Renting vs. Buying: Manhattan Absorption and the Winter Market

Written By Justin Spees | November 15, 2011
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Floating around the web circles of real estate watchers is a chart that analyzes trends in absorption rates for both rentals and sales in the Manhattan housing market over the past four years. The chart reflects a lot of overall economic trends since 2008 that we’ve written about before, but there are a few interesting key exceptions. Most significantly, this chart lays to waste the common wisdom that sales and rentals in Manhattan go up and down at inverse absorption rates.

Absorption is the rate at which every available piece of real estate in a certain area would be rented or sold if purchases and rentals continued at the current rate. So if the absorption rate is low, it means houses are flying off the shelves, and prices are likely to rise. If the absorption rate is high, the opposite is true. The chart begins at the first quarter of 2008, and both sales and rentals dip (which means absorption is high) steeply to coincide with the collapse of Lehman Brothers. By the end of 2009 sales and rentals begin moving upwards again, as the stock market begins to rebound. But then things get slightly more interesting.

In mid-2010 the Federal homeowner tax credit stimulus ended, which, along with tight mortgage underwriting, caused sales figures to drop while rentals stayed high. Beginning in 2011, rentals began dropping slightly as sales increased. Currently both sales and rentals are stable at balanced market conditions, but mortgage underwriting isn’t likely to loosen up anytime soon. Coupled with the aura of economic uncertainty that has turned buying a home into a risky financial affair, chances are that Manhattan rentals will remain at their current high popularity, moving at a faster pace than sales.

We can tell a few things from this information. For one, it means housing trends for both sales and rentals are more or less at the mercy of the greater economic climate – as anyone who has ever kept an eye on the newspaper’s real estate section can attest. For another, it means that rentals are currently easier to secure than buyers’ mortgages, and that average rent prices will probably maintain the steady increase that began over the summer and has lasted well into the fall. With the annual winter drop in activity on its way, how much those rents are likely to climb – if at all -- remains murky. Even more notable, those rents may increase at a rate faster than average sales prices. For potential buyers, this may mean more concessions in their future, as owners try to seal deals before winter’s annual market slowdown takes hold. 

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