Interest rates will hit their historical lows in mid-2012: Yes, the interest rates have been lower for longer than anyone had expected. When is the bottom going to come? We’re calling it for mid-2012. We anticipate that the first half of the year will be dominated by worries of Europe’s and the Euro’s fate, increased urgency in the national discourse around US fiscal health and deepening cracks in the Chinese growth engine. Don’t be surprised if QE3 (a third round of quantitative easing) hits the stage at that time, pre-election. After hitting this bottom, we anticipate they will nominally shift up towards the end of 2012, picking up pace in 2013. Owners with Adjustable Rate Mortgages should be sitting pretty at least until that time.
Credit markets will continue being tight: ‘Nothing new here. The last two years of tight credit were primarily driven by buyer-specific lending standards. Loans were hard to come by for buyers who were self-employed, those with new jobs and those with bonus-heavy compensation. We anticipate that the tightness of 2012 will by driven by building-specific lending standards. This includes caps on the percentage of a building’s rental units, sponsor-owned units and bank-specific loan penetration.
Inventory will continue tightening versus historical levels into the election: The market hates uncertainty and no place does this play out more dramatically than the less-than-liquid real estate market. We posit that the lower-than-trend inventory we’ve seen in the latter half of 2011 will be exacerbated in 2012 leading up to the election, driven by an uncertain global outlook, a shaky macro picture of the US and the shifting political landscape to come. Many sellers who don’t need to sell won’t, to their own detriment, as buyer frustration and demand picks up.
Volume down, prices up: It will be an anomalous year to be sure. Because of the on-the-ground dynamics we see at play, we anticipate that volume will be down but prices will see single-digit gains. How can this happen? The few good properties that will exist will be chased by an increasing number of buyers looking to pull the trigger, lock in a rate, and move on with their lives. This will make for a very interesting, almost bi-polar year. On one hand, transactions will occur farther apart, and many buyers will feel like they’re running while standing still; on another hand, unique, turn-key, well-priced properties will move faster than expected for minimal discounts to ask, all while other sellers scratch their head and wonder how to move their stale product.
Renovations up big-time: In agreement with shrinking inventory, many would-be sellers will opt to renovate the home they already know than purchase a home they don’t now at all. This will extend the utility of their current space for at least another year and avoid the hassle of selling tomorrow. Our prediction also leverages the macro trend of down-sizing or right-sizing away from McMansions and living more simply. We’re calling it now before anyone else: 2013 will be the year of freshly renovated re-sales.
Foreign buyers will look to diversify: This isn’t just any foreign buyer we’re talking about. We’re referring to those globe-trotters who own several properties across the globe, particularly in the now-volatile markets of Europe. Like it or not, the US continues to be the world’s safe haven (for treasuries, property, currency and otherwise), at least for a few more years. Those investors seeing trouble up ahead will turn away from equity markets and park their money instead in dollar-denominated, inflation-hedging real assets … enter NYC real estate.
What will sell: So here it is … all you sellers listen up, and buyers sharpen your pencils. Here are the pockets of activity that we believe will surprise on the upside.
· Three bedrooms – anywhere: have you noticed recently that your friends who had a child just a little bit ago are expecting their second, or third? When was the last time you spoke with someone intentionally having only one child (and are they in the majority or minority)? The baby boom in NYC is alive and well. This means crowded schools, Bugaboo traffic jams and a dramatic increase in demand for three bedroom apartments. The starter couple apartment is a one-bedroom. The starter family apartment is a two. The next step is clearly a three bedroom and yet the supply of such coveted properties drops off dramatically. Expect this market sub-segment to gain a lot of traction.
· Re-sales of 2006 and 2007 vintage year new developments: Let’s think about it a bit. The average, natural turnover for apartments in the city is 5 to 7 years. Those apartments were purchased at pre-downturn prices yet their owners are now facing post-downturn life needs. A very small portion of those purchases were unloaded in 2009 and 2010, at a loss for the most part, and usually driven by negative circumstances. Now, a good number of these “like-new” apartments are likely to hit the market in 2012 to the applause of buyers. The market has stabilized, sellers will have avoided selling into a downturn, and buyers will benefit from the remaining tax abatements of many such units while avoiding the dreaded transfer taxes of brand new competitors.
· The Brooklyn market will see the highest price increases in NYC: Brooklyn is the new Manhattan, people … haven’t you heard? Basically, the borough is benefitting from whatever conditions may come. If the economy is flat or down, Brooklyn will continue to attract those buyers looking for better absolute value than Manhattan offers. If the economy booms, then the multiple community and infrastructure projects underway will only add to Brooklyn’s appeal.
· New developments selling in record time: With inventory as tight as we believe it will be, new developments will be optimally positioned to exploit these market forces. But don’t expect any shiny towers in amenities overdrive anytime soon. The new breed of developments we anticipate will win over buyers and will maintain low carrying costs by limiting often-unused building offerings. They will argue for sensibility, value and community above all else.
Rents will hit multi-year highs: Tight inventory + uncertain environment + tight credit market = nowhere to go but up for rents. Prices haven’t dipped one bit over the last few months, bucking the seasonal trend of increased concessions and softening rents after Thanksgiving feasting. The rental picture will please very few tenants, as they will need to increasingly weigh their desire to move against the costs of doing so. We anticipate that this will hold true in many neighborhoods, with one overwhelming exception: the Financial District. The ‘hood may have won the Curbed Cup this year, but it’s done so as fueled by low rents as compared to the rest of the city. Competition abounds traditional rental inventory and from condo investors looking for an ongoing stream of revenue. We anticipate that by the end of the year, some level of equilibrium will be reached as inventory gets absorbed.
Well, that about does it for our predictions. So, what do you think? How did we do? If our track record holds from last year, expect at least 80% of these things to come true. Not too shabby …
{ 3 comments… read them below or add one }
The economy here in the US will continue to gradually decline, as well as in the European countries, including some in South America, India, and China.
As the US economy sinks, so shall the rest of the world.
As long as there are record debts in many countries, and lack of good paying jobs here in the US, the real estate market can not sustain growth, it too will adjust accordingly (down).
It will take another 5 to 7 years to start a slow 1% to 3% annual recovery
Cheers
NYC is a world economy, comparable to Shanghai, London and Hong-Kong. Currency volatility will be a major theme in 2012 thus driving prices up in Manhattan due to the perceived stability of the U.S. dollar and NYC real estate and the foreign investors desire to diversify abroad.
The lack of 3 bedroom availability is astounding; couldn’t agree w/the predictions in this piece much more. I do believe interest rates will remain low for an extended period of time however (2014); if the Fed tells you they are going to do something, listen!
Great job! -Jonathan Pokoik
Thanks, Jonathan – much appreciated … feel free to forward the predictions on – we’d love to expand the conversation around what’s to come in 2012!