In New York City real estate, it should come as no surprise that the post Labor Day period is one of the busiest. Folks are back from summer vacations, kids are back in school, and buyers and sellers are focused on getting deals done before activity slows again during the heart of the holiday season in late December. There have been a confluence of both fundamental and technical events that have impacted market conditions thus far in 2016, and subsequently there has been no shortage of discussion on what the future holds. While it seems more hit or miss on who has strong opinions on asset classes such as stocks and bonds, everyone seems to have a view (or is seeking one!) when it comes to real estate. After all, not everyone owns or follows stocks, but by definition, everyone who lives in the city owns or rents a home. Thus, real estate seems top of mind for a broader segment of the population. 2016 has been a year of skepticism, which, after a five year bull run, is not terribly surprising. You’ve also had a spike in new development, bouts of global equity market volatility, an escalation in geopolitical risks such as terrorism and the surprising Brexit vote, large swings in commodity prices, and an uncertain path of interest rates and currency valuations. This is a lot to digest, no doubt. As a result, I wanted to share a few thoughts on how things may play out over the next several months. Let me preface this by saying my crystal ball is as cloudy as most, but let me take a shot at walking through a few observations. As you might recall from my Katzen Reports dating back to the fourth quarter of 2015, I spoke about conditions feeling a bit toppy given the pace of price appreciation, the increase in new supply, and the challenges mentioned above hurting the broader affordability equation. While back then data remained quite strong, I highlighted that tone in the real estate market, as well its data, tends to lag that of more liquid asset classes. Equity prices can correct in days or weeks, and yesterday’s volume and price action can be seen at the touch of a button. In real estate, data for a quarter can be months (or in the case of new development even years) behind current market sentiment given the lag between contract signings and closings. In addition, it takes time for developers and owners to adjust prices to cater to market demand. Thus, while it hadn’t yet shown up in the numbers, I feared we were in for a period of moderating conditions. This is exactly how the year has played out thus far. As Jonathan Miller, the president of the appraisal firm Miller Samuel and the author of a report by Douglas Elliman stated recently, “We’re seeing the market reset. We’re exiting the period of euphoria the market experienced for the last several years and entering a market that is closer to long-term historical trends.” This has been shown in his data: compared to the similar period a year ago, 2016 second quarter resale apartment closings were down 9.4% to 2,231, a lower percent of sales were consummated at or above ask, and the number of listings was up by slightly over 10% (over 25% for resale properties, the highest number since the first quarter of 2009).
Now, as mentioned, real estate data and performance lags. This cuts both ways, and thus you may be in the midst of a bottoming or even the beginnings of the next move higher well before it shows up in the numbers. Let’s take a look at broader market conditions vs. late 2015:
- Despite volatility and a dramatic drop post Brexit, US equities are higher than where they were at any time last year. In addition, the market is 15% higher than its 2015 and 2016 lows driven by China’s currency devaluation and Brexit, respectively.
- The 10-year Treasury rate is lower than it was at any time in 2015, and is 70 bp below its 2015 highs. Suffice it to say, mortgage rates are better than they were last year, and I hear most expect the Federal Reserve to raise rates only once (if at all) this year
- Much of the existing new development has seen reduced pricing and/or reconfigured floor plans to cater to current market demand. In addition, overall sales prices have declined, or at a minimum, moderated
- For international buyers, Brexit arguably has made New York City real estate appear a safer option relative to London given uncertainty in the UK economy and the potential for further weakness in the Pound
- While economic growth has been less than earth shattering, it has been stable. In addition, US employment data has been improving
- Many segments of the finance industry, while still working through changing market conditions, seems to have found its footing
- The dollar is stronger, which certainly decreases the purchasing power of foreign buyers. However, this also can enhance the perception of dollars as a safe heaven, counterintuitively increasing the appeal of US assets to protect against a further decline in other currencies
As you can see, a lot of the conditions that caused a moderation in market tone may be in the process of healing. Heck, given the lag I mentioned above, one could make the argument that some of the deterioration seen in the first half of the year is a result of the severe global equity volatility and fear that occurred as early as mid 2015.
While it’s too early to say exactly where we are in the cycle, I would argue that real estate data won’t reflect positive trends until well after the green shoots of improvement are well underway. Therefore, I’d urge you to assess value for yourself, and resist the temptation of relying on the so-called experts to dictate value. Bad news always makes a good news story! I believe supply and demand imbalances may be correcting more quickly than many realize, which will lead to healthier conditions before the data endorses it.
Before signing off, I wanted to pass on a couple of additional points of interest.
The FinCEN Geographic Targeting Orders requiring US title insurance companies to identify the natural persons behind legal entities used to make “all cash” purchases of high-end residential real estate in NYC was extended until February 23, 2017. As you know this was set to expire this past August. In addition, the scope has been expanded beyond NYC and Miami, and now includes four other locales (LA, San Francisco, San Diego, and San Antonio).
Finally, I came across an interesting article that highlights what may be a peripheral, yet positive development for NYC real estate. Barry Sternlicht, Chairman and CEO of Starwood Capital Group, said Greenwich Connecticut may be the worst housing market in the US. His view is in part driven by “Connecticut got too close to the Manhattan tax rates.” Given in many cases taxes in other suburbs like Westchester and NJ traditionally are even higher than Connecticut, the appeal of the suburbs may not be what it was for families residing in NYC. Time will tell, but this trend may be a boost for homes in the city if fewer residents see value elsewhere in the tri state area. This very well may be a topic for a future Katzen Report . . .