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Tag: buyers market

  • Is there a Difference Between a ‘Buyer’s Market’ and a ‘Market that’s Rapidly Getting Less Advantageous Towards Seller’s’?

    The vast majority of latest prognostications point to a shift in the housing market, in favor of buyers over sellers. It’s about time. America’s housing market has been brutal on homebuyer’s, renters, and those looking to lease in prime locations for years now. There is a lot of qualitative and quantitative analysis to suggest that despite rising rates, buyers currently have the advantage.

    Realtor’s Weekly Housing Market: “The Four Big Bellwethers”

    Realtor has a weekly column called “How’s the Housing Market This Week?”. Realtor’s real estate economists are some of the most trusted in the industry. Weekly, Realtor delivers the most up-to-date statistics on what they coined “the four big bellwethers of the housing market”. These include home prices, # of new listings, total days on market, and of course, mortgage rates (Dutton, Realtor).

    “The housing market is resetting in a buyer-friendly direction,” notes Realtor Chief Economist Danielle Hale in her evaluation. We’d be remised if we didn’t note a “buyer-friendly direction” is certainly not the same as a true buyer’s market. While the same analysis notes the obvious, historic seller’s market that’s raged since COVID-19 began, it points out that the window for sellers is closing, rapidly. Below are the previously mentioned Realtor weekly housing trends, for week-end August 6th, 2022.

    -Realtor.com – Weekly Housing Trends, August 6th, 2022

    What jumps out to me are the top two statistics. A 15.5% median listing price increase, coupled with 8% fewer listing than the week before (Realtor.com). Hale has a unique and thought-provoking perspective on this phenomenon.

    Is There Surprisingly Good News in a 15.5% Increase in Median Listing Price?

    According to Hale, yes, this number is good news for prospective buyers. The last data from July 2022 shows a median nationwide listing price of $449,000. For the week ending August 6th, a 15.5% listing price increase means the new median was $518.595. While this marks the 34th straight week of double-digit price growth, Hale points out it’s also the “second consecutive week of deceleration” (Dutton, Realtor). The previous two weeks – at the end of July 2022 – median listing prices rose by 16.6% and 15.6%, respectively. This third ‘relatively temperate’ hike offers buyers hope home price growth will finally continue steadily dwindling.

    “The improvement has been substantial”, confirms Hale. She’s just as quick to add, “buyers in today’s market may still face meaningful affordability challenges as the typical home listing price remains near a record high”. But there’s little long-term evidence to suggest sticker price is a major deterrent for buyers (Dutton, Realtor). Hale reaffirms, “Persistent [homebuyers] may still continue to find success”. She goes on to add, “Second quarter data showed that homeownership rates increased from a year ago, both overall and for nearly every age and racial and ethnic group”.

    Given that homeownership rates have surged — amid rampant inflation, rising mortgage rates, and other deterrents — strongly signals that buyers who are willing to have some flexibility will ultimately win. Participants who are been willing to purchase somewhere they may not have considered pre-pandemic have largely become homebuyers. It’s a true testament to the lengths that homebuyers are willing to go today, provided sellers meet them halfway.

    Are Sellers Undermining the ‘Buyer Friendly’ Market?

    Anything positive for homebuyers is a negative for home sellers and of course, vice versa. Many sellers with properties on the market are panicking they ‘missed the mark’ by not closing a sale on their property during the COVID-19 real estate boom. For week-end July 30th, 2022, the number of new listings dropped by 8%, year-over-year (Dutton, Realtor).

    “New listings fell from a year ago for a fourth week. This is looking more and more like sellers may be wary of current market conditions, which have shifted substantially, even though they remain quite favorable to sellers who have owned for just about any length of time.”

    – Danielle Hale, Chief Economist, Realtor

    Hale appears to be hesitant to commit to buyer-friendly market conditions. However, she does definitively comment that conditions are becoming less and less favorable for sellers. The same message seems to be resonating across the board: if you’re a seller, the longer your property stays on the market, the worse-off your position will be.

    “While overall inventory [of new and old listings] grew by 28% over this same week last year, the active listings count still trails its 2020 and 2019 levels by more than 15% and 45%, respectively. More improvement in active inventory is likely needed to bring balance, but the recent trend may be at risk if homeowner attitudes toward selling now continue to deteriorate.”

    – Danielle Hale, Chief Economist, Realtor

    Once again, Hale seems to reemphasize the same underlying position. ‘We’re not in a pro-buyer’s market, we’re in a market that’s rapidly growing less favorable to sellers.’

    Are Rising Mortgage Rates to Blame for Homebuyers not Rushing to Close a Deal?

    The last question Realtor’s frequented market assessment addresses is why buyer’s aren’t rushing to close the deal. We are in a market that’s getting less and less favorable towards sellers, after all. What happens when we hit that market floor and conditions start to change against homebuyers. That has been the case – at a staggering rate – for well over two years now (Dutton, Realtor).

    In July 2022, listings lingered on the market a mere 34 days before getting snapped up. That’s nearly half the time it took two years earlier (Dutton, Realtor). Conversely, after having entered August 2022, it seems homebuyers are pumping the breaks and not feeling in such a rush. Hale’s prediction? Expect more of the same. She stated, “We expect more slowing ahead as the housing market reset”. The question remains, why?

    According to data provided by Freddie Mac, rising mortgage rates are a good place to start. For week-end August 11th, 2022, the average 30-year fixed mortgage rate increased to 5.22%. That’s considered a significantly steep spike from the previous week’s 4.99% (Mortgage Rates, Freddie Mac). Realtor predicts the future will hinge on how large corporations will view the potentially looming recession.

    “The big question for consumers is whether companies will over-react to the recession concerns and start trimming payrolls. A sharp pullback in hiring could have a direct impact on people’s ability to keep spending, especially with today’s high inflation.”

    – George Ratiu, Senior Economist, Realtor

    Realtor ultimately winds up agreeing. Prospective homebuyers should take full advantage of this buyer-friendly market while it lasts (Dutton, Realtor).

  • Is the US Real Estate Market Finally Starting to Cool Off?

    According to recent trends witnessed primarily in California, but largely nationwide, the supply in the housing market appears to be growing, while the demand is shrinking. This is what experts are counting on leading to a “cool off” period in real estate prices. “Today, week after week, we see more and more inventory come on the market and demand is down,” said broker Justin Itzen. He added, “Buyers have more to choose from, they can be more selective” (Moscufo, ABC News). Taylor Marr, chief economist of Redfin, echoed a very similar narrative. Marr made a distinguishment between expensive coastal markets and cheaper, rural housing markets. As Itzen’s remarks indicated, Marr concurs coastal cities located in California, New York, etc. will witness most of the impact.

    But that still leaves the larger question unanswered; are we looking at a nationwide real estate cooling period? According to an investors report Redfin released at the very start of August 2022, the share of home listings that have been on the market for more than 30 days has increased more than 12% from 2021. Due to inflationary effects, interest rates for average mortgages were between 5-6% in July 2022, compared to 2-3% July 2021. Inflation and rising prices (or rates) go hand-in-hand, but this increase is steep enough to leave tangible impressions. With more listings, dropping prices, and definite near future housing market uncertainty, we’re hopefully finally entering a buyer’s market.

    Importantly, Iesha McTier-Whyte, a broker selling middle to high-end homes in Newark, NJ advised she’s seen the same pattern. However, she doesn’t view it as a bad thing. “It’s nice to see [the market] cool down and kind of go back to the basics,” McTier-Whyte said. “What we experienced last year was like no other”. Itzen’s partner, Gio Helou, remarked “buyers are [now] able to actually go through the natural home buying process”. Assumingely, Helou meant that buyer’s now have the luxury of options. They no longer have to make the same kind of extraordinary sacrifices to simply purchase a family home.

    At one point, “homes were going within days for way over the asking price,” said Tim Sherman, a prospective homebuyer. When he and his wife found a home in Huntington Beach, CA, they began considering liquidating investments to purchase it. Not only “15% over the asking price,” commented Sherman, “but it was now over the market estimates of what the property was worth” (Moscufo, ABC News).

    The end to Sherman’s story really ties into the underlying assertion of this article. That first house fell through, but he and his wife did wind up purchasing a home. As soon as they saw the photos their broker sent them, they put in an immediate offer. Their former home in Dallas then sold in just one day (Moscufo, ABC News). If that’s any indication of the market dynamics moving forward, expect lower prices, more supply, and increased quality listings. A true win-win, both for individual homeowners and for real estate investors. As for the critics who continue to say there’s somewhat of a 2008-like “housing bubble” getting ready to pop, there’s little quantitative evidence to support the theory. Yet even the critics concede:

    “There is now a huge supply of new houses for sale, in all stages of construction, over 9 months’ supply in total, according to the Census Bureau. In terms of the number of houses, by June [2022], there were 463,000 new single-family houses at all stages of construction for sale, the highest since May 2008, and up by over 30%, from a year ago.”

    -Wolf Richter, The Wolf Street Report

    Their perspective is investors need to remain patient, as market conditions are continuing to return to their equilibrium. After what we’ve witnessed with the COVID-19 global pandemic, anything is possible, but conceptually, our economy isn’t close to the same state it was in heading into the 2008 financial collapse. We have far more restrictions on speculative investments, strict leverage ratios, mandatory reporting requirements, etc. The lessons of 2008 essentially taught us how to avoid widespread economic fragility when a significant market starts looking vulnerable. Additionally, the credit worthiness, financial disclosures, and ability to repay have all tightened considerably for buyers. Time will only tell whether we are in the midst of a “cooling off” period, or if we’re about to witness about bubble bursting. From our research and observations, we see it as more of a buyer’s market than a ‘fragile’ housing market.  

  • Four Major Valuation Methods Explained: Commercial Real Estate (CRE)

    From the perspective of investors, coming up with an accurate property valuation is the most significant factor in making investment decisions. Commercial real estate (CRE) investment has become increasingly popular in the past few decades. That’s because it’s viewed as an excellent vehicle for corporate and public wealth investors to achieve stable returns.

    In this post, we’ll look at four primary valuation methods investors use when looking at CRE proposals. It should be no surprise that technology deeply impacts a potential CRE investment valuation. It’s truly astounding how powerful software solutions can support the consistency, transparency, and standardization across the valuation industry.

    Cost Approach

    The cost approach involves estimating a rough total budget for how much the structure would cost to build from scratch. The cost approach accounts for the original value of the land, plus the cost to build the structure from the ground up. Investors typically look at this approach to see if it’s financially more profitable to develop a new property, versus buying an existing one. The cost approach is comprised of two major methods:

    • Reproduction Method – Costs of rebuilding an exact replica of the existing structure, using the same materials, construction methods, etc.
    • Replacement Method – Costs of rebuilding a new structure with brand new materials, construction methods, designs, etc.

    This logic is generally sound. However, it’s critical to note this method does not account for additional effort of development and construction involved in building a property from the ground up. Similarly, it does not account for the long-term cash flow of a given CRE project.

    Sales Comparison Approach

    Comparisons between key market factors are one of the most important inputs to any valuation method. Furthermore, sales comparisons are usually the source of information, such as cost of reproduction, current market capitalization rate, loan-to-value ratios, and others (Atlus Group). Prospective buyers use this approach to compare current CRE listings to recently sold projects. Though this list isn’t exhaustive, it includes major components of the sales comparison approach:

    • Price per square foot
    • Capitalization rate
    • Price per unit (multifamily CRE)
    • Price per key (hospitality CRE)
    • Physical condition
    • Location
    • Tenant profiles (income, credit quality, cash flow stability, etc.)
    • Income (financial statements)

    The closer in similarity a prospective CRE property is to a comparable sale – especially a recent one – referencing the above components, the more effective this approach tends to be. Finally, once the quantitative characteristics of the perspective CRE property are compared, there is a qualitative analysis to ensure any more or less favorable attributes are accounted for. These adjustments are an essential precaution, if using this valuation method for CRE purchases.

    One notable downside to this method is a lack of analysis of any long-term cash flows or property valuation.

    Capitalization Rate Approach (Income Capitalization)

    The “cap rate” approach is one of the most popular methods of property valuation. It’s very frequently used by analysts in both the lending world and intended acquisitions (Atlus Group). When you hear real estate professionals mention what a property “traded at”, they’re almost always citing either the cap rate, or the price per square foot, a property sold for.

    The formula for calculating cap rate is simple. It’s equal to the net operating income (NOI) of the property, divided by the capitalization rate. The outcome represents the ownership’s approximate value of the property, based on the first year’s expected cash flow.

    Like the Sales Comparison Approach, this tool is most valuable to estimate the current value of CRE properties. Furthermore, it’s even more useful if the property has relatively stable and easily predictable cash flow. New, complex projects that have essentially zero NOI are not good candidates for this valuation approach. In such circumstances, investors are much more likely to turn to the Discounted Cash Flow Approach.

    Discounted Cash Flow Approach

    While the three previously detailed CRE valuation methods are undoubtably useful under certain conditions, they share a major drawback. Each of first three valuation methods estimate the value of a CRE property at a specific point in time. This is in fact a major drawback for real estate investors, who are rarely investing primarily for short-term gains.

    Suppose an example of a long-term, direct real estate investor, looking to maximize their return of a 10-year period. The below formula, taken from Investopedia shows the common formula for the Discounted Cash Flow (DCF) approach.

    Source: Sabrina Jiang, Investopedia (2021)

    Investors utilize this method to factor in both the delta of the initial buying price and the value of the property after ten years, in addition to the net present value (NPV) of any cash flows that come in from owning that property over 10 years. This gives real estate investors a great formula to input prognostications, then make transactions based on those forecasts.

    Reverting to the drawbacks of point-in-time valuations, firstly, it’s critical to understand fundamental psychology real estate investors utilize. Typically, real estate investors have a longer-term vision, especially compared to investors who purchase various securities. This makes a point-in-time valuation much less relevant, since in the long-run real estate investors are not just looking at an easily predictably present value. As we saw in 2008 most famously and during the COVID-19 pandemic most recently, real estate prices can tank from unrelated market activities, political changes, or even a completely unexpected global health pandemic (Altus Group).

    Conclusion

    Long-term volatility concerns necessitate real estate investors to rely on more than increases in value over time. This is a primary explanation why investors generally rely on the cash flow, plus a final value increase. If an investor holds a property for ten years from purchase to sale, as an example, the overall return will be a combination of cash flow from all ten years of ownership, plus any difference between the initial purchase price and the ultimate sale price.

    The cost, sales comparison, and capitalization rate approaches all fail to account for both potential changes in the cash flow, or value of the property, over the investment hold period. Hypothetically, if an investor knows that in year three of the hold period, a major tenant is going to vacate the property and cause a significant decrease in the property’s cash flow for the period, this clearly negatively impacts the overall return the investor attains. The only valuation method that takes into consideration time value of money and captures the future performance of the property is the DCF method.

    The DCF method predicts future cash flows over an estimated property hold period. This includes both annual cash flow and profit at the time of sale. Many practitioners found that attempting to accurately predict revenue, expenses, and the future value of the property at the time of sale, is actually quite difficult. It essentially forces them forces them to think deeply and more critically. Long-term risk factors, management, quality of tenants, and trends in the real estate market suddenly appear on their immediate radar.

    While not perfect (valuation models are not a crystal ball), the DCF method is generally preferred by real estate investors. Bluntly, the DCF approach best matches the reality of the investment, compared to the others discussed above.

    The Closing Argument to Real Estate Investors (Primarily CRE Investors)

    Selecting the best-fit valuation method is akin to choosing the right tool for a homeowner’s repair project. Most of the decision is decided on a case-by-case basis, based on the best information available. With the varying subjective methods and information, asset appraisal in the world of commercial is part formula, part art form.

    In practicality, most appraisers don’t limit themselves to one method, instead taking an average of two or more methods. It’s hardly surprising appraisers have toned down their aggressive approach, especially compared to nearly 15 years ago. After the catastrophic downward spiral of 2008, the more analysis real estate investment projects undergo, the better. To build on the methods discussed, a well-known method rapidly gaining increasing popularity is called the stress test. Perhaps this test is more commonly referenced in the investment banking sector, namely to monitor volatility ratios of aggressive investment banks who also hold client checking and other deposit accounts, to ensure we don’t need to worry about anymore “bank runs”, but nonetheless the same logic applies to the real estate sector and it’s played an indispensable component to accurate real estate valuations. 

    If you take nothing else away from this article, use the DCF Method whenever possible. Especially in today’s ever-changing real estate market, periodic cash flows are a must to have a successful, long-term real estate holding. As with any other investment, do your due diligence, ensure you have the right team around you, and take calculated, well-thought risks. Good luck to all continuing to navigate the post COVID-19 real estate landmine!

  • Four Major Valuation Methods Explained: Commercial Real Estate (CRE)

    From the perspective of investors, coming up with an accurate property valuation is the most significant factor in making investment decisions. Commercial real estate (CRE) investment has become increasingly popular in the past few decades. That’s because it’s viewed as an excellent vehicle for corporate and public wealth investors to achieve stable returns.

    In this post, we’ll look at four primary valuation methods investors use when looking at CRE proposals. It should be no surprise that technology deeply impacts a potential CRE investment valuation. It’s truly astounding how powerful software solutions can support the consistency, transparency, and standardization across the valuation industry.

    Cost Approach

    The cost approach involves estimating a rough total budget for how much the structure would cost to build from scratch. The cost approach accounts for the original value of the land, plus the cost to build the structure from the ground up. Investors typically look at this approach to see if it’s financially more profitable to develop a new property, versus buying an existing one. The cost approach is comprised of two major methods:

    • Reproduction Method – Costs of rebuilding an exact replica of the existing structure, using the same materials, construction methods, etc.
    • Replacement Method – Costs of rebuilding a new structure with brand new materials, construction methods, designs, etc.

    This logic is generally sound. However, it’s critical to note this method does not account for additional effort of development and construction involved in building a property from the ground up. Similarly, it does not account for the long-term cash flow of a given CRE project.

    Sales Comparison Approach

    Comparisons between key market factors are one of the most important inputs to any valuation method. Furthermore, sales comparisons are usually the source of information, such as cost of reproduction, current market capitalization rate, loan-to-value ratios, and others (Atlus Group). Prospective buyers use this approach to compare current CRE listings to recently sold projects. Though this list isn’t exhaustive, it includes major components of the sales comparison approach:

    • Price per square foot
    • Capitalization rate
    • Price per unit (multifamily CRE)
    • Price per key (hospitality CRE)
    • Physical condition
    • Location
    • Tenant profiles (income, credit quality, cash flow stability, etc.)
    • Income (financial statements)

    The closer in similarity a prospective CRE property is to a comparable sale – especially a recent one – referencing the above components, the more effective this approach tends to be. Finally, once the quantitative characteristics of the perspective CRE property are compared, there is a qualitative analysis to ensure any more or less favorable attributes are accounted for. These adjustments are an essential precaution, if using this valuation method for CRE purchases.

    One notable downside to this method is a lack of analysis of any long-term cash flows or property valuation.

    Capitalization Rate Approach (Income Capitalization)

    The “cap rate” approach is one of the most popular methods of property valuation. It’s very frequently used by analysts in both the lending world and intended acquisitions (Atlus Group). When you hear real estate professionals mention what a property “traded at”, they’re almost always citing either the cap rate, or the price per square foot, a property sold for.

    The formula for calculating cap rate is simple. It’s equal to the net operating income (NOI) of the property, divided by the capitalization rate. The outcome represents the ownership’s approximate value of the property, based on the first year’s expected cash flow.

    Like the Sales Comparison Approach, this tool is most valuable to estimate the current value of CRE properties. Furthermore, it’s even more useful if the property has relatively stable and easily predictable cash flow. New, complex projects that have essentially zero NOI are not good candidates for this valuation approach. In such circumstances, investors are much more likely to turn to the Discounted Cash Flow Approach.

    Discounted Cash Flow Approach

    While the three previously detailed CRE valuation methods are undoubtably useful under certain conditions, they share a major drawback. Each of first three valuation methods estimate the value of a CRE property at a specific point in time. This is in fact a major drawback for real estate investors, who are rarely investing primarily for short-term gains.

    Suppose an example of a long-term, direct real estate investor, looking to maximize their return of a 10-year period. The below formula, taken from Investopedia shows the common formula for the Discounted Cash Flow (DCF) approach.

    Source: Sabrina Jiang, Investopedia (2021)

    Investors utilize this method to factor in both the delta of the initial buying price and the value of the property after ten years, in addition to the net present value (NPV) of any cash flows that come in from owning that property over 10 years. This gives real estate investors a great formula to input prognostications, then make transactions based on those forecasts.

    Reverting to the drawbacks of point-in-time valuations, firstly, it’s critical to understand fundamental psychology real estate investors utilize. Typically, real estate investors have a longer-term vision, especially compared to investors who purchase various securities. This makes a point-in-time valuation much less relevant, since in the long-run real estate investors are not just looking at an easily predictably present value. As we saw in 2008 most famously and during the COVID-19 pandemic most recently, real estate prices can tank from unrelated market activities, political changes, or even a completely unexpected global health pandemic (Altus Group).

    Conclusion

    Long-term volatility concerns necessitate real estate investors to rely on more than increases in value over time. This is a primary explanation why investors generally rely on the cash flow, plus a final value increase. If an investor holds a property for ten years from purchase to sale, as an example, the overall return will be a combination of cash flow from all ten years of ownership, plus any difference between the initial purchase price and the ultimate sale price.

    The cost, sales comparison, and capitalization rate approaches all fail to account for both potential changes in the cash flow, or value of the property, over the investment hold period. Hypothetically, if an investor knows that in year three of the hold period, a major tenant is going to vacate the property and cause a significant decrease in the property’s cash flow for the period, this clearly negatively impacts the overall return the investor attains. The only valuation method that takes into consideration time value of money and captures the future performance of the property is the DCF method.

    The DCF method predicts future cash flows over an estimated property hold period. This includes both annual cash flow and profit at the time of sale. Many practitioners found that attempting to accurately predict revenue, expenses, and the future value of the property at the time of sale, is actually quite difficult. It essentially forces them forces them to think deeply and more critically. Long-term risk factors, management, quality of tenants, and trends in the real estate market suddenly appear on their immediate radar.

    While not perfect (valuation models are not a crystal ball), the DCF method is generally preferred by real estate investors. Bluntly, the DCF approach best matches the reality of the investment, compared to the others discussed above.

    The Closing Argument to Real Estate Investors (Primarily CRE Investors)

    Selecting the best-fit valuation method is akin to choosing the right tool for a homeowner’s repair project. Most of the decision is decided on a case-by-case basis, based on the best information available. With the varying subjective methods and information, asset appraisal in the world of commercial is part formula, part art form.

    In practicality, most appraisers don’t limit themselves to one method, instead taking an average of two or more methods. It’s hardly surprising appraisers have toned down their aggressive approach, especially compared to nearly 15 years ago. After the catastrophic downward spiral of 2008, the more analysis real estate investment projects undergo, the better. To build on the methods discussed, a well-known method rapidly gaining increasing popularity is called the stress test. Perhaps this test is more commonly referenced in the investment banking sector, namely to monitor volatility ratios of aggressive investment banks who also hold client checking and other deposit accounts, to ensure we don’t need to worry about anymore “bank runs”, but nonetheless the same logic applies to the real estate sector and it’s played an indispensable component to accurate real estate valuations. 

    If you take nothing else away from this article, use the DCF Method whenever possible. Especially in today’s ever-changing real estate market, periodic cash flows are a must to have a successful, long-term real estate holding. As with any other investment, do your due diligence, ensure you have the right team around you, and take calculated, well-thought risks. Good luck to all continuing to navigate the post COVID-19 real estate landmine!

  • New York City’s Housing Market Finishes Strong in 2021; Slowdown Expected in 2022?

    New York City’s residential real estate market closed 2021 with many arguing it had the strongest performance in three decades. By mid-October, Manhattan contract signings already surpassed the previous record, which was 12,520 in 2013 (UrbanDigs). With a little under two weeks left in 2021, closings reached 14,774 (Cavanaugh, TheRealDeal). Already, that’s more than double the 2020 total. Despite a rise in listings, that level of closings undoubtably depleted inventory. Are we heading towards a residential real estate market slowdown in NYC in 2022?

    UrbanDigs found that through December 5th, 2021, listings had exceeded the 2008-2018 average by 18%. Net new inventory – the number of monthly new listings, minus contracts signed and listings taken off-market – surprised many market experts. Astonishingly, buyers bought out the increased supply at an even faster pace. Net new inventory dropped below zero in 9 of 11 months during 2021, to negative 861 units (Cavanaugh, TheRealDeal).

    For buyers, prices have steadily risen in tandem. For the first time since 2015, listing discounts fell consistently throughout the year, even as buy-side competition increased. The luxury market, considered properties with a selling price of $4M and up, had the best year since 2014 (UrbanDigs). Buyers spent over $14B so far and with less than a couple weeks left in 2021, this represents a 19% increase over the previous record of the last three decades (UrbanDigs).

    Even with the residential housing market’s red hot 2021 performance, UrbanDigs co-founder John Walkup does not have nearly the same forecast for 2022.

    “Deal volume may slow through the holiday season, especially with fewer units coming to market”

    -John Walkup, Co-Founder of UrbanDigs

    He continued with stating he feels the next quarter could be noticeably slower than Q4 of 2021.

    “A slowdown in buy-side activity may cause inventory levels to rise, pressuring prices”

    -John Walkup, Co-Founder of UrbanDigs

    Furthermore, he predicted a “multi-quarter lull in 2022” for the luxury market.

    Walkup’s predictions for 2022 aren’t exactly universally accepted by known residential real estate experts. Jonathan Miller, President and CEO of Miller Samuel, had a different sentiment in his latest report for Douglas Elliman. Miller sees deals in Manhattan and Brooklyn continuing to outpace listings heading into 2022, as they have closing 2021. His report cautions real estate market participants not to be surprised if there isn’t as noticeable a slowdown in 2022.

     “Inventory is continuing to collapse, and that’s why we anticipate continued price growth into the new year”

    -Jonathan Miller, President & CEO of Miller Samuel

    According to the Wall Street Journal (WSJ), the Federal Reserve may hike interest rates as early as March 2022. Walkup believes this could “put an upper bound on condo prices, with luxury and new development prices falling first”. Simultaneously, Walkup assured the luxury lull will be “nothing too drastic”, estimating discounts maxing out at 5%.

    In a peculiar comparison, the WSJ noted that condos, as an asset class, lag behind the exceptional performance of the S&P 500 Index (Joe Wallace, Wall Street Journal). The S&P hit a 67th record high in the third to last week of 2021 (Alexander Osipovich, Wall Street Journal). Since the 2008 US financial collapse was largely related to assets and various securities in the housing market, it’s not surprising during that time, both the stock market and the value of real estate took a hit as a result (Cavanaugh, TheRealDeal). UrbanDigs found that since January 2008, the S&P increased 230%, while the price per square foot of a new Manhattan condo rose 68%.

    “The frothy activity observed in the NYC real estate market since the reopening has yet to translate into anything approaching the gains seen on the broader equity index”

    -John Walkup, Co-Founder of UrbanDigs

    While that may be true, you cannot live in an index, or any stock portfolio.

    Interest rates could also be a major influencing factor for foreign investment. Should the Fed raise rates, this would further strengthen the USD, which already surged to a 16-month high in November 2021 according to Barron’s. As a result, this places buyers with wealth in other countries in a disadvantageous position. So much so, Walkup pontificates, that this will dissuade foreigners from buying US real estate. Instead, Walkup believes they are likely to liquidate their current holdings. He goes on to state, “2022 could be the year of the foreign sellers”.

    In anticipation of the opposite, NYC brokers geared up for an influx of foreign buyers, ahead of travel bans being lifted from 33 countries in November 2021. The increasing prevalence of the Omicron variant is heavily pushing a slowdown on that effort. Nonetheless, a rebound of residential real estate in overseas markets suggests foreign investor fears may be receding.

    “On the whole, I think travel bans take a back seat to [profit and loss] statements. So whereas a lifted travel ban could certainly stimulate some activity, if NYC investment returns are viewed as less than optimal due to currency fluctuations or price volatility, foreign buyers will look elsewhere.”

    -John Walkup, Co-Founder of UrbanDigs

    On a more granular level, Walkup expects continued strong townhouse demand and a renewed interest in “fixer-uppers”. Compared to the 2008 – 2018 average, in 2021 average monthly sales volume of Manhattan townhouses rose by nearly 50 percent. Walkup feels the market will likely remain hot, as buyers continue pursuing space and privacy, inspired by the COVID-19 pandemic. He sees sales and prices continuing to rise, as more homes are snapped up, thereby depleting inventory.

    The demand for renovated units, however, could be ebbing (UrbanDigs). In October 2021, UrbanDigs released a report outlining a roughly 30 percent divide between prices of renovated units and “fixer-uppers”. The prevailing theory seems to be supply chain problems, with labor shortages and rising material costs being the main catalysts. This helps explain why a very substantial block of buyers opted to avoid properties requiring extensive renovation.

    Walkup said in 2022, the spread between renovated and unrenovated units has potential to narrow. Increasingly tightening supply compels buyers to opt for units in need of some TLC. All-in-all, especially considering NYC has remained a historically hot buyer’s market when it comes to residential real estate throughout all of 2021, it’s too early to truly predict what 2022 will bring. The Omicron variant’s spread throughout the US, as well as the world, will surely have an impact. Other external economic factors will continue to impact NYC’s housing market as well, as all eyes are on the Fed. If and when the Fed chooses to hike up rates, investors should expect the entire landscape of residential real estate in NYC, as well as the entire United States, to change.  

  • New York City’s Housing Market Finishes Strong in 2021; Slowdown Expected in 2022?

    New York City’s residential real estate market closed 2021 with many arguing it had the strongest performance in three decades. By mid-October, Manhattan contract signings already surpassed the previous record, which was 12,520 in 2013 (UrbanDigs). With a little under two weeks left in 2021, closings reached 14,774 (Cavanaugh, TheRealDeal). Already, that’s more than double the 2020 total. Despite a rise in listings, that level of closings undoubtably depleted inventory. Are we heading towards a residential real estate market slowdown in NYC in 2022?

    UrbanDigs found that through December 5th, 2021, listings had exceeded the 2008-2018 average by 18%. Net new inventory – the number of monthly new listings, minus contracts signed and listings taken off-market – surprised many market experts. Astonishingly, buyers bought out the increased supply at an even faster pace. Net new inventory dropped below zero in 9 of 11 months during 2021, to negative 861 units (Cavanaugh, TheRealDeal).

    For buyers, prices have steadily risen in tandem. For the first time since 2015, listing discounts fell consistently throughout the year, even as buy-side competition increased. The luxury market, considered properties with a selling price of $4M and up, had the best year since 2014 (UrbanDigs). Buyers spent over $14B so far and with less than a couple weeks left in 2021, this represents a 19% increase over the previous record of the last three decades (UrbanDigs).

    Even with the residential housing market’s red hot 2021 performance, UrbanDigs co-founder John Walkup does not have nearly the same forecast for 2022.

    “Deal volume may slow through the holiday season, especially with fewer units coming to market”

    -John Walkup, Co-Founder of UrbanDigs

    He continued with stating he feels the next quarter could be noticeably slower than Q4 of 2021.

    “A slowdown in buy-side activity may cause inventory levels to rise, pressuring prices”

    -John Walkup, Co-Founder of UrbanDigs

    Furthermore, he predicted a “multi-quarter lull in 2022” for the luxury market.

    Walkup’s predictions for 2022 aren’t exactly universally accepted by known residential real estate experts. Jonathan Miller, President and CEO of Miller Samuel, had a different sentiment in his latest report for Douglas Elliman. Miller sees deals in Manhattan and Brooklyn continuing to outpace listings heading into 2022, as they have closing 2021. His report cautions real estate market participants not to be surprised if there isn’t as noticeable a slowdown in 2022.

     “Inventory is continuing to collapse, and that’s why we anticipate continued price growth into the new year”

    -Jonathan Miller, President & CEO of Miller Samuel

    According to the Wall Street Journal (WSJ), the Federal Reserve may hike interest rates as early as March 2022. Walkup believes this could “put an upper bound on condo prices, with luxury and new development prices falling first”. Simultaneously, Walkup assured the luxury lull will be “nothing too drastic”, estimating discounts maxing out at 5%.

    In a peculiar comparison, the WSJ noted that condos, as an asset class, lag behind the exceptional performance of the S&P 500 Index (Joe Wallace, Wall Street Journal). The S&P hit a 67th record high in the third to last week of 2021 (Alexander Osipovich, Wall Street Journal). Since the 2008 US financial collapse was largely related to assets and various securities in the housing market, it’s not surprising during that time, both the stock market and the value of real estate took a hit as a result (Cavanaugh, TheRealDeal). UrbanDigs found that since January 2008, the S&P increased 230%, while the price per square foot of a new Manhattan condo rose 68%.

    “The frothy activity observed in the NYC real estate market since the reopening has yet to translate into anything approaching the gains seen on the broader equity index”

    -John Walkup, Co-Founder of UrbanDigs

    While that may be true, you cannot live in an index, or any stock portfolio.

    Interest rates could also be a major influencing factor for foreign investment. Should the Fed raise rates, this would further strengthen the USD, which already surged to a 16-month high in November 2021 according to Barron’s. As a result, this places buyers with wealth in other countries in a disadvantageous position. So much so, Walkup pontificates, that this will dissuade foreigners from buying US real estate. Instead, Walkup believes they are likely to liquidate their current holdings. He goes on to state, “2022 could be the year of the foreign sellers”.

    In anticipation of the opposite, NYC brokers geared up for an influx of foreign buyers, ahead of travel bans being lifted from 33 countries in November 2021. The increasing prevalence of the Omicron variant is heavily pushing a slowdown on that effort. Nonetheless, a rebound of residential real estate in overseas markets suggests foreign investor fears may be receding.

    “On the whole, I think travel bans take a back seat to [profit and loss] statements. So whereas a lifted travel ban could certainly stimulate some activity, if NYC investment returns are viewed as less than optimal due to currency fluctuations or price volatility, foreign buyers will look elsewhere.”

    -John Walkup, Co-Founder of UrbanDigs

    On a more granular level, Walkup expects continued strong townhouse demand and a renewed interest in “fixer-uppers”. Compared to the 2008 – 2018 average, in 2021 average monthly sales volume of Manhattan townhouses rose by nearly 50 percent. Walkup feels the market will likely remain hot, as buyers continue pursuing space and privacy, inspired by the COVID-19 pandemic. He sees sales and prices continuing to rise, as more homes are snapped up, thereby depleting inventory.

    The demand for renovated units, however, could be ebbing (UrbanDigs). In October 2021, UrbanDigs released a report outlining a roughly 30 percent divide between prices of renovated units and “fixer-uppers”. The prevailing theory seems to be supply chain problems, with labor shortages and rising material costs being the main catalysts. This helps explain why a very substantial block of buyers opted to avoid properties requiring extensive renovation.

    Walkup said in 2022, the spread between renovated and unrenovated units has potential to narrow. Increasingly tightening supply compels buyers to opt for units in need of some TLC. All-in-all, especially considering NYC has remained a historically hot buyer’s market when it comes to residential real estate throughout all of 2021, it’s too early to truly predict what 2022 will bring. The Omicron variant’s spread throughout the US, as well as the world, will surely have an impact. Other external economic factors will continue to impact NYC’s housing market as well, as all eyes are on the Fed. If and when the Fed chooses to hike up rates, investors should expect the entire landscape of residential real estate in NYC, as well as the entire United States, to change.  

  • NYC’s Real Estate Market: Roaring Housing Prices Show No Signs of Slowdown

    “The story that I’m seeing across the board: All segments are transacting. New York [real estate] is back, and people want to be here.”

    – Christopher Kromer, Brown Harris Stevens

    Statistically, that’s an excellent summation of New York City’s real estate market. While real estate was least of all financial asset classes hit by the COVID-19 pandemic, it’s not really “recovering”. Quite amazingly, it’s heating up. It has been for months now, but experts predict that was just a warm up (Singh, CNBC).

    “We’re coming off a record number of signed contracts in the second quarter, and what’s driving that is buyers are seeing value. They’re sensing opportunity, and there’s a real sense of hope for an economic boom in September when it opens up.”

    – Christopher Kromer, Brown Harris Stevens

    In other words, even reasonable rental prices are getting nearly impossible to find almost anywhere in New York City. The buyer’s market is a different story. As Kromer put it, “For the most part, if you’re buying today, it’s probably less expensive than it would have been three or four years ago”. For these purposes, suppose we break New York City’s real estate market into two distinct elements. The profit opportunity for cash buyers has been there and will continue to be there for a prolonged time. Conversely, the residential real estate market for renters, who are mostly living paycheck-to-paycheck, is a nightmare (Nasdaq).

    A Contradictory Study

    Although, a recent Douglas Elliman and Miller Samuel report appeared to somewhat contradict this philosophy. The report showed median resale prices for Manhattan apartments reached an all-time high in Q2 2021 (Douglas Elliman). Average sale prices rose 12% in the quarter (Douglas Elliman). They topped $1.9 million and there was also a 150% gain in sales during that same time period, compared to 2020. In Q2 of 2020, Manhattan apartment sales had their largest percentage decline in 30 years. Residents fled Manhattan during the COVID-19 pandemic, so brokers largely weren’t even able to show apartments to prospective buyers.

    Kromer had a response to the data presented by the Douglas Elliman and Miller Samuel report.

    “I think it’s probably tilted with a lot of high-end closings. The luxury market has been booming lately with a lot of discounts.”

    – Christopher Kromer, Brown Harris Stevens

    The recent activity in Manhattan’s luxury housing market still hasn’t wiped away the excess inventory created by COVID-19. In the luxury market, sellers are coming down on asking prices to meet buyers on their side. This in turn gives buyer’s even more buying power because they have options.

    “What’s driving this are more realistic sellers and softer prices. We still are at near-record levels of inventory. So, the sellers are going down to meet the buyers at their prices. The buyers have options.”

    – Christopher Kromer, Brown Harris Stevens

    Moving Beyond Manhattan

    Astoundingly, markets in the outer boroughs of New York, such as Brooklyn, showed far more resilience through the pandemic. This is again compared to the luxury, upscale housing market in Manhattan; a very significant geographic market difference.

    “People were looking for value, for space and less dense areas, and you did not see the discounts that you saw in Manhattan in the outer boroughs”.

    – Christopher Kromer, Brown Harris Stevens

    A few of Kromer’s own listings in Queens and Brooklyn recently sold above asking price, after receiving multiple offers. One two-bedroom co-op in Brooklyn even sold at roughly 8-9% above the price it sold at three years ago.

    “A single-family home in Queens was overwhelmed with interest. We had about 50 showings within the first week, with it selling for about 10% above the asking price”.

    – Christopher Kromer, Brown Harris Stevens

    In Conclusion

    Despite the study from Douglas Elliman and Miller Samuel, data shows NYC’s housing market is prospering. Housing rental prices on luxurious Manhattan properties are barely affordable. Rental prices outside the heart of New York are still steep and the availability of affordable housing is shrinking. This is nearly all attributed to the “buyer’s market” NYC real estate is clearly in the midst of. Prospective renters need to act fast to avoid losing out on any decent affordable housing in the five boroughs. Prices will only continue to increase, while availability will only continue to decrease.