Does looking back help us to move forward in figuring out the best decisions to make when it comes to your home? We definitely think so, it helps to see how we ended up in this current position so we can make educated decisions on what will be one of the largest financial transactions of our lives. Fortunately we have a better idea on the current landscape of the real estate market in NYC. The narrative became clear in 2019 that we are in a “policy driven reset” What does that mean exactly? Long story short, the sluggish market that we’ve been seeing over the last couple of years (actually it is going on four years now) is largely due to policy decisions that were made nationally and locally that directly impacted real estate decisions here in New York. Compared to back in 2008 when the Real Estate market went down and it was largely understood that the downturn coincided with and was caused by the economic crisis.
This time around we’ve seen a strong economy and booming stock market, but the Real Estate did not share in those gains, in fact it’s been sluggish for the past four years or so. One of the reasons why it has been so sluggish is because its taken much longer to understand or pinpoint the reasons why.
First things first. Yes, this slowdown has been going on for about four years now. While that may sound like a long time (and it certainly does to us!), the market pretty much peaked in 2015 from both a pricing and annual sales standpoint.
Did you know that in 2015, 31% of listings went to a bidding war and last year it was 6%? That shows you what kind of shift in demand we’ve seen.
What’s been difficult this time around compared to 2008 is that we didn’t see a swift drop or correction in pricing. There also wasn’t a related event we could point to and say, “Ah ha, that’s it.”
We’ve seen a slow, drawn out crawl of prices coming down. Depending on the market segment being examined, generally speaking we would say prices have come down about 15-25% over that timeframe. The entry level price points haven’t seen nearly as much correction in pricing as the luxury segment of the market which has really taken the brunt of the correction.
Because we haven’t seen a quick drop, it has been hard for sellers and buyers to get on the same page regarding price. What we saw starting in 2016 is:
- Buyer demand quickly shifted.
- The days of multiple offers on most apartments disappeared.
- The days a property sat on the market for listings really accelerated
- Initial offers started coming in a lot lower than expected
- Sellers didn’t really accept that buyers left the party until probably 2018 when asking prices started to adjust to buyers expectations
To sum up, it seemed buyers had lost confidence in the “hot sellers’ market.” After seeing prices increase anywhere from 30-50% between 2012-2015 buyers had grown to expect a “best and highest” bidding war every time and cash deals dominating the market.
The real question is what brought about this change? In our experience, there were a few factors at play. The first is that buyers could only take so much prices increase and eventually wanted to pump the brakes. The mentality of getting beat out on every new listing was taking its toll. In addition, or perhaps as a result, uncertainty was entering the mind of the buyer. A spike in prices like that creates affordability issues for many buyers, its hard for actual incomes to keep up.
The narrative for the last couple of years was that buyers were “uncertain” and employed a “wait and see approach.” There was a pretty big divide between seller’s asking prices, sellers’ expectations of what their home was worth, and what buyers were actually willing to spend.
The demand side of the equation really started driving the market and the result was longer days on market for listings, more listings sitting on the market, less volume of transactions, offers coming in lower, and prices shifting downward. The pendulum was swinging to the buyer’s favor.
The “uncertainty narrative” was being driven by a series of policy decisions both nationally and locally that were giving buyers a lot of reason to wait and see where the market would end up.
Changes to Federal Tax Rates as well as SALT deductions being taken away from buyers were among the most impactful. The latter was especially difficult to absorb. A cap of $10,000 on state and local taxes really made buyers think twice as they were losing a valuable deduction.
In addition, New York State lawmakers increased the Mansion Tax and transfer taxes, and several rental laws were also hastily changed last year which affected landlords. Combine all that with a strong US dollar, a looming trade war, a tightening of LLC disclosure laws and capital control restrictions abroad, and outside investment slowed dramatically.
Even with all that ongoing, we still didn’t see a sudden, big drop in prices. It was a gradual process that drew out over the past several years. Each passing year made it harder for sellers to realize that in order to sell they’d have to adjust their prices. It took putting the apartment on the market and having it sit for 90+ days to realize that last year’s prices weren’t happening and that a bidding war within the first month probably wasn’t on the table.
Buyers were becoming much more selective, highlighting any perceived flaw in the apartment, and only making offers on apartments that were well-priced and that checked every box on their wish list.
Like any sector, the Real Estate market goes through cycles. Some favor the buyer while others favor the seller. And sometimes, as is the case now, there are signs that within certain segments of the market, primarily entry level cateogores, demand is increasing. Did you know that prices decreased in 2019 by just 4%, which contrasts with the narrative we see in a lot of headlines that emphasize a “sky is falling” perspective. It’s true that pricing is down. It’s also true that it’s not down by that much.
A promising statistic came out at the end of 2019 that sale volume (the number of transactions taking place) was actually up 1.2% for properties below 5 million. Thats not something we’ve seen in the last couple of years.
Tracking the overall sales volume is important because its often one of the leading indicators of where the market is headed. We will want to see how that statistic tracks over the next couple of quarters, it will be interesting to see what happens in the spring and summer markets.
Looking ahead into 2020 what we see more of are buyers that have been waiting on the sidelines these last couple of years and now see that prices have adjusted. Mortgage interest rates have continued to be a highlight of the market, increasing affordability for any borrower.
Due to a booming stock market, a lot of people have experienced large gains in their portfolios and are looking to take some of those gains and turn them into a more tangible asset.
Buyers when they see something really well priced are not as afraid to make the jump and make an offer and sellers can expect a little bit more demand that what we’ve encountered the last couple of years.
