A Market Normalization

Last quarter the Manhattan real estate market continued the trend of normalization that we saw take hold in the first quarter of the year. In recent years many disruptive events have had an outsized impact on market dynamics, but now it appears we are dealing with more normal market conditions.

Specifically, the impact of the virtual closing of the market in 2020 due to the pandemic, which led to record levels of activity in 2021 and 2022, is finally almost behind us. While it is true that contract signings last quarter were down 20% year over year, that decline was only 9% in June versus June of 2022. Current levels of activity seem consistent with long-term sustainable levels.

Digging under the hood further, I call the picture mixed. Prices have changed little in recent months, generally continuing to drift slightly lower.

Inventory levels are down slightly compared to a year ago, but availability varies by price point. The under $2 million market has seen inventories decline by about 7% versus a year ago, while above $2 million inventory was up 6%. Interest rate increases are likely driving this phenomenon, as many buyers remain budget-conscious, and sellers are reluctant to give up their attractive mortgage rates. At higher price points, interest rates appear to have a somewhat smaller impact.

Apartments are taking longer to sell than they did a year ago. Days on the market have increased 25% yearly to 131 days. However, this metric declined 3% from the first quarter, so days on the market also appear to have stabilized.

The luxury market (over $5 million) may be the healthiest sector of the market, with contracts signed in May, for example, up 38% year over year. This sector is probably more responsive to stock prices than interest rate increases. Stocks, of course, have done well so far this year, as the market has made back most of its losses from late 2021 and 2022.

Anecdotally, the market does appear stronger to me than it was late last year. Appropriately priced apartments are attracting good interest. Inventory levels remain under control. Although prices have been drifting lower in recent quarters, they have rebounded quite strongly from the pandemic lows of 2020. If interest rate hikes are nearing their end, and the stock market continues to do well, then real estate prices will probably also start to increase.

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