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Three Cents Worth: Manhattan Sales, Rentals Not Opposites

[This week, real estate appraiser, Curbed graph guru, blogger, and podcaster Jonathan Miller challenges a common market assumption.]

I thought I'd take a look at price growth between the Manhattan rental market and sales market over the past decade. I am struck by how many of us have the default view that these two markets always move in opposite directions, myself included. In other words, if rental prices are rising, sales prices must be falling and vice versa.

I trended the year-over-year change in median rental price and median sales price over the decade. I also inserted significant US housing milestones along the way but left out the '13 launch of Iron Man 3. (I tracked using quarterly rather than monthly since my deep sales historical has been built quarterly but rents are both monthly and quarterly because of greater volume.)

Here are a some of my rambling thoughts using history as a guide (I know, I know, this time is always different).

Rental and sales rice trends more in sync post-recession: They were moving in opposite directions before the Great Recession but the Fed's low interest policy (QE) has made them more in sync for various reasons. Tight credit is the main reason, as it keeps would-be buyers from moving to the purchase market because they either don't qualify or can't find what they want to buy.

Homebuyer tax credit in '09-'10 did impact Manhattan market: Sales prices popped as buyers rushed to meet the April deadline to sign a contract. The benefit of the stimulus program was offset the next year. A teachable moment was born: tax credits are a zero sum game and we don't need any more housing sleight of hand. We just need the basics: more employment and personal income growth. NYC is seeing employment growth.

Real estate industry is obsessing about new development: Manhattan housing sales prices didn't peak until the first half of 2008 (two years after the US '06 peak) as new development product skewed market prices higher, one of the by-products of record Wall Street bonuses of the era. This time around, virtually all new development projects are targeted at an even higher demographic and Wall Street, while a significant economic engine, isn't hiring and overall comp is not what it used to be. Nearly all new development product now starts above $3M (the luxury market threshold, i.e. top 10 percent) and are often small projects. How is the supply for the other 90 percent of the market being addressed? I think inventory is near the bottom now (seasonally adjusted) and as sales prices rise, more inventory will enter the market, perhaps tempering the potential for runaway sales price gains.

When Fed's low rate policy ends (QE), rent growth may rise and price growth fall: Look at the last time this happened (June 2004). Fed began to raise rates and housing price growth began to cool a few years later (but the damage was already done). Rents back then initially increased because buyers became unsettled about the U.S. bubble bursting in 2006 and the (mistaken) expectation of spiking interest rates in the following year. The hope is that a stronger economy will allow a "soft-handoff" from unusually low interest rates to be uneventful.

Once credit returns to more normal standards (measured in years), the rental and sales markets will probably be less in sync than they are now. Until then, there isn't much rental and sales price growth relief in sight?of course all bets are off when Iron Man 4 launches.
· Matrix [matrix.millersamuel.com]
· Three Cents Worth archive [Curbed]