The regional housing market in the New York City metro area continued to slow in the second quarter of 2023, with sales falling but prices maintaining historic highs. Going forward, we still expect sales to level out in the latter half of the year at close to 2014-15 levels, while severely low levels of inventory will continue to drive price appreciation through the end of the year.
Sales continued to fall below pre-pandemic levels. Closed sales fell in almost every county within the report and were down sharply compared to last year’s second quarter for each region – falling 22% in Westchester and the Hudson Valley, 26% in Northern New Jersey, 17% in the Bronx, and 24% in Fairfield County. Similarly, pending sales that went into contract during the quarter, which provides a leading indicator of future closings, were also down, falling in each county (other than the Bronx) and in each region.
We predicted last fall that 2023 sales would fall to 2014-15 levels, when the housing market was slowly recovering from the 2008-09 Financial Crisis. We believe that prediction is playing out, and it’s worth remembering that we considered 2014-15 to be a balanced market, with sales at reasonably high levels. The question is whether we level off now, or continue to see more deterioration.
So why are sales falling? The obvious answer would be that higher interest rates, which started climbing 18 months ago, chilled buyer demand by making already-pricey homes even more expensive. A drop in buyer demand, though, would normally be accompanied by a decline in average prices, as fewer buyers would put less pressure on pricing. And that’s not what we’re seeing.
Indeed, even while sales continued to fall, pricing was relatively strong, with some counties stabilizing but others still appreciating. Compared to last year’s second quarter, regional prices were down 4% in Westchester and the Hudson Valley and 5% in the Bronx, even though many counties in the region were up. And prices in Connecticut and New Jersey were fairly robust, with Fairfield up 9% and Northern New Jersey up 5% for the quarter. Meanwhile, over the longer term, virtually all the counties and the regions saw price appreciation for the last 12 months, reaching yearlong historical highs.
Accordingly, we do not think that higher interest rates have had a depressing impact on buyer demand. Certainly, we have relatively fewer buyers than we had two years ago, when the market was white hot, but we have more than enough demand to continue to hold prices steady even with sales falling.
So if it’s not falling buyer demand, than why are sales continuing to drop? The explanation is simple – we don’t have enough homes to sell.
We continue to see a severe inventory shortage throughout the region. We measure inventory by looking at the average number of homes that we sell each month, and then calculating how many months it would take to sell out the current stock of homes for sale. According to industry standards, six months of inventory marks a “balanced market” – anything less indicates a tight seller’s market.
Well, we’re way below that balanced market level, with 1-3 months’ worth of inventory in most of the counties and property types in the region. That’s a major reason for the current state of our market: sales are falling so much because we don’t have enough homes to sell, and prices are still being propped up despite rising interest rates, because we still have too many buyers chasing too few homes.
Why is inventory so low? We think it has to do with that rise in interest rates. Rising rates did not significantly impact buyer demand, but it has dramatically affected supply. Why? Because thousands of homeowners throughout our region currently have mortgages with interest rates below 4%, and in many cases below 3%. Many of them purchased their homes in the past five or six years, when rates were at historic lows, while others smartly refinanced their existing loans to lock in those lower rates.
Now, those homeowners have “golden handcuffs” locking them into their current homes. Even the owner that might want to sell, perhaps because their home is now at its highest value in history, are thinking twice about it, because they are loathe to give up the attractive rate they have on their current home. And in some cases, this makes financial sense: homeowners who want to downsize could find that buying a lower-priced home at a higher rate might cost them more money per month. Basic economics tells us that when prices go up, supply also rises as sellers see an opportunity to take advantage. But with so many homeowners shackled by the “golden handcuffs,” we’re not seeing the normal economic response to higher prices.
Will this change? It’s tough to say. Many long-time homeowners are reaching the point where they might become agnostic as to rate, because they have so much equity in their homes that they don’t need to finance their next move. Others might just reach the point that they need to move for personal reasons, even if it means giving up their historically-low rate. And still others might see the recent stabilization, and in some cases decline, in average prices, and rush to get on the market before the music stops.
Going forward, we believe that sales will eventually stabilize, and that low inventory will continue to drive price appreciation. That’s not because we believe that the market is going to significantly strengthen, but only because we will be measuring off a much lower baseline, not off the strongest market in history. Accordingly, we believe that the market will hold to that 2013-2015 era level of sales, with low levels of inventories propping prices up near their current levels through the end of the year.

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