A Perfect Storm For New York City Real Estate Buyers? Get Ready!

In Manhattan, sellers have had the upper hand since late 2020. In Brooklyn, sellers have held an advantage for even longer. However, the past weeks have seen a notable slowdown in contract signings in both boroughs.

There are myriad potential reasons that could be happening. For starters, it could be due to the fading post-pandemic, low-rate “sugar rush” for real estate. Or, perhaps it’s because many city buyers have already decamped to the Catskills or Hamptons. Or it could be that volatility in stocks, bonds, and crypto has simply chilled the mood. Finally, buyers could simply be worried about the rising risk of recession. Either way, there is no shortage of reasons buyers prefer caution to action.

Still, while there might not be a single reason behind the drop in activity, one thing is clear: this summer, a long-awaited window of opportunity likely will open for buyers. To be clear, this is not a pricing call. Instead, this is a preview of how shifting market conditions may alter supply and demand dynamics to favor buyers in the coming months.

NYC Real Estate Lags the Markets

A comparison of NYC real estate to various other types of markets suggests that even as broad market indices, such as the S&P 500 and NASDAQ, have moved meaningfully lower, New York City’s real estate deal volume has yet to follow suit.

Indeed, the chart below shows that while most markets are already down sharply, New York City deal volume is still near its highs. Of course, just because the markets have moved lower does not mean New York City real estate will follow lock-step. Rather, the move lower across the board paints a picture of buyer and seller sentiment. Falling asset prices tend to pause buyers and slow the market. A slower market means less competition for buyers, leading to wider spreads between bid and ask. Wider spreads indicate lack of inventory is no longer the trump card it was six months ago. Instead, sellers must compete on price, or else they risk sitting on the market longer than expected, or even withdrawing their listings.

Supply vs. Demand

Supply in Manhattan and Brooklyn is beginning to build, albeit slowly, at the same time that demand has started to fade. As this trend continues, the demand-to-supply ratio (the “Market Pulse”) will continue to fall from levels consistent with a seller’s market.

While the Market Pulse has been in seller market territory since late 2020, at the current rate, it will most likely slip into neutral market territory by mid-summer. Of course, since that is an overall measure, there will be pockets of comparative strength and weakness. Still, the balance of power seems to be shifting to buyers from the sellers, just as the market is heading into the typically slow summer season.

Sellers Take Notice: Sales are Slow

Prices follow deal volume, so a slowing market today hints that prices most likely peaked in the first quarter. However, because recorded sales data can take months to become public information, the final tally will not be known until perhaps the third or fourth quarter of 2022. With foreknowledge of a slowdown in the works, today’s sellers should focus on working to negotiate now before broader pricing knowledge is known. It’s better to surrender a few percentage points on price now versus lingering on the market and giving up several percentage points later.

Window of Opportunity

The short-to-medium term outlook for New York City real estate is murky at best. After record deal volume, buyers appear exhausted, and ready for not only a seasonally slow summer break, but a break from supply-constrained bidding wars and intense competition.

At the same time, with various economic indicators significantly lower, the overall landscape for purchasing seems bumpier than it did six months ago. Sellers have undoubtedly noticed the slowdown in open house attendance and overall buyer engagement, and may finally be open to negotiation.

However, this may be a short-lived opportunity. Sellers tend to withdraw listings when their price is not met, and if that is the case, buyers will find themselves squeezed for supply once again. Hence, the next few months may offer both choice and negotiation for buyers who are less rate-sensitive.

Buy-Side Conclusions

To take advantage of this window of opportunity, buyers should get ready by understanding the inventory in their local market, knowing their financing plan, and identifying potential candidates. Do not ignore stale properties that may be trying to find the market via previously unsuccessful price reductions. Those sellers will be most emotionally affected by the demand slowdown and more likely to engage a lower offer to get the place sold as soon as possible.

Lastly, because seasonality is returning to the market, buyers should remember that demand will likely pick up in the early fall. Hence, the slow summer and hot summer months could be the widest window of opportunity for buyers in the near term.

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