The NYC Real Estate Market is Adjusting
While Q1 of this year saw a continuation of the unprecedented liquidity that we saw in 2021, Q2 threw some water on that fire. Supply remains steady, but is trending down in line with the typical seasonal patterns we see heading into the summer months. Demand is also trending down in line with seasonal trends, but, generally speaking, it has come down far more than supply has over the past three months. The past year-and-a-half has seen materially above-average contract activity, but, as demand has trended down over the past few months, this gap has narrowed, and, for June 2022, the number of signed contracts finally returned to historical levels. While this fairly sharp reduction in demand simply returned the market to historical averages, it remains unclear whether this downward trend will continue through Q3 beyond typical seasonal adjustments, suggesting more of a fundamental market shift.
The end of last year’s wild market comes with increasing uncertainty about the economy. The Fed’s material increase of its benchmark rate in June to combat inflation came on the heels of a mortgage market that had already seen residential mortgage interest rates nearly double so far this year. And the Fed is likely not done increasing rates this year, which will most certainly cause mortgage rates to continue to rise, further reducing buyer demand for new homes. The stock market also posted its worst performance over the first half of a year since 1970, impacting real estate buying power and fueling fear of a looming recession.
A countervailing consideration here is the rental market, which peaked during Q2. The rental market will likely remain around current levels for an extended period time while supply remains extremely tight (although it has loosened a bit over the past several weeks). This will continue to prop up demand in the sales market, as home ownership, while still very expensive, is increasingly seen as a more affordable option and an attractive hedge against inflation (and people hate paying rent).
What does this mean for next quarter and the remainder of the year? We are likely in store for an interesting couple of months as these trends, which began coming into focus during Q2, exert their influence on the market. Real estate is always very slow to react to macroeconomic forces, partly due to the lag of recorded data and partly due to the fact that residential transactions are not purely economic decisions. As a result, the market still feels pretty healthy right now, with supply and demand working well together. But on the ground, we are definitely seeing fewer buyers and increased negotiability. This will soon be more broadly reflected in sales prices as more data is recorded. This will likely portend a buyer’s market over the 2nd half of the year, with solid opportunities for buyers with resources and patience.
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