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While the first quarter of 2023 started off with promise, continued interest rate increases, general economic uncertainly (i.e. in the banking sector), and low inventory levels resulted in a lackluster second quarter, especially in Manhattan. The market slowed even further in June, an earlier-than-usual start to the summer slump, as both buyers and sellers seem stuck in their wait-and-see stance.
This month in our newsletter, in addition to our usual focus on the Manhattan and Brooklyn markets, we will also include a brief section specifically on mortgage rates and the macroeconomic climate. We've also brought back our monthly collection of homes highlighting certain price points/areas or features.
While Manhattan contract activity was nowhere near the unusual lows of Fall 2022, things fizzled rather than heated up as the spring turned into summer. March contract activity – which was essentially even with historical averages for the first time since August of 2022 – was a peak and not the start of a trend as many had hoped. The failures of SVB and Signature Bank in March arguably brought on a wave of buyer hesitancy, and contract activity in April dipped well below historical averages. Contracts signed seemed poised to recover in May, but rate-relief never came and economic uncertainty continued to mount (including the collapse of First Republic) leading to another dip in contracts in June.
Listing traffic, new inventory, contract activity, and open house attendance have all declined sharply since Memorial Day. Though traffic had been building, open house attendance changed course in June with almost half of all open houses reporting zero visitors consistently each week. Inventory had been surpassing historical averages in the earlier part of the quarter, but fell short in June, likely due to sellers holding out in the face of diminished demand.
Despite all this, prices in Manhattan have not declined significantly and remain neutral. There is some negotiability, but not enough to motivate buyers causing the lack of activity/transactions. As expected, days on market has increased and – 29% of homes sold in Q2 took 180+ days to enter contract. We don't expect to see many price reductions until fall, as sellers may be waiting out the slow summer in hopes of greater buyer interest and traffic in the fall.
In Brooklyn the market remained resilient, with overall metrics still positive relative to historical performance (albeit more restrained than what we've seen in the last decade). Once again, averages were buoyed by the continuing strength of certain neighborhoods/property types, while other areas, most notably South Brooklyn, have been experiencing many of the same challenges as Manhattan.
Brooklyn contract activity was down compared to Q2 2022 – the last strong quarter before elevated rates and economic uncertainty began to weigh heavily on buyers, but was still above historical levels even with lower-than-usual new inventory levels. While inventory ticked up in May, with new listings over historical averages for the first time since June 2022, June saw another sharp decline, keeping competition high and negotiability low. Median sales prices rose compared to the first quarter, and the median listing discount – calculated as a rolling 2-month average of the difference between the original asking price and the closed sales price – declined in both May and June.
Q2 also saw a greater percentage of over-asking sale prices (23.01%) compared to Q1 (20.03%). While still nowhere near early 2022 levels (33.7% of sales closed over-asking in BK in Q2 2022), current price metrics and activity levels in Brooklyn indicate an active market, constrained more by lack of inventory than limited buyer demand. There continues to be massive variation among neighborhoods, product type, and price-point. In the most in-demand areas and products, bidding wars are still common albeit with fewer participants. Anecdotally, what we have seen for the most in-demand properties is 2-5 strong offers from the most competitive buyers – instead of 8-10 offers that run the gambit – with winning bids still coming in substantially over ask with very strong terms.
It might be hard to believe it was only Q2 of 2022 when rates started going up last year. The average rate then on a 30-year fixed jumbo loan was about 4.25%, and the average rate this year over the same time period is a whopping 1.625% higher. Rates this last quarter bottomed out in early April (around 5.375%) but increased steadily over the quarter and have only gone up further in July.
The last meeting of the Fed took place on June 13-14 and as widely expected, they did not raise rates at that point. While mortgage rates reacted favorably to this news, the industry's optimism was short-lived. Last week, the Fed released the minutes from that meeting and it turned out that we were shockingly close to seeing the 11th straight increase in rates and that it is almost certain that the Fed will continue to steadily raise rates for the rest of the year. According to Chair Powell, “We expect the moderate pace of interest rate decisions to continue.” CME Group’s FedWatch tool puts the probability of rates being increased later this month at 88%, and financial markets are telling us that there is a 95% probability that the Fed is going to increase rates by another 25 basis points to the range of 5.25 - 5.50%. In response to the Fed's hawkish stance, we are now seeing conforming 30-year fixed rates over 7% at most banks.
Recent macroeconomic indicators offer some cause to be optimistic. Recent jobs data was a mixed bag with some indicators up (which may embolden the Fed) and others missing the mark (which could counsel restraint in further rate increases). The payrolls jobs report from this past Friday showed 209K jobs added in June, the first miss vs expectations in over a year, and revisions helpfully subtracted 110,000 jobs from the May and April data. But data also showed the labor force participation rate among 25-54-year-olds (prime working age) at the highest rate we've seen since May 2002.
On the inflation side, the ISM manufacturing index, also known as the purchasing managers' index (PMI), a monthly indicator of U.S. economic activity based on a survey of purchasing managers at more than 300 manufacturing firms, showed a decline from 44.2 to 41.8, a level which has historically coincided with headline #CPI inflation of close to zero. Services inflation follows ISM very closely and is on the decline as well. The next CPI report comes out next week and may force a real debate within the Fed on the upcoming rate increase.
While it seems unlikely that any of these trends will cause the Fed to change course now, they may strengthen the argument that inflation is continuing to moderate and rate hikes are no longer needed. Normalizing rates – or at least the prospect of imminent normalizing rates – should hopefully spur the real estate market into action with plenty of pent-up demand and supply.
A dozen national real estate groups have joined New York landlords' legal fight against the state's 2019 rent stabilization laws, filing briefs asking the U.S. Supreme Court to overturn the landmark legislation. While they have been unsuccessful in the lower courts, if it chooses to hear the case, this Supreme Court could be landlords' best shot. (BISNOW)
New York became the first state in the country to ban natural gas and other fossil fuels in most new buildings constructed after 2027. The ban does not impact existing homes or buildings with gas stoves. (NYTIMES)
Available office space in Manhattan reached an all-time high in 2Q 2023, with 70.3 million square feet (19.7%) ready for leasing. (THE REAL DEAL)
It seems like Manhattan deals fell off a cliff this spring, but the numbers are less shocking than they appear. Co-op and condo sales plunged more than 30% in the second quarter of this year compared to the second quarter of 2022, the heyday of the pandemic-era sales boom, but those uneven comparisons will end soon. (BRICK UNDERGROUND)
Mortgage rates have soared to their highest level of the year, dealing another blow to prospective buyers already socked by high prices and a shortage of homes on the market. According to Freddie Mac, the average rate for a 30-year, fixed-rate mortgage climbed to 6.81% as of July 6, driven by a resilient economy, persistent inflation and a more hawkish tone from the Federal Reserve. (FORBES)