The Case for Rising Prices in NYC Real Estate.

The Case for Rising Real Estate Prices

As 2008 passed into 2009, who would’ve thought that a post with this title would ever be written again. But that is exactly how bottoms of markets are made. When all of the people with the ability, the willingness and the need to sell have already done so, markets will rise on their own and those with a need to buy will still do so. Of course a stiff wind can’t hurt either. And the powers that be decided that the wind was needed. The wind came in the form of multiple QE’s, Quantitative Easing’s by the Federal Reserve. Effectively they printed more money; they just made it and spread it around.

As an experiment think of an instance where there is $3 to spend and 1 quart of milk needs to be purchased. How much is that milk worth. Depending on the need, up to $3, Now let’s increase the supply in the $ in the equation, say to $6. How much is that same milk worth? Possibly $6, but even if not it certainly will be easier for the buyer to spend $4 or $5 on it and still have $1 or $2 left over for some cookies. Well that is basically what the Fed has done. At the time, the economy was falling off a cliff. Anyone with any money was not spending it as prices of everything was falling and the value of those $ was increasing. That’s not good, in fact that’s terrible as, as bad as inflation is, deflation is far worse and business literally stops. So the Fed began a series of money injections designed to inflate their way out of this mess. By buying their own bonds, this forced interest rates down and made the value of a borrowable $increase dramatically……..if you could get a loan. And so the housing crisis was averted or stopped depending on your perspective. Take a look at the chart below. It’s the Monetary Base, basically the amount of money available in the system. You can see the dramatic increase in the amount of m one available to buy the fictional quart of milk.

But what else did this policy do? Well it created nirvana for a real estate investor. See money remained tight for most of the population as credit standards were tightened significantly. It also had the unintended consequence of putting the rental market on steroids. Most would be new buyers could no longer buy an entry level home and were forced to enter or remain in the pool of renters. Demand for rental homes soared and many who sold homes could not qualify to buy a new one and became renters. Here in NYC, rents have soared past old peaks in prices while the costs of home ownership, while improved are on average still below the peak. Qualified investors are able to buy properties at prices below 2007 levels, finance them with interest rates far below the rates available back then, and then turn around and rent out the units at rents far above what was paid just 5 years ago.

This inability to get new loans by sellers has caused many potential sellers to remain put. An owner of a 2 bedroom condo in Manhattan won’t sell it for $1,200,000 even though they paid $700,000 for it because they can’t buy anything else and they don’t want to pay $6000 a month in rent. So there are very few trade up sellers. Other than those with pristine credit and income the only sellers are those that have to or those that are moving out of the area. This trend shows up in the available inventory levels here in Manhattan. Take a look at the chart below. Right now there are approximately 4800 available units in Manhattan. Now to get a true feel for what that # means we need to compare apples to apples. Comparing and April number with say 8 months ago means nothing as the amount of apartments for sale in the spring is totally different from that of August. The chart below was provided by Noah Rosenblatt of Urban Digs and he does a great job of keeping track data here in the city. So let’s look at April of 2012, there were just under 7,000 units available about a 30% decline. 

And in April of 2011 there were just under 8,000 units available. 2010, again just under 8,000, and in 2009 there were 9500 available properties. This is a huge drop-off in supply.

And as for demand, the old phrase “The British are coming” has been changed to “They all are coming” International buying has been running about 15% of all NYC properties and over 30% for condos. This combined with the investor appetite taking advantage of a superheated rental market and you can see why the prospect for higher prices over the near term is exceedingly high.

Next up………..what could change all this?