In early June, we discussed the possibility that a window of opportunity might be opening for Manhattan buyers as deal volume fell. In July, we thought the market was crashing back to normal with fear levels outpacing the data. Now, in August, the window of opportunity may be open as the market is softer — but no longer falling.
In mid-April, the market began cooling from white-hot levels while mortgage rates rose. The shift down felt fast and furious, with the number of contracts signed, a broad measure of market activity, dropping 30% compared to last year. Buyers, it seemed, had simply stepped away from the market.
In reality, though, the market was simply re-adjusting to typical seasonal levels, with deal volume remaining above 2019, the last pre-pandemic year of 2019, and the new benchmark for ‘normal.’ Now, in August, with a few months of data to analyze, it is safe to say that the Manhattan market is stabilizing. In other words, the market is no longer actively falling, and it appears today’s levels are the new normal.
Below are three data points suggesting activity is resetting at these levels.
1. The 30-day pace of deal volume is stabilizing
The rolling 30-day measure of contracts signed is currently holding steady in the mid-800s, suggesting that perhaps the peak fear of this cycle down was during late June and early July, when each passing day indicated a slowing pace. Since then, buyers appear to be narrowly (read: cautiously) stepping back into the market.
If price is the great equalizer, the market may have found a bid. The re-emergence of buyers hints that the market has receded to levels needed to bring reluctant participants back to the table. Interestingly, the current low point for activity in 2022 remains well above the low point of 2019 and relatively close to last year’s low. The stabilization closer to 2021’s low versus 2019’s low, albeit with several weeks of summer slowness ahead, suggests that market liquidity, despite a seemingly fast and furious deceleration, remains robust.
2. Inventory pressures remain
While a lot of attention has rightly been paid to buy-side activity, there are two underappreciated phenomena at work in the background: the drop in new listings and the number of listings removed from the market.
While the drop in new listings is seasonal and expected, it keeps the pressure on buyers by removing additional choices from the market. Similar to the declining pace of new listings, the increasing pace of listings removed from the market is mostly seasonal and expected. However, whereas in 2019, the number of listings removed from the market gradually rose from May to June as summer got underway, in 2022, the number jumped 50% from May to June.
From a buyer’s perspective, even with the lower contract activity, the combination of fewer new listings and more removed listings serves to effectively negate the new inventory. Although buyers may not sense a shortage of inventory, they may get the sense that the available inventory is shrinking, which, unlike a glut of inventory, helps speed up decision time.
3. Negotiating Leverage is Stabilizing
To understand the current state of leverage, whether it belongs to buyers or sellers, it is necessary to understand the real-time balance of supply and demand.
One method is to look at the ratio of contracts signed to active listings (the “Market Pulse”). This measure peaked in early 2022 and began falling as the rising pace of active listings overshadowed the pace of contracts signed. Recently, however, this measure appears to have broken its downtrend with a slight bounce as supply is now fading faster than deal volume.
Similar to the inventory pressures noted above, while buyers have been seeing softer prices for the last several months, now they are also seeing other buyers. In short, deal volume increased relative to the market size, preventing a lopsided ‘buyers’ market’ by balancing negotiating power.
Putting it All Together
Compared to the first quarter, the level of activity in the market is markedly lower. Presently, however, there appears to be stabilization around current levels. Of course, where it goes from here remains unknown until a catalyst, such as changing seasonal trends or a noteworthy macro event, triggers the next directional move. Either way, there are three paths from here:
- Deal volume rises.
- Deal volume remains at current levels.
- Deal volume declines.
While these outcomes are inherently unpredictable, with the downshift in the rearview mirror and real-time indicators showing a light bounce off the lows, the market’s current attitude hints toward a higher probability that deal volume will likely rise in the coming months versus sink back down toward the 2019 lows.
Advice for Sellers
The decline in deal volume in Q2 will likely lead to lower prices in Q3. While the actual numbers are still in flux and will not be fully known for a few months, early indications suggest declines in the 5-8% range. Hence, current and prospective sellers should be very cautious, if not skeptical, when looking at closed deals that were signed in Q1 or early Q1 as these sales represent a different market.
Instead, sellers should be cognizant of their immediate competition and early buyer traffic to gauge if their pricing is appropriate. Sellers should also bear in mind that the lower level of buyer activity will likely lead to a longer time on the market.
Lastly, sellers should understand that early September will likely see a new wave of listing activity as the fall season gets underway, which may necessitate aggressive price reductions for those currently on the market but without buyer traffic or contracts in hand.
Advice for Buyers
While the shift down for New York City may not have been as deep or violent as other housing markets across the country, buyers here should understand that New York City did not see parabolic price rises over the last three years.
While the more bubbly markets are popping, New York City is simply deflating back to normal. Add in declining supply, a soaring but peaking rental sector, and the resetting of deal volume activity to its normal seasonal average, and that equates to a market that has found its new level. In short, buyers should understand that the market is no longer falling. Buyers who have been waiting for a better environment to submit an offer finally have it: prices are softer, sellers are more likely to negotiate, and the market is stable.
Lastly, buyers should realize that although contract volume declined 50%, it dropped from abnormally high levels back to normal. In other words, while the market is not dead, the stabilization in deal volume hints that the leverage the market is currently offering may not last.
Since the move happened, we must adjust our biases. I am notably less negative today than I was three months ago for the very fact that a shift took place. Now we must wait for new market signals and macro triggers to tell us where we go from here.