Contract Volumes Decline: A Quieter Spring Season

The Manhattan real estate market is showing signs of slowing down this spring, with a decrease in contract volumes. This trend is likely due to several factors that have prompted buyers to exercise caution, including rising interest rates, stock market volatility, geopolitical tensions, an impending election, and uncertain predictions regarding Federal Reserve rate cuts. Despite the Fed’s decision to maintain the current federal funds rate to combat inflation, high interest rates persist, directly influencing mortgage rates.

While contract volume has dropped by 4% compared to last month, it remains 13% higher than last year. April of the previous year was marked by a notable slowdown due to the collapse of Silicon Valley and First Republic banks. Although there was a rebound in May last year, it is uncertain if this pattern will repeat in 2024.

On the supply side, inventory rose 10% last month but is still 3% lower than last year. According to the Elegran | Forbes Global Properties Manhattan Leverage Index for April, the market is close to equilibrium, but buyers are starting to see a slight advantage. If demand continues to be subdued and supply increases over the next two months, buyers might find more favorable conditions this summer.

Price trends slightly increased in April, reflecting deals closed from contracts signed in January and February when interest rates were lower and the market was more competitive. Moving forward, expect limited price increases and possibly greater negotiation in listing prices over the upcoming months.

SALES

– “Neutral” markets don’t exist because buyers and sellers are constantly playing tug-of-war for leverage

–  At times (e.g., the past 12 months), there’s no clear winner as buyers & sellers reach equilibrium¹

– According to the data, April saw a balanced market, where neither buyers nor sellers had a significant edge. However, buyers gained a small advantage.  In the last month: 

- Demand (measured by contracts signed) decreased by 4% in the buyer's favor.

- Supply increased by 10% in the buyer’s favor. 

- Median days on market decreased 10% in the seller’s favor. 

- Median PPSF (Price Per Square Foot) increased in the seller’s favor.

RENTALS

–  March saw a 3.1% decrease in median rental prices from February, bringing the median price down to $4,100, marking the first year-over-year decline in Manhattan's median rent in four months.³

Elegran | Forbes Global Properties Manhattan Leverage Index

The Elegran | Forbes Global Properties Manhattan Leverage Index is powered by four indicators: supply, demand, median price per square foot (PPSF), and median listing discount.

It informs us whether the current is a buyer’s or a seller’s market, i.e., which party possesses transactional leverage.  Looking at the graph below, this is indicated by the direction of the curve, where:

- An increasing trend from left to right indicates a seller’s market

- A decreasing trend from left to right indicates a buyer’s market

Our indicator also informs us regarding the relative strength of that leverage, indicated by the slope of the curve, where:

- A gentle slope indicates a weak advantage by one party over the other

- A sharp slope indicates a strong advantage

But the numbers are not important.  What is important is the direction and slope of the curve. For more than a year, there has been a stalemate between buyers and sellers in a relatively balanced market. The Manhattan market is currently in a state of equilibrium, with neither buyers nor sellers holding a clear upper hand. Interest rates, a key factor influencing buyer confidence and assertiveness, raise the question: are these the most favorable conditions we'll see this spring for sellers, and are buyers re-gaining a slight advantage?

Manhattan Supply

Inventory in Manhattan increased noticeably in April, rising 10% from March. However, despite this seasonal uptick, overall supply remains 3% lower than it was at the same time last year.

What this means for:

- BUYERS: The market is tilting slightly in favor of buyers, with an increase in listings and a subdued contract volume suggesting a potential rise in supply over the next few months. This trend enhances buyers' leverage, giving them more options and better negotiating power.

- SELLERS: Although supply has increased, sellers who set realistic prices continue to sell their homes. The median days on the market have decreased by 10% from last month and 4% from last year and now stand at 94 days. This indicates that well-priced properties are moving relatively quickly.

The traditionally active spring season extends through the first half of June, allowing buyers more time to explore the growing inventory, while sellers have a narrowing window to position their properties advantageously to secure sales during this peak time.

Manhattan Demand

April experienced a modest decline in contracts signed, with a 4% drop compared to March, possibly indicating a decrease in buyer urgency. However, when compared year-over-year, there is a 13% increase in contracts signed. Notably, last April was impacted by the crises at Silicon Valley and First Republic banks, but the market rebounded in May.

What this means for:

- BUYERS:  The recent dip in monthly contracts may present a window of opportunity, as the decrease in competition, coupled with an increased inventory, offers buyers a better chance to secure the right apartment.

- SELLERS:  Despite short-term concerns about the spring market's momentum, the underlying market health remains solid, and the long-term outlook appears positive.

As seen last year, April showed fewer contracts than March, influenced by factors such as stock market declines, rising interest rates, and geopolitical uncertainties. It remains to be seen whether this May will witness a similar rebound as observed last year.

Manhattan Median PPSF

In April, the median sales price per square foot (PPSF) increased 3% from March, reaching $1,357. This figure reflects deals closed in April, likely from contracts signed in January and February when interest rates were lower and the market more competitive. Despite the recent rise, the median PPSF is still 8% lower than it was in the same period last year.

What this means for:

- BUYERS: The recent increase in monthly prices may indicate that some sellers are testing the waters for higher prices. However, the year-over-year decrease provides a potential advantage for negotiation. With some properties overpriced relative to last year, buyers could find more room to negotiate favorable terms.

- SELLERS: The uptick in April prices is encouraging, but this trend may not persist in the short term. The year-over-year decline underscores the necessity for realistic pricing. Properties priced too high may linger on the market.

As the inventory continues to grow and contract activity slows, another opportunity for buyers to secure favorable deals may arise this summer. Mid-summer could see sellers more open to negotiation, particularly those keen to sell.

Manhattan Median Listing Discount

The median listing discount in Manhattan's residential market has increased slightly, rising from 5.9% to 6.1% over the past month, yet it remains lower than last year.

What this means for:

- BUYERS: The median listing discount could rise further in the upcoming months as the market shifts slightly in favor of buyers in the short term. However, it's important to note that discounts are still not as substantial as last year.  

- SELLERS: While sellers are experiencing a slight decrease in leverage in the short term, their overall position remains stronger than it was during the same period last year.

Expectations for the future suggest that this metric may continue to rise in the coming months, possibly peaking before starting to decrease again in the fall.

RENTAL REMARKS

March saw a 3.1% decrease in median rental prices from February, bringing the median price down to $4,100. This marks the first year-over-year decline in Manhattan's median rent in four months. The 30-Year Fixed Rate JUMBO Mortgage Index is trending at 7.4%⁴, and the average JUMBO APR is 7.11%⁵.  So, it’s a “catch-22” for renters, as the rent versus buy scale may feel equally punitive on both sides. Don’t expect rents to decline much further, as they’re likely due for increases heading into the peak summer rental season.

INVESTOR INSIGHTS

The total return is driven by net rental income and capital appreciation. For all-cash investors, Manhattan cap rates are currently 2.7 - 3.2%. Unfortunately, there is no net income potential for those investors using a large percentage of leverage, with the average JUMBO mortgage APR at 7.11%.  Timing and a strong USD may afford foreign investors, depending on their native currency, the opportunity to realize significant capital gains upon selling their assets.

References

1. According to the Elegran | Forbes Global Properties Brooklyn Leverage Index

2. Data courtesy of UrbanDigs

3. Data courtesy of Miller Samuel, Inc.

4. Data courtesy of Federal Reserve Bank of St. Louis

5. JUMBO mortgage rate APR data courtesy of Bank of America, Chase, and Wells Fargo

If you would like to chat about the most recent market activity, feel free to contact us at info@elegran.com or connect with one of our Advisors.

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