A concept I discussed with sellers for years was the “Absorption Rate,” to help give context to where their apartment fit into the market overall. The explanation required some lifting. Then Absorption Rate became “Inventory Levels,” which felt firmer, since it referred to the amount of property on the market. Unfortunately, the original confusion actually worsened, because it promised something easier, and delivered the same confusing message.
I bring this up because the most recent “Inventory Report” that my firm has produced (Link here) can create some heart attacks for sellers, too much confidence on the part of buyers- and SURELY a bit too much schadenfraude for those on the sidelines.
In short, there are two items that are being interrelated: (1) The number of apartments currently on the market for any given type (condo or coop, townhouses are separated out), neighborhood (broken all across manhattan, with a completely separate report for Brooklyn) and size (Studios, 1-, 2-, 3+ Bedroom apartments and Loft Apartments, meaning large) -AND (2) the pace of sales (broken out the same way). Number (1) is pretty clear.
Number (2) gets muddy in a hurry. The pace of sales will vary day to day, and week to week. There’s a report (which I love) dedicated solely to sales of $4mm and above. Each week there are currently between 10 and 15 sales, give or take. So what is the pace? How do we define the pace? For our purposes, we take the number of sales PER MONTH, and then create a rolling 6-month average of sales.
If you imagine, then, a fraction. At the top, the numerator, is the number of apartments on offer, not in contract, that current month.
The lower part of the fraction, the denominator, is the rolling average of monthly sales of units of that size and type.
When you divide Top by Bottom, the outcome is the “Months of Inventory,” (MOI) this imaginary length of time it would take to sell everything on the market, were there to be a magic button to freeze inventory.
While this is a useful metric to toss around, right now the numbers have gone totally off the rails. What do I mean?
We compare this MOI to last month, and to the same month the previous year. What do we find? We find a shocking increase in the MOI, and a far more reasonable increase in actual number of apartments Year over Year. I had to look twice, when I saw that there was SIXTY months’ of inventory for 3+ bedroom condos downtown. Surely something had to be wrong? Was that a typo? Alas, no.
In most cases, inventory levels, the actual number of apartments, has gone up between 20-40% for any one category, year over year. That’s a big jump, to be sure. But it’s not the 200-400% increase in the MOI, is it? Could that be right????
So what gives? What accounts for this insanity? And what is STILL missing from the report?
The most important takeaway from this month’s report is this: It’s the pace of sales. The pace of sales has been ridiculously slow. Any slight increase in the pace of sales is going to massively impact (aka REDUCE) the MOI across every category.
Second, what is missing from the report is this: NOW, we’re seeing that large pickup in sales. I’ve confirmed it with colleagues across the market, to make sure I wasn’t going crazy. We have been seeing deals coming together at a pace I don’t remember, given that (1) We’re 8 months into a bizarre COVID real estate market and (2) the market was still gathering steam back in early 2020, just finding its sea legs.
I am assuming that we manage to elect one of the two people running for president right now, without too much mess- I mean, either one. I will also assume that we, at some point in the near term, manage to create a working vaccine-
I would have to expect that we actually start to see a ridiculous improvement- possibly even a roaring real estate market. Headline numbers, again, are highly misleading. Even when we create them… -Scott