Rents in NYC Decline – Home Prices to Follow?
Earlier this week, Bloomberg reported on a year-over-year decline of 1.2% on the median monthly rent in New York City. The numbers are actually worse (if you’re a landlord) given that inflation appears to be on the rise with consumer prices up 1.5% since September 2015. In real dollars, we’re talking about a nearly 3% decline in what landlords are able to charge in NYC area. However, that’s great news for renters, who have more money in their pocket as housing expenses decline while incomes increased 5.2%.
Obviously, some of these comparisons are apples to oranges (national data to local) but the underlying trend pushing rents down is universal: the Invisible Hand is working. Simply put, demand for rentals increased substantially after the financial crisis as millions of people lost their homes and most job creation occurred in the largest metropolitan regions. The market responded to this demand by raising prices – dramatically in NYC, which saw increases of “as much as 20 percent since the end of the recession in June 2009” according to Bloomberg.
These were hard years for renters who watched as rents soared while missing out on the equity appreciation that homeowners were enjoying. However, behind the scenes, the invisible hand was hard at work, increasing supply to meet that demand. With rents at all time highs and financing at all time lows, developers are flooding the market with new units. According to that same Bloomberg article, the inventory of available listings has increased 35% y-o-y (the largest increase on record). These massive developments, including the Hudson Yards project which will add 4,000 additional units, take years to come to fruition and thus slightly lag the market drivers that factor into the developers’ decisions to build.
When trying to forecast where prices will go, it’s useful to think of the rental (and by extension housing) markets as late reactors to price. From 2007-2010, as the housing market collapsed and home-flippers fled, development of new units came to a standstill. The lack of supply (especially since so much development had focused on suburban detached units over the prior two decades) and the increased demand (especially in urban cores) led to sky rocketing prices. From 2012-present, developers have responded by building what had been for the most profitable market… high-end apartments. As we enter a new four year cycle, it’s worth considering the impact that this increased supply will have on prices. My guess: the Invisible Hand always wins.