Managing Manhattan’s Inventory Shortage

Written By Thomas Faddegon | April 03, 2013
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We already knew that Manhattan’s real estate inventory has been falling for several years, but in the last two months, the situation has begun to reach critical levels. The absorption rate, or how long it would take to sell off all of the remaining inventory if nothing new was added, has fallen to almost half of its ten-year average. Now, even fantastic credit and a hefty bank account isn’t enough to insulate you from the difficulties of buying New York real estate.

The simplest explanation for the inventory shortage is a lack of loans available for new projects after the recession and housing crisis. The lack of new construction has finally caught up with the market, leaving buyers with fewer and fewer options. Unfortunately for both buyers and sellers, Occam’s Razor doesn’t fully explain the situation as new developments only account for a small portion of sales, typically around 15%. In reality, the complete picture is one that neither buyers nor sellers want to see.

Although Manhattan’s real estate market has rebounded exponentially faster than the rest of the nation, the excess supply created after the collapse of Lehman has virtually disappeared.  Typically, a shortage of inventory means low competition, and the ensuing bidding wars are enough to entice even the most hesitant sellers. So where has the supply gone?

New construction slowed dramatically following the bust, but it also shifted the development of many new properties from condos to rentals. Although it cuts into short-term profits, it’s a low-risk strategy in times of financial uncertainty. Furthermore, much of the the new construction that does take place is often high-end luxury apartments, leaving middle-tier buyers out in the cold.

While inventory shortages generally play into the hands of sellers, there are factors at work that hurt both parties. Nationally, many homeowners cannot sell their homes because they owe more than their homes are worth. While this isn’t necessarily the case in the city, the national credit shortage created by the housing crisis has affected the local market, creating a lack of upward mobility. Tight credit results in a lower “turnover rate” between homeowners. In other words, many owners can’t sell because they no longer qualify for a loan that would allow them to upgrade to a larger home. Of course, even if an owner has the desire to sell and the money to buy, it means little if they can’t find better options in a low-supply market.

Although Manhattan has remained somewhat insulated from the foreclosure crisis that swept the nation, the resulting credit shortage has still affected the New York market. Supply will likely remain limited until credit is easier to come by and new construction can catch up with the market. Whether it will be enough to keep inventory from drying up over the next year remains to be seen.

What does this mean for prospective buyers? For one, waiting for the storm to pass may not be the best idea. There is no guarantee that supply levels will begin climbing again in the next few years, and it may be a better financial decision to simply pay a bit above market price in the short term rather than standing by while interest rates rise. At the same time, investors should keep level heads and avoid throwing their money at the first prospect that comes along. Although prices have gone up, shortage does not mean crisis, and good options are still available. The best thing is to prepare yourself to pounce on a good opportunity by ensuring your loan eligibility with your bank, and of course, enlisting the help of a real estate agent to keep you ahead of the game.

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