An Ebbing Luxury Tide In New York City Real Estate?

Taking a look at the big real estate picture in Manhattan and Brooklyn, the post-pandemic recovery was skewed toward larger apartments, largely because buyers opted for more size to accommodate the fact that many of them would be spending more time at home. In New York, size and price are non-linear: price increases faster than size. So, with more sales at higher prices, the luxury market’s rising tide is lifting the market as a whole. However, as luxury sales begin to slow down, the reduced number of higher-priced sales could mean overall prices will likely dip as 2022 progresses.

The Luxury Sector, Month by Month

The luxury market’s recovery reached a crescendo in late 2021, with nearly 200 deals over $4 million signed in October and November. While volume has slowed a bit, the monthly average for 2021 and 2022 remains at an elevated 151 deals — compared to the 2015-to-2019 average of 98 deals per month, the current rate is 54% higher. As those deals start closing in the first quarter of 2022, median price numbers will naturally skew higher.

Luxury Versus Non-Luxury

The median price of luxury units is substantially higher than the rest of the market: looking at the median price of the top 10% of sales each quarter as compared to the bottom 90%, the difference is clear, as the below chart shows. The combination of significantly higher prices for luxury units and the higher number of deals means that market prices will get pulled higher.

The ‘Pull’ Effect

Real estate prices are naturally skewed to the right. This means the vast majority of sales prices will cluster near the median, but there will be a steady progression to incredibly high prices. For example, since January 2021, closed sales prices have ranged from under $200,000 to over $80 million. In any given year, there will be thousands of sales at elevated and even outlier prices, but with near-record luxury volume in 2021, the number of prices above and beyond the median was especially large. A look at distribution of sales prices since January 2021 shows this effect clearly.

Outliers and Medians

Unlike averages, which take into account each number, medians are simply the middle value and are not as affected by outliers. While medians may not be swayed by outliers, they are influenced by them, especially if there are a great deal of them. By comparing the median price of the bottom 90% to the overall median price, the “pull” effect becomes obvious.

In the chart below, the spread or gap between the two medians appears to remain fairly consistent from 2006 through 2016, when it begins to widen. This coincides with the market’s peak at that time. As the market contracted in 2019 through the COVID nadir, the spread narrowed. Then, as the market rebounded and luxury sales began taking off, the spread began to widen again.

On average, from 2006 to 2019, luxury sales pulled up overall median prices by nearly 13% each quarter. Data from the first quarter of 2022 shows this pull is now over 18%, reflecting the increase in the volume of high-end deals.

How Long Will This Pricing Affect the Data?

Closed sales prices are essentially a rearview mirror look at the contracts signed three to six months ago. To that end, a look at current contract activity is warranted.

Note that the level of luxury contracts signed during Q4 2021, which is currently powering price statistics, is notably higher than those signed during the first quarter of 2022. While the actual price negotiated for these contracts remains unknown, the lower level of deal activity suggests that future price trends will be less affected by luxury sales.

With fewer luxury sales closing, the “pull” effect will shrink once again. In short, after a sharp run-up in prices, the lower luxury volume suggests price trends will moderate and likely dip as 2022 unfolds.

What to expect

As 2022 heads into spring, which is typically busy in New York City, we should expect a confusing market with participant expectations starting to bifurcate. Sellers will be focused on reported sales prices showing significant gains, and many will, as a result, price aspirationally, hoping to get what sellers received before them, plus a slight increase.

Buyers, on the other hand, will be focused on local activity. There, they will likely see more and more listings coming to the market with higher and higher prices staying on the market for longer and longer.

Takeaways: Strong buyer interest, act quickly

As noted, overall price statistics might dip as volume in the luxury market ebbs from its 2021 highs and “pulls” the market less.

For sellers: In general, buyer interest remains strong, but with interest rates rising and economic uncertainties increasing, underpricing may be the best bet to shortcutting time on the market as listing-side competition increases.

For buyers: With inventory finally arriving, take note of what is lingering in your price point and be prepared to act quickly if an advantageous situation arises, but be aware that above-average discounts will remain elusive for the time being.

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