The Fun One I’ve Been Fielding a Lot:“So Why Haven’t Prices in the Sales Market Tanked Yet?”
I’m sure I’ll unravel the traumas I’ve been hurriedly compartmentalizing over the last 6 months, but I feel like I just blinked and we somehow leapfrogged from March to September. When the city initially turned into “I Am Legend”, to maintain sanity I was heavily resorting to bourbon and fastidiously reorganizing my closet based upon a rotating classifier, be it color, season, decade of popularity, or graduating decency. When things dissolved into “The Purge” in May, I moved on to mezcal and unsuccessfully tried to cook a live crab in my kitchen.
If I look back at what I did the summer of 2020, it really boils down to the singular grave mistake of by accident ordering 100 rolls of paper towel on Amazon, which essentially has become my dowry, and my three month disappearing act once the real estate flood gates opened with the onset of Phase 2.
I can assuredly tell you that it has been incredibly frustrating to hear people, who have no business predicting the real estate market, diagnose it with inappropriate logic then sell it a fate steeped in baseless presumptions. While inventory is low, prices are absolutely not following suit; if anything, demand outweighs supply, leading to a competitive marketplace.
Right now we are in the midst of a Pandemic Paradox: sales are down but median prices are up. For people waiting for the other shoe to drop and prices to get slashed, it’s not going to happen. In layman’s terms, you are not going to stroll into Marshalls and find a Louis Vuitton purse and pair of Christian Louboutin’s for 30% of the original price.
AND NOW WE’RE GOING TO DISCUSS WHY.
Last October, our industry was convinced the market had bottomed out and 2020 began with a wonderful sense of renewed voracity and excitement. When the pandemic kicked into high gear in March, the real estate market came to a screeching halt, which directly coincided with the beginning of our notoriously busy spring purchasing season. Shelter-in-place and looming unknowns made showings impossible and most potential sellers withheld from entering the market. During the darkest days of spring, naysayers had grim and unfounded predictions for the market and everyone waited in the wings for the worst.
However, once in-person showings were shepherded back into the equation with Phase 2, the market exploded and activity kicked into high gear, fueled by buyers acting on historically low interest rates and enticed by a market that swung heavily in favor of buyers over sellers. Throughout spring, supply had remained limited and immediately following declaration of Phase 2, listings came onto the market at a torrid pace. Reports of contracts signed rebounded in July, but still that number was deflated from the usual figures, again largely attributed to lower inventory compared to prior years.
The question I’ve fielded quite frequently is “Why isn’t the tanking economy bringing home prices down with it?” It’s a reasonable question given that so much of the economy moves in lockstep and the last economic crisis in 2008 sent the housing market into free fall. The price of anything is a function of the relationship between supply and demand. Usually, a huge drop in demand would put downward pressure on prices; home sellers would be competing with each other to attract a limited number of buyers by dropping their asking price. But while housing demand has dropped substantially, housing supply also dropped in lockstep, as potential home sellers pulled out of the market for many of the same reasons buyers are.
While both supply and demand have dropped, the relationship between the two went largely unchanged, meaning the drops in supply and demand were generally proportional to each other. Furthermore, home sales also dropped after the pandemic hit, and it’s hard for prices to move when there aren’t as many housing transactions to make prices move in aggregate. Together, this leaves prices much where they were before the pandemic.
This cannot be compared to the 2008 financial crisis. That crash was heralded by shady lending practices creating excess demand for housing by bringing unqualified buyers to the market. Home builders responded by increasing construction to meet this demand. When the financial system locked up, it brought the excess housing demand to a halt because banks weren’t able to lend in the same volume, not to mention the recession the collapse induced, which caused unemployment to rise and buyers to drop out of the market. At the same time, banks foreclosed on houses in the millions. Given housing supply was already high from home builders constructing in excess, this sudden pile up of foreclosed houses created a nightmare scenario for the market: low demand and very high supply. Home prices plummeted. This is clearly not applicable to the present.
Interest rates on home loans are still extremely low by historical standards and that’s helping to create fierce competition in the real-estate market. Although they are rising slightly due to an upcoming surcharge by Fannie Mae and Freddie Mac imposed on individuals refinancing, mortgage rates continue to remain below 3%, allowing more buyers into the arena and spiking competition. With supply and demand moving in opposite directions, sellers are slowly gaining the upper hand in the market as buyer competition continues to build and prices gain momentum going into the fall.
Quickly we have to address the human element of a transaction as well. You have to take into consideration the sentiment of these sellers. Most of the homes on the market now were purchased 5-7 years ago, during what was a very robust sellers’ market. No matter what comps say or the market dictates, pushing a seller to agree to the price at which they purchased property, or further, to net a loss is quite difficult. Purely from a psychological exercise, accepting an investment of yours as an utter loss is a hard pill to swallow; once you approach a seller’s break-even line, or start to bring them into the red, emotions run high and heels begin to sink into the ground. Placing yourself in their shoes, you’ll find it hard to admit you’d act differently.
As we creep into what is bound to be a tumultuous election cycle, the market will quiet while the country enters a short period of uncertainty. This is a cyclical slow down that ALWAYS happens during election years and cannot be intrinsically tied to the pandemic. Following the election, I believe with the country continuing to gain it’s footing with Covid-19, emerging from an election cycle, and hopefully still bolstered by favorable interest rates, we should *she knocks on every piece of wood in her apartment* be positioning ourselves for a great market in 2021. That market should still favor buyers, however reflect a continued uptick in pricing due to competition and a resurgence in inventory due to sellers who want to buy-up or simply off-load their investment at growingly more favorable resale prices.
Just to make a quick note, I’m not addressing the ultra luxury market here. This post applies solely to the ~under $4m market in New York. You cannot apply a general blanket statement to the New York Real Estate Market as a whole because a property selling for $550,000 is influenced by an entirely different set of factors than one selling for $15,000,000. While this is a whole different conversation, in short, the luxury market is bearing the largest brunt of the pandemic blow, with luxury properties showing an 11% price drop in the second quarter and new listing inventory for luxury down 21%.
Also, as Jerry Seinfeld said it best in his recent article for the New York Times, New York is going absolutely no where.