Conventional real estate wisdom dictates that rentals and sales work in opposition to each other: When sales are slow, rentals pick up, and vice versa.
But in recent months, the New York City sales market has ground to a halt while rents have plummeted. Does that mean the old rule of thumb no longer holds?
Yes and no, experts say. The recession, with its high unemployment figures, is throwing the usual patterns out of whack as it damages both markets.
“A stronger sales market tends to hurt the rental market — that’s the conventional wisdom,” said Brad Inman, the publisher of the real estate journal Inman News. “But convention is not at work here because of the impact of the recession.”
Some of the confusion surrounding the subject stems from the fact that the relationship between sales and rentals is more complicated than many people think, said data guru Jonathan Miller, the president of appraisal firm Miller Samuel.
The sales and rental markets aren’t exactly opposites, Miller said. Rather, they tend to follow one another. If sales are doing well, rentals dip in response, he said, but not necessarily right away.
“Over time, they trend like sound waves,” he said. “They’re not in perfect sync.”
Moreover, the two markets don’t operate in a vacuum. Other factors, like interest rates and economic conditions, can affect one or both of them. As a result, “they’re not mutually exclusive,” Miller said.
For example, he said, after Sept. 11, 2001, the rental market fell roughly 30 percent over several years, bottoming out in 2005. True to the conventional pattern, the sales market grew in roughly the same time period.
“Rents fell sharply in ’02, ’03 and ’04, and sale prices rose significantly,” Miller said.
A 2006 slowdown in sales then caused rents to rebound. But when the sales market took off again in 2007, hitting record highs, rents stayed strong, buoyed by high demand for Manhattan housing.
The strong sales market “didn’t make rents plummet,” Miller said. “Volume slipped a little, but it was still an active rental market.”
A recession like the current one disrupts the usual interplay between sales and rentals. Layoffs and stock losses cause both markets to plunge at the same time rather than responding to each other. Economic realities force people to stay where they are or find ways to reduce their cost of living, Inman said.
“Historically in a recession, people double up or move in with their parents,” he said. “There’s just less demand and more supply.”
Fewer people are able to buy, but they’re also unlikely to rent new apartments.
“Anytime you have a severe recession, neither market is going to do particularly well,” said Gregory Heym, chief economist at Terra Holdings. “People may not want to buy right now, but that doesn’t meant they’ll go rent an apartment. A lot of potential buyers are already living somewhere.”
Of those who do move, many forsake the city for suburbs, where housing is cheaper.
Daniel Hedaya, the director of leasing and management at Platinum Properties, said that’s already started to happen.
“Something I’ve been hearing is that people who are not renewing their leases … when they give a forwarding address for the security deposit, a lot are out of state or in the outer boroughs,” he said.
The double slowdown is particularly noticeable in the current recession, since the city is experiencing a large number of layoffs, Inman said.
According to statistics released last month by the federal Bureau of Labor Statistics, the national unemployment is soon expected to surpass early 1990s levels. And, the New York area, beset with Wall Street woes, is expected to lead the country in layoffs, with 181,000 jobs expected to be lost in 2009, according to a forecast released last month by the U.S. Conference of Mayors.
“Not all recessions have high unemployment,” Inman said. “In the early ’90s, [unemployment] wasn’t as high as it looks like this is going to be.”