Warburg Realty Third Quarter 2012 Market Review

Warburg Realty’s third quarter sales upend the conventional wisdom about real estate in the summer months. Traditionally, the summer is always the weakest quarter, with August the weakest month within the span. This year, the third quarter burned hot! With 30% more sales than in July, and 140% more than in August of 2011, Warburg saw more contracts signed in August than during any other month of 2012 so far (as the attached chart indicates, the market overall had a slightly different experience.) These results for the summer months are extremely unusual, as a look at 2010 and 2011 in the chart demonstrates. What is going on?

MONTHLY CONTRACT ACTIVITY
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Data provided by Urban Digs

First, a word about the deals themselves. The conventional wisdom about summer sales did prevail when it comes to dollar value. While the market was extremely active in August, most of those deals were not big deals. Those big deal buyers actually ARE at the beach.  But all summer long we have seen acceleration in the market for $2 million and under. These buyers, more than any others, are influenced by low interest rates and how the resulting cheap money and low monthly payments, not to mention the tax benefits which no one really believes are going away no matter who wins the election, make buying more attractive than renting. Add to that a continuing ultra tight rental market and you have an active summer on your hands.

Equally interesting, and more unexpected, is the acute lack of inventory throughout the sales marketplace. It has been true for some time that foreign money is snapping up the high and mid priced condominiums all over Manhattan. But the profound shortage of inventory which has developed in the co-op market defies expectations. Throughout the city, resident New Yorkers are hamstrung month after month in their new home searches. At $20 million, at $10 million, at $5 million, at $1 million – few new listings appear. The customers, hoping that there is still seasonality in the market (in my observation, there really isn’t!)  ask, “Won’t there be a lot more inventory hitting the market in September?”  Sadly, the answer was no. Many of these customers asked the same questions in April. As you can see in the attached chart from Urban Digs, my favorite source for analytical data, there was no major spike in inventory in the spring and not much more in the fall. And I don’t anticipate one any time soon, at least not on the resale side, not even with the almost certain increase in the capital gains tax burden for sellers looming on the 2013 horizon.

ACTIVE INVENTORY
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Data provided by Urban Digs

What we will see however, on the Upper East Side, is a remarkable number of new construction and conversion projects coming together this fall. Two beautiful new buildings on East 79th Street, two major conversions on Park Avenue and one on 72nd and Lexington – these are the headliners for this uniquely large crop of new condos available to buyers as the fourth quarter begins.

As I have suggested in the past, I believe a significant part of this tight market relates to consumer perception of our product. Six or seven years ago, real estate in New York (and throughout much of the country) was the lynchpin of everyone’s get rich quick scheme. Clearly that is no longer the case. No one, thank goodness, buys real estate these days because they hope to flip it and make a quick profit. But it has emerged as a hedge. Buyers, both foreign and domestic, see real estate as a safe place to park their money. As I have noted often before in this blog, bricks and mortar are, well, bricks and mortar. They exist. You can touch and feel them. And when they are in New York, one of the world’s truly international cities, with an ever expanding population – probably there will always be demand.

Some caveats still apply. While all the new condos in Williamsburg are long since sold, and most of the inventory in Harlem has been snatched up, while more and more younger people are exploring Bed/Stuy and Inwood, and artists are all over Bushwick, price sensitivity still defines most markets (townhouses in Brownstone Brooklyn may be the only environment where it seems that almost anything goes).  In general buyers, even the most eager, don’t want to overpay. That’s something  everyone learned  from the recession.

In conversation this week with a Warburg buyer, she expressed her fear, fueled by many of her Wall Street friends, that the market would plummet if Obama gets re-elected. Don’t believe it! I have heard this refrain countless times during my 32 years in the business. Regardless of your political persuasion, the fundamentals about New York will remain the same no matter who is President. New York will still be a world commercial hub, attracting people from everywhere. It will still offer its uniquely wonderful quality of life. There will still be more demand than supply for the foreseeable future. While we are certainly not immune to the play of market forces, I don’t see this election, however it comes out, as significantly impacting the value of our real estate.