Why Apartment Landlords Are Confident About 2024
What will the 2024 housing market look like? While a few factors remain up in the air one thing is for certain, landlords across America are confident that 2024 will continue to be a strong year for rental demand.
While mortgage rates have backed off their high of 8% in recent weeks, they are expected to settle in the 5-6% range sometime in the not-so-distant future, which still makes homeownership unaffordable for many.
And despite lower demand, housing prices are not expected to come down because of a shortage of homes for sale. New York City has not experienced the same shortage of homes for sale that many cities have in the rest of the country, but it is an expensive real estate market which traditionally keeps more people renting. In Manhattan demand to buy apartments has slowed more than usual as would-be buyers keep renting with a “wait and see” attitude. This has been a boon for landlords and is likely to extend throughout 2024.
In Manhattan, median rental prices hit a record high of $4,500/month in May and June of this year. Those monthly prices were 16% over the high of the previous year. It is important to note this was not a seasonal summer surge as the median prices at the beginning of the year in cold, dark January were already 17% over the prior year.
Rental prices are strong and while prices typically dip during the colder months, this October prices were 2% over last year. The pace of price increases is clearly moderating yet rental demand continues to keep prices strong, coming in at $4,270/month.
What is fueling strong rental market?
Apart from buyers waiting for mortgage rates to subside, there are also many workers who are required to be at the office anywhere from two to five days a week. For those who have settled outside the city, many are simply picking up a small rental to see how it will all go over the next year or so before they decide if they make the move back to the city a permanent one.
High pricing alone will not necessarily encourage landlords to be optimistic, but certainly some of the recent headlines might. Respected media outlets such as The Economist and The New York Times have both run articles recently suggesting that now is the time to rent versus buy.
The rent vs. buy math
In a recent New York Times article, Mark Zandi, the chief economist of Moody’s Analytics, suggested the best metric for deciding if you should rent or buy is to simply take the potential purchase price and divide it by your potential annual rent. If the outcome is less than 18% you should purchase; if it is above, you should buy.
Using the median sale price of $1,175,000 in NYC at the end of the third quarter and dividing it by the annual median rent at the end of the quarter, which was $4,495, the resulting 22% tells a rational buyer that it is time to rent and not buy. However, that is a very general number. Manhattan is a big city, and these ratios should be looked at through your own particular circumstances. If you are looking for upper west side apartments for sale your ratio could be different than the buyer looking for a Harlem brownstone.
Buying may not be for everyone
Has the age-old notion that renting is throwing out money and buying is how you build wealth been upended? I would argue that it has not, but it has certainly changed. Buying may not be for everyone. If you are transient or own a second home, buying in NYC might not be for you. Savvy real estate investors are looking for long term properties. If you are an investor, you already know that demand for rentals is likely to increase in the future and not decrease. The population keeps growing and Manhattan is an island.
On the supply side, the construction of new rental buildings has slowed because of the increased costs of building and the elimination of the 421-a tax abatements. Many established developers in NYC are active outside of the city going further afield to find building opportunities which yield a better profit with less risk.
The wise investment right now
Demand for rentals will continue to grow but the inventory outside of high-end luxury apartments is not likely to keep pace. Purchasing economy apartments may be a wise investment right now. If you were thinking of investing $3 million perhaps you buy two condominiums instead of one.
Knowing where to find the right neighborhood to make a promising investment is always key. For example, there are a number of Murray Hill condos which trade at a lower price than Upper East side condos for sale, yet the rental prices can be similar. Simply use a CAP (Capitalization) rate to compare. With current headlines encouraging people to rent and not buy, could it be your time to be a landlord?
Could it be your time to be a landlord?
Depending on where and how you purchase you could secure a good return on your investment and even throw off a small amount of cash. Owning real estate in NYC will never stack up against a hot stock in terms of the rate of return but it will offer steady long-term gains and a hedge against inflation. Many cash buyers like owning real estate knowing that over a ten-year period of time they will come out ahead. NYC has been viewed as a bit of a safe haven by international investors for decades. And pricing is favorable right now. The sharp uptick in mortgage rates last year pushed many NYC buyers back into the rental market, tamping down demand and therefore competition. By the end of Q3 the median price declined by 3% year over year while negotiability hovered at 5%.
The economics of buying has clearly shifted. The best real estate agents in NYC can help you determine if you should buy now or not is as important as crunching the numbers. While 2024 looks like a great year to be a landlord, you need a local professional to help you create a realistic long-term strategy. So, get in the game in 2024 and be optimistic!