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08.08.2004
 Prices Rising? It's No Surprise

The New York Times
August 8, 2004

By Jeffrey Jackson

So, this was a week for records in Westchester. The 2nd quarter median price of a single-family house in the county hit an all-time high of $660,000.

With the news, there's been surprise and panic. After all, the median sale price was only $570,000 a year ago. (Remember when Bill and Hillary Clinton's Chappaqua house seemed to cost a fortune?) But people should have seen this coming. One law above all others governs Westchester real estate: As goes Manhattan, so goes Westchester.

To some extent, this is a function of supply and demand as buyers find themselves priced out of Manhattan - especially when it comes to homes big enough for families with children. To comprehend this ripple effect that Manhattan has on the metropolitan region - especially on Westchester communities with easy commutes to Midtown - it's important to understand what makes the New York City housing market such a powerful catalyst.

The composition of the housing stock in Manhattan is essentially the opposite of other major housing markets. The average ratio of home ownership to rental properties is about one to three, the opposite of what is found nationally. When combined with a densely populated area and little land available for new development, this ratio means that the market rises quickly as a comparatively larger pool of buyers chase a relatively small inventory of housing.

The last three years have shown just how potent New York City housing is in heating the market. In 2001 when 30-year fixed-rate mortgages dropped below 7 percent for the first time in 30 years, rents were near record-high levels, making buying a home a more attractive option. As a result, there was a significant increase in buyers - but still a relatively small pool of houses and apartments for sale - leading to a bigger rise in sales prices compared with the rest of the region. That forced some buyers to look at Westchester, and sellers enjoyed a bonanza. A look at the median price trends of Manhattan and Westchester per quarter since 2001, shows how county prices follow on the heels of city prices. When one compares the median sale price of two or more bedroom city apartments against single-family homes in Westchester, there appears to be a corresponding lag time averaging two to four months. For example, when the city market declined by 4 percent in the third quarter of 2001, then rose 5 percent in the fourth quarter, Westchester followed a similar pattern one quarter later, recording a 5 percent drop in the 4th quarter and a 5 percent increase the next. In the last four quarters, Manhattan prices have increased 20 percent and Westchester's 16 percent. On a larger historical scale, prices in the same Manhattan market segment declined from 1991 to 1996, then recorded double-digit increases for the next four years, averaging 17 percent a year. That meant Manhattan prices rose to a median of $795,000 from $425,000, while Westchester, which averaged 9 percent annual gains during the same period, rose to a median of $407,000 from $285,000.

Based on this analysis, by following the median sale price of two or more bedroom homes in the city, home owners and prospective buyers in Westchester get a glimpse of what's to come once the Manhattan market wave reaches them several months later. Theoretically, an owner in Manhattan could sell as prices are rising and purchase in Westchester in time to see the appreciation wave roll in while other prospective buyers are sitting on the sidelines wondering if the market has peaked.

As appraisers, we record market values on the date we inspect a property; we do not forecast. As an economist, however, I foresee the next three months as a critical indicator of market direction. We recorded a 16 percent drop in purchases for July, and the median price leveled off. Since August is historically the slowest month for sales, we will be watching the market closely in September to see if the slowdown is cyclical or a diverse trend influenced more by socio-economic and political factors other than just interest rates.

Either way, property owners and buyers in Westchester should stay tuned to see what the Manhattan market will be sending their way.

Jeffrey Jackson is chief economist at Mitchell, Maxwell & Jackson, a residential appraisal and consulting firm.