It’s halftime 2022, the well-deserved break that everyone has been waiting for and, generally speaking, it feels like all the players (buyers and sellers) have gone into their locker rooms for a rest. The chaos of 2022 has everyone exhausted with all of the news (economic, political, geopolitical, tragedy…you name it) and has precipitated most to take a “time out” before they get back in. It’s “The Great Pause” when people are revaluating their budgets and watching prices. The question is how long will this moment last? Through the end of summer for sure and likely well into Fall.
We had been running at around 1,300 deals/month since the post-pandemic run started, with a peak in April of 2021 at around 1,800 deals in that month alone. We saw 1,500 as recently as this past March. But since then, deal volume for the most recent 4 weeks has fallen below 1,000. This loss of momentum is causing negative sentiment; but remember, it’s relative. For nearly 18 months the market had been running hot; meaning that a drop back to a more normal (pre-covid) level feels bad, when in actuality it’s healthy.
Monthly Contract Activity
Chart: Courtesy UrbanDigs
This drastic reduction in deal volume is what has defined The Great Pause, brought on by a variety of factors, most notably, this time, by inflation and the rapid relative spike in interest rates. Both have been a shock to the system, not only the economic system, but to our own personal/mental coping mechanism for rationality. Oddly, rental prices, which are astronomically high, have served to actually buoy the sale market and sustain moderate demand. And it’s these high rents that have investors actually re-entering the marketplace. The fact is, people want to buy; however, that bid/ask disconnect between buyer and seller has cooled deal volume.
While buyers are adjusting their offers to compensate for their reduction in purchasing power (see the eye-opening purchasing power analysis below), many sellers are holding on to yesterday’s prices. All the market reports right now are showing the record results from our recent peak earlier this year. However, those results are just that, the lagging results of deals negotiated in January, February and March of this year, before the war, before the highest inflation we have seen in 40 years and yes…before interest rates virtually doubled. These numbers do not represent where we are today. Consequently, sellers need to adjust to the new reality to get it done.
The 2% difference we have
experienced in the last 90 days
Example below reflects the difference in purchasing power between:
3% vs. 5%
$1M borrowed at 3% = $4,216/month
$1M borrowed at 5% = $5,368/month
That is a difference of $1,152/month or $13,824/year.
Alternatively, we could look at it this way:
At 3%, $4,216/month will afford you a $1,000,000 mortgage.
At 5%, $4,216/month only affords you a $785,500 mortgage.
So what’s ahead? Well, although lower deal volume had begun to result in increased inventory, the seasonal summer-slowdown and the “pause” have been greater counterforces, contracting overall-inventory at the moment. With many buyers on the sidelines, the serious buyers are actually encountering a bit less competition. Their fortunes could improve even more when Fall comes and a flood of new property could come on the market; many sellers have been holding their properties back until after summer. With sentiment still sticky for most, this Fall could present an incredible buying opportunity, as the higher level of inventory will likely outweigh the demand. By mid-Winter/Spring though, sentiment will have improved and the new normal of high interest rates and new, more favorable, pricing will have settled in. New buyers will be entering the marketplace in large numbers, and it has the makings, once again, of an extraordinarily busy and uber-competitive first half of 2023.
So much more to discuss, but no time. Please contact me to discuss anything and everything…inflation and interest rate expectations, inventory, pricing, timing, the rental market, preparedness etc.
As you know, I always say two things: 1) Anyone interested in buying or selling, should be rolling up their sleeves to determine whether the time is right to sell or if there’s a home/investment property out there for them; and 2) Who represents you matters…your best investment is often in the broker you choose; find someone with experience, who you feel you can trust.
Licensed real Estate Broker
Brown Harris Stevens
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We need more new construction on the upper Upper West Side.