Issue 59 – The Ever Changing Market

Hello, and I hope you’re enjoying the fall season.  I can’t believe Thanksgiving is only a few short weeks away!

Looking back on last month, October was not for the faint of heart.  Volatility spiked in the stock, bond, commodity, and currency markets, we saw continued weakness in the Eurozone, Ebola made its way to the US, and terrorist activity continues to plague the Middle East. Furthermore, the uncomfortable events of last month coincide with murmurings in the broker community of a mild slowdown in the velocity of sales.  Notwithstanding November’s material improvement in sentiment (the most noteworthy due to the stock market’s recovery), this begs the question: despite its current stability, is NYC real estate a lagging indicator and thus should we expect material weakness ahead?

In my opinion, the short answer is no; at least not a material deterioration in the short  term.  As I’ve mentioned in previous Katzen Reports, a pause in the market given its massive improvement over the last several years should not only be expected, but can be healthy.  In other asset classes such as equities, you’ll often hear of a period of consolidation before the market moves another leg higher.  Record prices and speedy sales have gotten many people a bit spoiled. Rarely does this continue uninterrupted, particularly when the rise in real estate prices has outpaced the increase in wages for many buyers.  The market moved from a period of significant pent up demand post the financial crisis with very limited inventory, to one of relatively greater supply (in part due to the explosion of new development) and near record prices.  With high priced product competing for big but not unlimited dollars, it is completely understandable that buyers have grown a bit more cautious and are doing their research on all availably inventory.  This simply results in a longer digestion period.  However, from a historical perspective, the current pace of sales remains quite strong.

Given the increase in supply is one cause for the slight slowdown in sales, I wanted to share a conversation I had with a prominent real estate investor here in the city.  With over 50 years of experience in the New York City real estate market, he has virtually seen it all.  While discussing the same question posed above over dinner, he said “Over the years, I look up at the sky for an indication of what may be in store for the real estate market.”  As I looked at him a bit puzzled thinking maybe it was some sort of religious reference, he smiled and said, “The cranes.  I look up to see the number of cranes.”  Clearly his reference was to new development and thus pending supply, which would have to be measured against future demand characteristics.  Given we all notice the construction going on throughout the city, my next question was what “the cranes” are telling him now.  “Are there too many for your liking?” I asked.  His answer, as he sat back in his chair was a confident, “No, not yet.”  He then explained why he believes the strength of demand can handle the new supply, and keep the NYC real estate market healthy in the near term.  For example, historically low interest rates in conjunction with disciplined lending practices has resulted in a more qualified buyer compared to the crisis with less leverage in the system.  Furthermore, while US economic growth hasn’t been earth shattering, it’s materially better than many other parts of the world.  This bodes well for US asset prices, as the US will continue to attract both domestic and foreign investment.

To further temper anxiety about the speed of sales, consider the following:

• This time last year saw a similar trend, prices were up, but the number of closed sales declined by 10% from the previous year. A trend we returned from.

• Manhattan’s prime selling season, January through June, is on the horizon. Looking at the first two quarters of 2014 as an indicator, Manhattan home prices increased an average of 20% as compared to the same time in 2013.

• While new development condos represented only about 7% of all closings in the second quarter of 2014, they also had the biggest year over year price gains: average sale prices were up slightly over 60%, median prices were up just over 15%, and the average price/square foot was up over 30% (to just over $1,800).

• The re-sale market also produced double-digit gains: average price/square foot on re-sale co-ops and condos was up over 15% (to $1,020) and 14% (to $1,460), respectively.

Now, there certainly are reasons for concern in this ever changing market:  interest rates are likely to rise over the next 12 months, there is speculation of falling Wall Street bonuses in certain parts of the industry, and as mentioned supply is on the rise and prices are near record levels.  These factors certainly may temper the upward  trajectory in prices and speed of sales.  However, the market doesn’t need to rise at its current pace to remain strong and healthy.  Therefore, even if there is slowdown in the pace of growth, I anticipate solid market conditions as we move into 2015.