A Hypothesis About Next Year’s Sales Cycle: The second wave of first-time home buyers

With winter fast approaching and the holiday season knocking on our door, it may seem premature to look beyond the first quarter of next year as we speak about NY real estate.    Yet I couldn’t help putting pen to paper as I let my thoughts wander to next year and what it might bring.

The big question on my mind is:  where will the next pool of buyers come from to drive the market forward?  We had the vultures swoop in during the market’s lows, then we had first time home buyers drive purchases, and most recently those looking to upgrade to larger homes have propelled the market forward, both in terms of volume and prices.  Could it be that first time home buyers may take the helm again next year?

It is very clear that the ultimate goal of the Fed and Treasury is to create or maintain low interest rates.  (One stated reason for Fed’s new move to purchase over $600,000 Billion of new mortgages).  The idea is that people can thus afford more of a home.  Subsequent home purchases may help create a solid floor for the housing market, serving to stabilize it and solidify a new foundation upon which further growth can take place.  For more than a year now, industry experts have largely agreed that “rates have nowhere to go but up” and have had to swallow this statement over and over as rates have instead inched lower (not including the last few weeks of increases). 

What if, I wonder, rates continue to stay this low or *gasp* move even lower?  How might next year play out?  According to current wisdom, Q1 is likely to be bolstered by a very robust bonus season, activity which would then be reflected in Q2 numbers. By April / May, buyers will be reading this data, reassured that “the worst is indeed behind us” and perhaps getting nervous (as many are already) that they missed the bottom.   This is the magic window; this might be what makes or breaks next year based on a simple truth:  75% of leases turn over in the city between May and September.  This is the magic window in which those renters looking to buy would finally take the plunge rather than renew their leases.  I don’t mean the perma-renters (those tenants who will never be in a position or have the desire to purchase). I speak rather the other two categories of renters:   previous owners who sold and are renting temporarily and potential first time buyers who have not yet purchased a home.

If the rental market maintains its current strength through next year, landlord rental rates will inch up again, another wave of first time home buyers is a distinct possibility.  This could especially be the case if the renter runs a Buy vs. Cost comparative analysis using current or slightly lower mortgage rates.  Further, since Summer tends to be dead, from a seasonal sales standpoint, that extra volume injection based on market psychology may surprise on the upside as the next wave of first time home-buyer holdouts actually purchase a home.

Then, of course, the question is:  will supply follow suit?  Will sellers then be convinced that the market is healthy enough to now list OR will enough existing inventory be absorbed to create a meaningful increase in prices?  It is here where my hypothesis ends, though I welcome your thoughts and predictions.  In the meantime, I will be diligently watching rates and the market (as I’m sure you will as well), hoping for a good holiday season for all … and a prosperous New Year!