Are Home Prices in the Manhattan Suburbs Due? — The Big City Exodus Theory

Lower_Manhattan_from_Jersey_City_November_2014_panorama_2

Are home prices in the New York City suburbs on the rise?

We’re not seeing it in the data just yet.  Even with home sales up pretty robustly for the past five years, home prices in the Manhattan suburbs have been relatively flat since their financial crisis correction back in 2008-2010.  At some point, you have to think that increasing demand with a flat supply is going to drive prices up — just basic Economics 101.

And here’s another theory that bolsters the idea that the suburbs are due for some price appreciation.  Conor Sen in Bloomberg View argues that demand for homes in the suburbs is likely to surge in the next few years, driven largely by the simple fact that big-city housing prices are out of whack. Indeed, he analogizes big cities to large cap stocks and suburbs (and smaller cities) to small-cap stocks (this is Bloomberg, after all — everything is about equities….), and thinks that the housing market is like the stock market in the late 1990s, when large caps were overvalued and due for a fall relative to small caps.

Why? Well, basically, two reason.  First, home prices in the big cities across this county have soared in the past few years, and at some point people are going to decide that they just don’t want to pay that much to live in Manhattan or San Francisco or wherever.  And second, he sees the internet driving job mobility:

The conventional wisdom that the internet would allow people and jobs to leave primary metro areas for secondary ones has run up against the fact that over the past 20 years the opposite has occurred. There are a few problems with this argument. First, at the height of the last housing boom the impact of the internet on daily lives was still quite small. The only people with smartphones were business users who had BlackBerrys. Cloud technology was still in its infancy. For most people, the internet was still a desktop-computer- and email-based experience. Now, with a labor market approaching full employment and the housing market nearing a normal recovery, it would be fair to evaluate the question of whether people will move. And the evidence suggests they will.

Certainly, this makes sense in the New York area, where Manhattan prices have risen dramatically in the past ten years compared to pricing in the surrounding suburbs.  To give you an idea of how the market has changed, let’s compare the average sales prices for Manhattan and some of the surrounding suburbs in the past ten years.

First, Manhattan. According to the market reports put out by the Corcoran Group, the average Manhattan home is now priced about 60% higher than it was ten years ago in 2006.  Here are the numbers, with links to the market reports:

Okay, so Manhattan is up 60% in the past ten years.  Now, let’s look at what’s happened with pricing in some of the surrounding markets over that same time period. We have done a quarterly market report every quarter for about 15 years for the New York suburbs, so we can get the data there:

Westchester County:

  • 2006Q2:$938,825
  • 2016Q2: $841,549
  • Difference: -$97,276 (-10.4%)

Rockland County

  • 2006Q2: $567,277
  • 2016Q2: $465,795
  • Difference: -$101,482 (-17.9%)

Orange County 

  • 2006Q2:$351,538
  • 2016Q2: $228,037
  • Difference: -$123,501 (-35.1%)

Putnam County

  • 2006Q2:$483605
  • 2016Q2: $362,584
  • Difference: -$121,021 (-25.0%)

In other words, while the average price in Manhattan is up almost 60%, the pricing in the New York suburbs is down between 10% (Westchester) and 35% (Orange).

And it’s the same in the New Jersey suburbs to the west of Manhattan.  We don’t have market reports going back as far in that county, but we do have the calendar year average prices going back that far.  So here’s a comparison of the average price for the past rolling year ending in June, and the calendar year price in 2006:

Bergen County

  • 2006 (calendar year): $680,313
  • 2016Q2 (rolling year): $569,484
  • Difference: -$110,829 (-16.2%)

Passaic County

  • 2006 (calendar year): $396,703
  • 2016Q2 (rolling year): $312,000
  • Difference: -$84,703 (-21.3%)

Same thing: while Manhattan is up almost 60%, Bergen is down 16% and Passaic is down over 21%

And how about the eastern suburbs — i.e., Long Island?  We don’t cover that market, so I don’t have market reports handy, but if you look on Zillow’s median price index, you can see that the median prices (not the average) in Nassau and Suffolk Counties have done the following:

Nassau County

  • August 2006 Median Price: $510,000
  • August 2016 Median Price: $469,000
  • Difference: -41,000 (-8.0%).

Suffolk County

  • August 2006 Median Price: $447,000
  • August 2016 Median Price: $343,000
  • Difference: -104,000 (-23.2%).

You have to be a little careful comparing averages to medians, but the trend is still pretty clear: Manhattan is up, and all the surrounding suburbs are down.

So does that bear out the thesis that home prices in these suburbs are due?  Maybe.  Certainly, it’s amazing how well Manhattan has done over the past ten years, rising almost 60% while the surrounding suburbs have still not recovered from the 2008 financial crisis.  And it’s puzzling that this kind of rampant appreciation has had little or no impact on suburbs that are right on the border.

Think of it this way: back in 2006, the average price of a Manhattan home was $1,25M, which was 33% higher than the average priced home in Westchester.  Today, the average Manhattan home is almost $2.0M, which is 137% higher than the average priced home in Westchester.  That seems a little nuts, particularly when you think about what $2.0 buys you in Westchester.

Now, it might just be that the imbalance could be corrected in another way — Manhattan prices could just go down, rather than suburban prices going up.  But I think that we have good reasons to be optimistic about suburban pricing.  We have a strengthening economy, low interest rates, good employment, and a lot of twentysomethings who can’t afford a home in Manhattan and are likely to start looking outside the city in the next few years.

Posted on September 6, 2016 at 10:56 am
James Troia | Category: Rand Country Blog | Tagged , , ,

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