Demand and Supply drivers for Real estate

Layoff's and job security will weigh on demand. Tightening credit will reduce demand by disqualifying many potential buyers. And the biggest effect on demand will be price.

There is TONS of supply being held on the side as to not flood the market by New Developers. The question remain is how long can they last with the bank asking for their money.

MSCHLEE: Random thoughts about your topic after a few drinks and a long, hot day. Any semblance of coherence strictly accidental.

We rent an apartment in the Ellington on West 52nd St. We're on the 15th floor with three exposures in a one bedroom plus den, one bathroom. Our lease renewal, after one year, was the same price: $3395 for one or two years. Previous to this, we lived in four different neighborhoods in furnished short term rentals.

We'd like to buy! We're looking to buy! I'm 62 years old and this is the first lease I've signed because I've always been a home owner and still do own five properties not in NYC. I check the real estate sites and do some open houses when I'm in NYC. I have $600,000 on the sidelines expecting the "right one" (at the right price) to come along. Anything I see to buy that is as nice or a little nicer than our rental would cost an additional $3000 a month even after my $200,000 - $300,000 down payment/closing cost contribution.

We looked at new stuff like the Charleston and the Link and the Hudson; resales like
World Wide Plaza and the Link and Lincoln Towers, but just can't get excited enough to make the financial commitment to buy.

Factors in buying:

Price, price per square foot, maintenance, taxes.
Neighborhood stability, potential appreciation or depreciation.
Tax benefits if one buys.
Terrorist activity affecting the value of the neighborhood where I purchase.

Factors in renting:

Availability of rental apartments in a variety of neighborhoods.
Conservation of capital that would be used for down payment and closing costs.
Wasted rent money.
Flexibility - easier to move to larger (or smaller)apartment as necessary.
Easier to change neighborhoods as necessary - even to be able to walk to work.
So much new construction coming on line - why not rent until the absolute best price,neighborhood,building,etc. comes along?

Out of steam myself now. I didn't mean to make this a buy vs. rent issue, but I do believe that rental availability is a supply/demand factor, especially as investment/hoped to flip condos come into the available rental mix when they don't sell. Hope you get lots more input on the topic, perhaps from those with a more academic knowledge of economics.

Just curious dco, although I believe we agree on the likely direction of the market I've heard the idea that "TONS of supply being held on the side as to not flood the market by New Developers" being bandied about StreetEasy but is there any substantiation for this claim. Are you suggesting condos-to-be are being rented instead or that these condos are sitting vacant or unfinished while developers wait for another bull market? It doesn't exactly add up to me. Sort of like a bank sitting on an empty foreclosure when in fact they want to unload it and get it off their books.

Sorry to speed-bump your thread mschlee.
G'night.

kgg, it's a supply-side issue so I don't think your question's off-topic. It's pretty simple, actually. When a developer plans the building and sales start, at whatever stage of construction, only a fraction of the planned units are made available, which keeps the inventory numbers artificially low, and creates more urgency through limited availability (at least that's what the developer and brokers are hoping for). As contracts are signed, more units are released, possibly w/ price adjustments.

The Edge in Williamsburg has been discussed recently; it's a perfect example of this. There are 1,085 units planned, but only 48 are currently listed for sale.

please don't compare williamsburg with NYC, that is not a 'perfect example'

Brooklyn is NYC, and this isn't a Manhattan-specific thread. There are plenty of people here with an interest in Williamsburg, but that's not the point. The principles of controlled release are the same regardless of borough, even if the developments in Manhattan aren't as massive.

Historically in NYC real estate demand is tied to employment. The cost and availability of capital -- the interest rate on mortgages and the ability to get one -- is a big driver. In the current market, we are seeing a lot of foreign investment, which is driven by the relatively weak dollar and the political instability of some buyers' home countries.

Also, the quality of NYC as a place to live is going to drive demand -- which is why factors like the capacity and outlook of schools are worth looking at, as is crime.

What else? Carrying costs like property taxes, the cost of service personnel, and fuel.

Finally, there's the availability of substitutable goods, such as luxury rentals.

Did I miss anything?

ali r.
{downtown broker}

Kgg- Tenenmental did explain some of the knowledge. I'll take it a step further. A new development begin selling sometimes 1-2 years before the anticipated completion date. (which is just about always later). As people buy the units the developer will release other units. This is done very carefully with a lot of consideration. Certain units are purposely held for various reasons. This is what tenenmental was referring to and he is 100% correct. His example is also 100% correct. It doesnt matter if it's Brooklyn. They (developers all do it.).

If a building is going to have 150 units and 50 are sold then that would leave 100 units on the market to reflect inventory. Correct. No because the developer may only have listed say 15 units currently listed for sale. The other 85 units are there only, they don't exist for inventory numbers. So take a look at New Development on this site and get the total number of units in the building and subtract units sold (or contract) and listed for sale in that building and the answer is what is being withheld from the market inventory numbers. Actually if anyone had that figure it would be interesting to know. My best guess is a few thousand if not more.

Here's the other problem in this declining market. The developers really can't lower prices as the market declines. They are stuck between a rock and a hard place and this is the reason why. As I stated above the developer starts to sell unit well in advance. This was working great for the last few years. But here in lies the problem. Now that the market is declining and price are dropping the developer can't lower prices until they close on pending contracts and that is usually not until the building is ready for people to move in. If the developer lowered prices to meet the market, pending contracts may back out. Why would you go to contract for a unit at say 1M when your neighbor just signed a contract for the same exact apartment (same as in other unit) at $800,000. Almost non of these buildings meet delivery date and have contingency agreements that lets the buyer back out. Which most would do if the prices were lowered. Also the developer would have to worry that appraisals for the pending contracts would come in considerably lower if the same unit was lowered $200,000 last week. This would cause the buyer to be denied for the mortgage or come up with more money (Unable to get a mortgage is also a usual contingency).

This is a little more complex then people think. I hope this explains it a little more. Oh and by the way once the developer closes on those pending contracts then all bets are off. If the market calls for a substantial decrease then they will lower the prices as needed leaving the new owners wondering why they paid a lot more than their neighbor. Or they can keep them and rent them as long as they don't need the money to pay the bank back themselves.

tenemental, supply is controlled by developers who "release" apartments based on feedback from brokers. They are manufacturing shortages in many buildings to create interest/feeling of urgency. In the old days this was called "warehousing and was legal up to 10% of a building during condo/coop conversion. Not releasing units feels like modern-day warehousing at a > 50% rate. There may be a UCC violation here. Any lawyers out there have something to add?

"They are manufacturing shortages in many buildings to create interest/feeling of urgency."

Isn't that what I said?

There are two cartels in play here
(a) the developers, who "warehouse", and
(b) the brokerage community that make it next to impossible to bypass full-service brokerage firms while selling/buying property

Both have had their part to play (aside from cheap lending standards) in driving prices up. With the crash, and resulting desire to hold some public hangings, I wonder if someone (e.g., public prosecutors, class action lawyers, journalists) will start to go after these groups ..

Off the Beige book reported today ...let's look at New York

New York: Economy has weakened since last report. Housing sales are down sharply from a year earlier and tourism activity has softened. Attendance at Broadway theaters has dropped. Office vacancy rates are rising. Consumer spending is little changed from a year ago, and inventories are mixed. Bankers report little change in loan demand and refinancing activity. However, lenders are reporting a "notable rise" in late payments for consumer loans.

Thanks for the responses. I see your point and believe that what you are describing does happen but am not convinced this is always so conspiratorial. Sometimes it is just part of the process. New building goes up, the big pieces are put together, majority of the crew moves on to new project. Smaller crew systematically moves through building readying units floor by floor. So now, floors 2-7 are getting punchlisted for buyers while 8-14 still have concrete floors and exposed wiring. If I was the developer, I would want some income asap and I wouldn't be surprised if they in fact need that income to continue with the completion plan. I wouldn't be surprised if we see just that when prices do undeniably slump 2009-11 and developers bail, stranding people in condos in half-finished buildings the same way people
are sitting in their new homes outside phoenix and vegas looking out at never filled lots and half-built home-sites as their neighborhood turns into a dustbowl. I digress.

Moving on, as a "bitter renter" with no interest in a new dev condo building but who has been eyeballing the 2 Bed UWS sales market for quite a while I have made a few observations. One, supply-side, inventory has increased dramatically (number of 2 beds have doubled since Jan. 1)over the last 6 months. Although I would hazard a guess this is because of slower sales and longer times sitting on the market not a real increase in apartments hitting the market.

Second, apart from a few significant price cuts on flawed apartments that are lingering on the market,
prices (or at least ask) have not really dropped. Nor have they really gone up barring some trophy bldgs. Demand is not down in my opinion, demand is on the sidelines, and the market is in a stalemate.
For now.

Andrew Stein, as Manhattan Borough President in the 80's, went after developers for warehousing apartments and tried to get the law changed.

From the NY Times
By ALAN FINDER
Published: March 20, 1987
LEAD: A coalition of tenants and city and state legislators yesterday proposed a new campaign to prevent landlords in New York City from intentionally keeping apartments vacant.

http://query.nytimes.com/gst/fullpage.html?res=9B0DE5DB143FF933A15750C0A961948260

Interseting article 80sMan but not the same. Different time. Different town. Not developers, landlords. Pre-conversion buildings. Sure their are similarities...

kgg, developers turn into landlords when they can't sell what they build/convert. Just take a look at LIC.

interesting views - has anyone read the paper "why is manhattan real estate so expensive" it was done a while back by a couple of professors (harvard and wharton i believe). i dont remember all of the details, and i remember not agreeing with some of their assumptions, but they make the point that r/e prices in manhattan are primarily driven by shortages in supply caused by government regulation.

it's an interesting read.

also a quick note on price driving demand - remember it is the other way around. demand is not influenced by price, but rather determines the price. however, expected appreciation i.e., expected sales price in 5 years, will have a strong impact on demand.

sorry to nitpick, just want to keep the focus

mschlee, if you have the link please share

http://www.manhattan-institute.org/html/cr_39.htm

http://www.economics.harvard.edu/faculty/glaeser/files/Manhattan.pdf

here is the full version.. warning its PDF

good discussion, it looks like so far the primary drivers identified are:

Demand:
Employment - both absolute employement levels and wage rates
Quality of life
Potential appreciation or depreciation.
Tax benefits if one buys
The cost and availability of capital
Cost of substitutes i.e., rental

Supply:
a bit of a slippery one and thanks for the good posts. I think there was some good exchange on supply manipulation, but what is really driving the supply, or developers changing the way they release it into the market?

mschlee -
rather than comprehensive demand drivers, it might be valuable to look at drivers that have changed. in that sense, tax benefits is constant - was true 5 yrs ago, as it is today, so will not affect prices up or down. so, I think:

Demand drivers
- Employment, wage rates,
- Quality of life (decreasing crime, etc)
- People's perception of where the market will go (appreciate/depreciate)
- Cost and availability of capital
- Increase/decrease in foreigner interest in the city (I am yet to see a meaningful data point on this one)

Supply drivers:
- Lower cost housing available elsewhere (e.g., Florida, for sr citizens to sell and move to)
- Increasing numbers of condos being constructed
- Substitutes (availability and cost of rental, cost of nearby areas such as W'burg, Brklyn hts, NJ)

Thanks dco and tenemental for explaining why new developments don't lower prices. So in this market, would you advise to wait out the closings on the apartments under contract and hope for new, better priced inventory in buildings that have only offered, say, half of their inventory? We are interested in a new construction building. There has been no negotiation on price, yet only half of their units have been put on the market and many do not have contracts. We hear that the building may be ready for occupancy late summer/early fall. So after the first batch close, is the developer more likely to negotiate price/closing costs? I understand that if you wait, you risk not getting the apartment that you like, but since the developers are limiting releases, how do you even know what else there is in their inventory? The building we are interested in keeps trickling out new apartments and some have floorplans that I have never seen before and some I like better than the one I first bid on (which was rejected, by the way, because it was below asking price). Another question, if the units that are not sold are later rented by the developer, does that hurt/help the overall value of the property? Thanks for your input and sorry this is off topic, but these questions were triggered by your posts about inventory manipulation.

exaclty on point cartman, just wanted to get the list out there and then solicit views on which will change (and what direction).

so lets tackle the first one - employment. wall street layoffs are in all the headlines, but anyone have good info on the overall employment market?

NYRENewbie- Did you do the math. Look at how many units the building has total and add up the sold/contracts and what is available. Then subtract that from the total units for the building. The answer is the number of units not reflected in the inventory numbers. You will find that most buildings still a very large amount of unreleased units. Also usually the first units released are the least desirable ones. There is a lot of strategy on releasing of the units.

The best advise I have for you would be the same I would give to a family member (one I like of-course) is wait. Just think about the logic. Even if your unsure ask yourself this question. Is it more likely that prices will increase or decrease over the next 12 months? Depending on how you answer this question and given your situation, you will have your answer if you should wait or buy now. I don't see one shred of evidence that doesn't point to a significant decrease in the next 12 months. Remember that developers have to answer to banks as well and will eventually lower prices in order to make payments. Don't get caught up in that you have to buy before it's to late. That's the oldest trick in the book. Or the building has a waiting list....... Ever go out to a club and see this huge line outside. So you and you friends wait 100 people deep just to get in and when you do you realize that the place is empty. Remember thinking Wow it must be a great place, we have to get in. Well that's the same premise used by developers. The empty club represents the thousands of units being held to give the appearance of desperation and curiosity of "I must be missing something". It's called marketing.

Again sorry for the rant I was just trying to help I think it's clear what I would do.

NYRENewbie, DCO's point about why some developers won't lower prices (or at least they'll hold out until the last possible moment) definitely makes sense, but others certainly will lower prices earlier in response to sales (or the lack thereof). Go to curbed.com and seach the words "pricechopper" and "chopper." You'll get to read about the way many developers have had to deal with less than expected interest. Curbed may be full of comedy, but there are also links to serious articles - and to StreetEasy, to demonstrate the chops - and in between the bickering in the responses (the Curbed boards make this one look downright civil) you'll occasionally get some good insights.

It's tough to say how you should approach it; all developments are not created equal. 15 CPW prices aren't going down, unless you consider someone offering their resale at a 100% profit instead of 120% a discount. On the other extreme end, there was a new dev in Windsor Terrace (advertised as Park Slope) that only sold 1 out 16 (that one buyer must now be totally underwater) and held a no-reasonable-offer-refused sealed bid auction. If you bought early at the Charleston or Northside Piers at asking you clearly made a mistake and should have waited. You said it yourself: by waiting you risk losing the apartment you like most in the building, but by not waiting you risk the release of other units you would like more. Unless you're a heavyweight insider getting first dibs before the public (malraux has talked about this - interesting stuff), you really don't know. There were some 1br units at the NOVO Park Slope that were great deals (though interest in the development faded fast and it's now having all kinds of trouble); I think they might have been loss-leaders to generate buzz and get a big opening (it worked, the first open house was nuts, but it didn't last). Some developers will also opt to turn the whole building rental before lowering prices as much as they would have to (the East Harlem building) with the possible intention of trying to sell again in the future. If the building winds up mixed sale/rental, it is indeed bad for value. At worst, with too high a percentage of rentals, it's hard for buyers to get financing. At best, buyers are worried that the renters won't care for the building as well as other buyers.

I, personally, would wait. Unless it's the perfect unit in the perfect building on the perfect block and you plan on being there a very long time, I would expect plenty of suitable options showing up with discount already in place in the not-too-distant future.

Much thanks dco and tenemental for taking the time to respond to my post and mentoring me through this!

NYRENewbie- I is this your first purchase?

In NYC,yes, this will be our first purchase. But we do own other property. But New York Real Estate seems to be an intentional maze, buyer beware, few consumer rights. NYC real estate tactics might be construed as consumer fraud in other parts of the country. That is why posts like these are so invaluable in alerting folks like me. Thanks again!

My pleasure. Glad it was helpful.

Tenemental--

which was the windsor terrace development that had the sealed-bid auction? Thanks.