How do different real estate market segments impact each other?
The NYTimes recently reported that the 3BR+ Manhattan real estate market (ranging in price from $2.5-$7 million) was by far the best-performing segment in the first quarter of 2010. Both young families and empty nesters are looking to replicate suburban space in an urban setting, which accounts for the strong demand. As well, new construction condos lend themselves best to family living (pre-war units tend to incorporate separate dinings rooms while new construction has a very large great room), which further drives demand for this segment.
The different market segments impact each other, no question about it. In the last few months, I have dealt with several Hoboken 2BR owners looking to upsize into 3BRs, and the common lament I keep hearing is how little their 2BR units are worth right now. Because they are taking a hit on their 2BR sales, they seem to want to share the pain with 3BR sellers.
The reason why the segments tend to operate independently of each other is that not every two-bedroom seller is a 3BR buyer. The majority of people sell and move out of the area, either because of job relocations or to go to the suburbs. And a lot of 3BR buyers are coming from Manhattan, and are looking only at the 3BR segment. Interestingly, I have noticed a lot of demand for 1,400 sf 3BR units. Buyers seem to think that is enough space to house a family comfortably, and of course smaller units are cheaper. I must be the only person in Hoboken whose possessions breed on their own; I have clutter everywhere in my 2,100 SF 4BR. I would be extremely nervous about running out of space in only 1,400 sf.
Two-bedroom units comprise 57% of the overall Hoboken market, by far the single biggest market segment. 2BRs are getting hammered because they is on the wrong side of the supply/demand equation. Meanwhile, 3BR+ units comprise 11% of the overall market, so they are benefiting from the other side of the equation, plus a dynamic that has an increasing number of families looking to stay in Hoboken for the long-term.
When I bought my Hoboken 2BR in 2004, the price difference between a 2BR and 3BR was about $100k. Now it’s more like $200k, which means that sellers seeking to upgrade had better have an extra $50k-$100k in savings.
A 2BR is not a 3BR. There may be some gray area because of 2BR+den units that are marketed as 3BRs, but they do not count as comparables for appraisals. That being said, how is the bleeding in the 2BR market impacting 3BR sales?
For starters, not much is moving. The inability of 2BR owners to sell their units at the prices they want means they are either priced out of the Hoboken 3BR market, or else they are hunkering down in their 2BRs for the time being, hoping that prices will rise in the next couple of years. That translates into fewer 3BR buyers. The pool is further diminished by buyers who are put off by the $200k price differential and opt for a large 2BR instead.
3BR sellers have the following choices:
- Rent out their units (3BR rents are still quite high since there are so few of them on the market, plus it is cheaper for three roommates to split $3,200 than it is for two to split $2,500). Hope the market improves and they can get close to their asking price. The rental market is much stronger now than it was six months ago, which augurs well for sale prices.
- Wait until a buyer comes along who is willing to pay what they are asking.
- Drop their asking price.
- Market heavily to NYC buyers, who think Hoboken prices are cheap.
If enough 3BR sellers get desperate to sell and have to drop their prices, then that will have a huge negative impact on the overall market segment. I think that is unlikely to happen because it is so easy to rent your 3BR and cover the mortgage. Plus 3BR owners don’t have the same issue of outgrowing their space as 2BR owners. The overwhelming majority of my friends get desperate to sell their 2BRS when the second child comes along, which is not an issue with a 3BR.
As long as 3BR units remain a very small percentage of the overall market, barring some sort of global economic depression, I don’t see prices dropping to the same degree as other market segments. We will have to see what kind of new product comes online in the next few years; if a lot of 3BR+ units are built, that would be a game-changer. However, it might also be exactly what Hoboken needs to be truly competitive with the suburbs as a destination for raising a family because more high-income parents improve the probability that student test scores would rise. If Hoboken schools rank highly, more families will live here, thereby absorbing additional volume and keeping 3BR prices high. Either way, I am betting that Hoboken continues to grow in popularity among families.