Came into the city on the last day of 2014 to join Deirdre Bolton on her Fox Business show Risk & Reward to talk housing rents and 2015 with a dash of $50M+ sales in New York. Always fun.
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The report we author for Douglas Elliman covering the Manhattan/Brooklyn rental markets was published today.
Back in February many observers of the Manhattan and Brooklyn rental markets were saying: “The Spread is Dead, Long Live the Spread!” Ok not really.
But there was a lot made of the fact that the difference in median rental price between the two markets narrowed to $210 from as much as $1,125 in 2008. Manhattan rental prices had stabilized at the end of last year as Brooklyn continued to see sharp gains.
But that was as close as it got. Since the beginning of the year, month-over-month Manhattan rental prices began to rise as Brooklyn started to level off.
Manhattan rents cooled last year as the sales market poached demand from record volume. I saw the decline was temporary. The excess purchase activity from several years of pent-up demand has largely been absorbed allowing rents to begin climbing again.
Brooklyn rents are beginning to level off as a result of all the new rental development entering the market soaking up demand.
There was a good article in the New York Times yesterday: In Many Cities, Rent Is Rising Out of Reach of Middle Class
Many have complained about the Federal Government’s (and our society’s) overselling of homeownership over the past decade and how the decline in homeownership will eventually lead to an emphasis on rentals in the US. Of course, like many housing market ideas, good and bad, they tend to be presented in a vacuum, without real context.
I believe much of this discourse is in reaction to tight credit combined with a weak economy rather than some sort of fundamental cultural and economic shift. During the bubble we got the opposite discourse – that there was a fundamental cultural and economic shift towards homeownership.
Currently there is a much smaller subset of Americans that have access to financing. According to the Federal Reserve Senior Loan Officer Survey, lending has actually tightened in 2014 over 2013 (related to QM). Many homeowners are unable to sell because they can no longer buy and many renters no longer qualify for financing so the idea of of homeownership as a goal fades.
Case in point has been the recent public discourse on the issue of home affordability, whether it be sales or rentals. Zillow presented an analysis for the New York Times that illustrates how much rents have risen in the past 13 years (since 2000) in cities across the US.
Here’s the scenario:
The economy is weak – we are seeing tepid growth in employment, stagnant incomes and historically tight residential mortgage lending.
The organic flow out of the rental market into the sales market is slowed and a log jam is created of too many renters and not enough buyers.
Rising rents against stagnant incomes creates an affordability crisis. The sales and rental markets are connected. They are not mutually exclusive.
Rising rents are a product of tight credit, which is a residual byproduct of the financial crisis. Fix the economy and credit eases, then lending normalizes (no, not circa ’06) and the pressure on rental housing is eased.
I’m not entirely confident with the reliability of the historical rental data being presented to the New York Times by Zillow – but I still agree that affordability is being pressured:
- Zillow was launched circa 2006 and rents are not public record so the early data has to be super thin.
- The comparison was made between a first quarter (low) and a third quarter (high) in a highly seasonal market.
- I am not sure if “New York” means Manhattan or New York City. If it is Manhattan, then our median rent figure in 1Q 2000 was $2,600 in nominal terms, and $4,276 in real terms. In nominal (unadjusted for inflation) terms, rents have risen 23.1% through 3Q 2013 while real median rent has fallen 27.3%. The Zillow median rent as share of median income nearly doubled, rising from 23.7% to 39.5%. Either incomes have collapsed in NYC or the 2000 rental figure being punched into their model is flawed, ie way low, no?
Other inights on any of this would be appreciated.
Rob Ferdman over at Quartz writes a great breakdown of the narrowing rental spread between Manhattan and Brooklyn using the data I crunch for The Elliman Report: Manhattan & Brooklyn Rentals. Here’s my version of the chart.
After I designated last week’s Bloomberg story headline “Brooklyn’s Hipster Economy Challenges Manhattan Supremacy” as my favorite new phrase, specifically:
Brooklyn’s Hipster Economy
Quartz has given me a new favorite phrase (see under original chart):
Coolness doesn’t come free
Given the discussion about the narrowing gap between the Manhattan and Brooklyn Rental markets, I thought I’d place the rental price trends side by side to get a sense of how the two markets match up.
While the year-over-year Manhattan rental numbers have fallen short of the prior year, rents have remained fairly stable over the past 6 months:
Brooklyn rental prices have been trending sharply higher to the point where the rental price spread between the two markets is at it’s lowest level every recorded (since 1/2008):
I think many, if not most people calculate the return on their home as an investment as this CNN/Money calculator does. After seeing this, I whipped up a theoretical infographic illustrating how the use of leverage in a home purchase factors in to your return. It’s super simplistic, not factoring in opportunity cost, use and enjoyment, tax deductions, improvements and other factors because I wanted to show the power of leverage.
Forget about price indices like Case Shiller or similar. I can’t tell you how many times I have seen a home price index paired up against a stock price index as a way to determine which investment is better. Apples and oranges.
Measure your ROI using what you invested (down payment) and what your home equity expanded (or contracted) to.
The CNN/Money rate of return calculator is really only a measurement of home price appreciation compared to the same period for stocks and bonds as an opportunity cost – comparing different asset types side by side – yet that’s not how the majority of homebuyers interact with their home as an investment.
It’s most often about leverage.
An appraisal colleague and friend of mine pointed out that in my original version, I incorrectly used the word “profit” within the infographic rather than what I was actually talking about: “equity” ie return on investment (ROI) – how much the original down payment gained over time. The numbers all remained unchanged.
The rental price spread between Brooklyn and Manhattan is narrowing. At $210, the month of February saw the lowest differential between the median rental price of Manhattan and Brooklyn’s North and Northwest regions.
While Manhattan rents have leveled off, Brooklyn rents have continued to rise sharply – a combination of rising demand as well as a shift in the mix towards luxury rentals.
A decade ago, who would have thought we’d be talking about Brooklyn this way?
Affordability was largely favorable in the second quarter but higher home prices and mortgage rates more than offset the increase in family income. The West Region shows both higher prices and more highly leveraged transactions. Kansas had the highest affordability for home ownership.
NOTE: This table shows the approximate home price a family earning the specified income could afford making a 20 percent downpayment, with no more that 25 percent of gross income for principal and interest payments. Variables include the type of loan and interest rate.
While the national median sales price of a US home was reported to be $218,900 in June 2005, there was great disparity in the 4 regions covered: Northeast, Midwest, South and West.
The West saw an 85% higher median sales price in June than the Midwest did. Not only does the West region have the highest housing prices, but has the highest payment level as a percentage of income, roughly 50% more than the other regions.
A urban development think tank ranked housing affordability by state using median sales price and median household income for 1970 and 2000. They contend that denser urban areas that control growth generally have higher prices.
Kansas was the most affordable place to own a home in the US. Hawaii was the least affordable, nearly 2.7 times that of Kansas.