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.