatsmore the average price of contracts also trickled downward by 10.5 percent. The most significant shift was downtown, where contracts dropped 42.8 percent year-over-year. Nevertheless, it is essential to remember contracts signed do not include off-market deals, which have escalated in recent years. While comprehensive Q3 data represent a market correction, some things remain unchanged. First, New York real estate has historically appreciated, and people will always need a place to live. While the bidding wars and soaring prices of 2021 may be over, it would be a mistake to sour on Manhattan real estate in the long run.
We have all heard it before, when it comes to buying or selling a home, using a real estate agent is essential. They have the knowledge and experience to help you navigate the complicated process and get the best deal possible. I do value analyses and offer strategies for buyers which leads to confidence that they're not overpaying and encouragement on appreciation growth in the foreseeable future for when they need to sell. For sellers, I offer a similar report, doing a value analysis with pricing strategies so that they can feel confident they aren't leaving money on the table while avoiding price cuts and market decline. Remember inflation at first increases home sales and home prices (even record-high prices) but as inflation rises and becomes too high it leads to rising rates. High mortgage rates lead to less buying which translates into more supply and eventually price reductions.
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This is especially important for sellers who are currently listed on the market, as the active season may be shorter than usual.
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