The Impact of Strict Lending Standards on the NYC Market

Market data has not changed much in the last couple of months. New development selling out in record time and an utter lack of property, especially at the low end of the market.  Thoughts about what is causing the continued lack of inventory, along with what levers might move the market to a healthier equilibrium.

How do we reel in underwriting standards?

I looked back to see that I covered lending as a source of stress on the inventory about a year ago.  One take, the popular and simplistic Economics 101 view, was that low rates were driving buyers into the market, both for purchasing and refinancing, and inventory suffered as a result.

The slightly different take on lending’s impact considers its impact on limiting inventory, and not because of demand.  Rather, because of pressures facing sellers, the inventory has suffered.  That is, sellers are finding that underwriting standards are keeping them from either upsizing OR downsizing.  They qualify for neither.

Jonathan Miller, who maintains a great blog, today put out some data about the lower 90% of the market – the non-luxury market is still accelerating.  He was theorizing the above: that strict underwriting is freezing new inventory more than anything else.  And that, more than anything, is creating this appreciation acceleration.

New development is a separate issue because no sub-luxury market product is being built.  The luxury market, then, is its own subset, and my view is that there remains some theoretical limit to the astronomical push of prices in the top 10, where the pace of sales already appears to be slowing a bit.

Buyers squeezing into an ever-shrinking box for underwriting.

90% of the cooperative and condominium market inventory, then, is limited by those sellers who are hyper-qualified and don’t need to sell; or who squeeze into an ever-shrinking underwriting box, and can hold out at these high prices; or who are moving away (or dying, or getting divorced).  You can read about the time when lending standards were tightened in 2010, which seems to have coincided with the run-up on pricing here, actually.  Last week the WSJ reported that Fannie Mae and Freddie Mac are again loosening standards.  The NYC market has its own built-in tight standards on who may purchase, and downpayment levels likely will never drop below 20% here again.  In nearly every market in the United States, inventory levels have shrunk.

My view is that everything could line up and hit at the same time:

1) Increasing Rates
2) Loosening lending standards
3) Growing secondary private market for loans as rates increase
4) Seller awareness that their homes have really appreciated, and a desire to capture those gains

The question is whether tax structures will become onerous to the point that people will overcome the rest and sell anyway.   Another major mitigating factor on pricing, then, is the lack of new development in Manhattan and Brooklyn to increase inventory.  Cooperatives will see their share of total sales continue to grow along with any inventory increase.  This is just a different lens to view why prices may flatten a touch.  The good news is that rising rates should indicate a strengthening economy.  Hopefully they’ll find a Goldilocks level of underwriting standards (i.e. Just Right), but don’t count on it.  The pendulum probably has to swing the other way.