For brokers and buyers alike, 2013 may shape up to be the year of fewer real estate alternatives. In both the Manhattan and Brooklyn markets, inventory in most neighborhoods has plummeted in the last few years, and there is not much indication that the situation will be changing any time soon. In Manhattan, the market remains stratified, with the one bedroom market still oversupplied while larger properties are as scarce as hens’ teeth, while in Brooklyn the market seems tight throughout.
The small apartment marketplace continues to offer the largest number of available properties. Studios and small one bedrooms, especially in the East Side corridor beginning at 96th Street and stretching all the way down through Kips Bay into the 20s, do not sell quickly, and there are many choices. Interestingly, recent analyses appearing in both the Wall Street Journal and the New York Times have noted that this segment of the market is also slow for rentals, and that as a result rental prices have come down slightly for these smaller units. It’s a rare occurrence when both rental and sale prices in a particular segment are simultaneously slow; it clearly indicates lower demand for this type of property across the boards. Why should that be? While we can only speculate, several of my agents have suggested that the weakness in the job market may be to blame. Younger people, who are typically the occupants of these smaller apartments, are not finding the Wall Street jobs which used to be so much easier to come by. Fewer of them are moving to the city. And more of them are living with their parents to save money as, even when they are employed, their opening compensation packages are less rich than they were six or seven years ago.
As buyers move from the one bedroom into the two bedroom market, inventory drops dramatically. Here there is very little supply. And my agents tell me that there is a resurgence in a phenomenon they have not seen for a number of years: the move to the suburbs. I believe there are a number of reasons for this. First (and probably most important) the housing recovery in the tri state area outside the city has been far slower than the recovery IN the city. So you can sell your two bedroom and, for similar dollars, buy a four bedroom house. Second, as young families are feeling more economically squeezed, many feel less able to afford one or two private school tuitions. So they are attracted to the towns with good public schools. Many of these couples would RATHER remain in the city – for working couples the lifestyle is much easier. But with so few three bedroom apartments available, and at such high prices, it sometimes is simply not an option.
In the larger apartment category, the lack of inventory feeds on itself. Two bedroom buyers, if they are not prepared to move out of town, don’t sell because they cannot find decent three bedrooms. Three bedroom buyers do not sell because they cannot find decent, affordable four bedrooms. And the owners of the large co-ops, at least for now, won’t sell because they do not want to have to pay the newly increased capital gains taxes which went into effect on January 1. Not to mention the fact that there are not many two or three bedroom units, either for rent or sale, to which they can move.
Of all the neighborhoods, inventory seems to be thinnest on the Upper West Side. A recent article in the Wall Street Journal noted that there is only a five month supply of inventory there, which is a historic low. For example, buyers for large prewar co-ops on Central Park West quickly learn that there is literally nothing to see. And there was also nothing to see last month, or the month before. Asking prices all over town are escalating in response to this scarcity, and it seems increasingly likely that buyers will be responsive and pay more to obtain a place to live when there are so few options. That said, and while 5% to 10% year over year increases seem steep but possible, I doubt that most buyers will purchase properties which are coming on at 20% over last year’s prices. Even in today’s scarce inventory environment, pricing still needs to have some relationship to the comparables and price history of similar units.
One final note: financing and appraisals can still be challenging. Banks are still hyper-vigilant about the customers to whom they make loans, and high credit scores and strong income are a must (the same is true of landlords.) Fortunately, appraisals are beginning to catch up with last year’s values, although they are not yet reflecting the price increases we see coming at us since the first of the year. Given the banks’ post-recession conservatism, I have some concerns about appraisals for new deals in the months to come.
In a seller’s market like this one, well priced inventory moves fast. But sellers and their agents are, by definition, ambitious; they don’t want to leave any money on the table. It is too soon to say whether the new price levels at which properties are being placed on the market are achievable. In the condo market there have been some extraordinary successes (like Walker Tower in Chelsea and 200 E 79th St) while other buildings seem to be struggling to reach their ambitious price goals. In a tight market, prices go up. As to how much, and how fast, we will have to wait and see.