Well, I was only wrong by eighteen months!
I had assumed and written here that mortgage rates surely would start going up by mid-2014 and had pondered
their impact long before today.
I even recall having a conversation during the summer of 2013 while running with a very smart guy, who was asking me how rate increases would impact the market.
Further back, in 2010, I clearly remember discussing with a client that buying an apartment at that point would be a wonderful hedge against inflation.
Just goes to show how hard it is to time markets.
Only now are we dealing with the impact of a measly 0.25% increase in the Fed’s lending rate.
This increase, and those to come, are sorely overdue.
If the Fed’s stated point of keeping the rates lower was job employment targets, inflation targets, and economic targets – they have been way too slow to act.
Even in the last two years here, the job market so obviously has recovered.
The data has
been shouting from the rooftops – job growth has been amazing here.
But, until last week, no rate increase.
Ask anyone living in NYC about the cost of living.
I find it shockingly hard to claim that there has been no inflation.
Thankfully, the price of oil has been a major boon to the operation costs of apartment buildings, keeping maintenance levels from rising as much as they would have otherwise.
I am not sure that the Consumer Price Index hasn’t been
stripped of its useful indicators.
Lastly, the prices of apartments continue to skyrocket.
So, what was the Fed’s wait for?
And not just here.
Every agent I speak to in every part of the US says the same thing: low inventory, low rate environment, strong prices.
If the Fed has been given the role of playing God of the stock market and housing market, it seems to have been playing pretty timid for an
All hard assets have been inflated:
the art market, real estate market, and stock market, all strongly correlated, have risen, probably a bit too high, relative to the broad wage indexes to which the Fed pays attention.
The Fed has created the situation it was trying to fix.
Anyone with assets before 2009 has seen them grow, outpacing wage earners.
At the end of 2015, the real estate market
surely has benefited from all of the above, and will continue to do so.
A 1/4 % bump will not create a world ending disaster.
Don’t forget that 2005-2007 saw a massive run-up in prices while we enjoyed “historic” mortgage rates in the 4-6% range.
At this rate, we’ll be a generation down the road before that happens.
So, while we have yet to see the final numbers for 2015 (which I’ll address next month), what will we end up seeing?
2015 Sales Volume Down, Slightly
I expect that sales volume (total dollar volume of sales) will be down slightly
in the market for the year, but only by about 5%.
Lower Average Prices for the Quarter
Our chief economist likes to break out New Development prices from resales – and it’s wise to do this.
New Development closings happen so much later than when they go into contract, and even now the pace of these sales is incredibly strong, compared to resale apartments of similar quality.
The averages prices actually may dip, if only because the average deal size has gotten smaller.
Our firm probably will still have its 3rd or 4th best year ever, but the deal size will have shrunk substantially.
The Number of Transactions Will Be Up
Up, you say?
Despite the slowdown at the top of the market, and the lack of inventory, the overall number of sales
probably will be the same year over year, or even up slightly.
There is massive demand under $5mm, just not at $10mm+.
Not only that, but the sales velocity in Brooklyn and the Bronx in many ways has outpaced Manhattan.
How does this translate into 2016?
Looking over the horizon, even with my reluctance to prognosticate, I must make some educated
In this case, it’s hard to miss some of the very obvious ones:
First, let’s talk about Brooklyn.
Downtown Brooklyn will see an addition of rental units the likes of which New York City has not seen in 1-2 generations.
This flood of apartments will put downward pressure on rental prices across the area.
Simple supply and demand.
However, the lack of condo units that will be ready until 2017 or 2018 will continue to
pressure pricing up.
Bed-Stuy both continue to gentrify at a surprising pace.
Even Ridgewood, Queens will see some of the spillover impact.
May the subway Gods continue to shine their light on the L train.
I don’t expect nearly enough condo inventory to appear for YEARS.
Manhattan, meanwhile, feels like it has been ignored on the rental front for many years.
Some long-time landowners finally have
been able to maximize their holdings on the West Side of Manhattan, and we’ll see over 2000 new rental units hit the market in 2016.
Further, rental prices have increased, unabated, for a few years.
The impact of this likely will
be reduced rental prices.
Not to a level that would be considered reasonable in any other place, but to one
that will feel a bit more of a value to NYC renters.
Already we are
seeing some downward pressure, in the form of longer vacancy, landlord incentives – months free, etc. – and the like.
Expect more of that next year.
Price Corrections in Manhattan
Pricing had gotten a bit out of hand this year, and the gap between seller and buyer will close in 2016.
In the phrasing
of Yoda, “Close it will.”
This gap may be almost entirely due to psychology, but the reasons hardly matter.
Sellers must adjust with a slightly less strident attitude towards buyers in 2016.
Higher Average Deal Size
As sellers adjust, I expect 2016 to have a higher average deal size.
We should see some outsized deals finally happening, once sellers come back to Earth.
2nd Avenue Subway
Yes, the 2nd Avenue subway really is
In a year.
Stations will be free
of debris and columns, full of Wifi.
What a boon to the East Side.
As the reality becomes clearer and the light grows at the end of that subway tunnel, pricing along Second Avenue will rebound.
That, and buyers and sellers
have agreed on value.
Rates, and Prices.
Last but not least.
I’m thankful that we almost certainly will continue to see rate rises throughout the year.
While a rising rate environment probably will flatten prices somewhat, it should help close the gap between buyers and sellers, and help make deals happen.
Rental prices may keep some less serious buyers on the sideline, but buying in New York was never an unserious activity, anyway.
I am available and would love to discuss any of the above with you in detail.
Just email or call!
Know anyone you think would benefit from meeting me and my team?
We would love your introductions.
Here’s to a happy and healthy 2016!
May all of your dreams come true this year.
– Scott & the HRT