By Matt Woolsey, Forbes Magazine
Though luxury home buyers took a big bite out of the Big Apple last year--properties in the Plaza Hotel and condos along Central Park West sold for record prices and the city posted new highs in price per square foot and median sales price--2008 hasn't been as kind to sellers.
There is plenty of new construction, especially on the West Side and in the outer boroughs. But vacancies are on the rise. That's bad news, especially when the job market takes a pounding.A loosening market, job losses and new construction projects adding to an already growing inventory lands New York, typically a strong market, No. 21 on our list of best cities for home sellers.
"What happens is that people tend to look at prices as a barometer of the health of the market," says Jonathan Miller, president of Miller Samuel, a Manhattan appraisal company. "But it's really how many people are in the market, and what you're seeing now are people dropping out because of affordability or because they can't get credit."
West coast sellers are faring better. In San Jose, Calif., No. 1 on our list, tough regulatory measures make it difficult to overbuild. New home construction dropped 63% last year, while jobs grew by 1.2%. Home vacancies, which were already low at 1.6%, fell to a national bottom at 0.8%, helping make San Jose one of the country's tightest markets.
Farther north, San Francisco's conforming loan limit jumped from $417,000 to the maximum $729,750, which makes getting credit a simpler affair for many of the city's home buyers. In 2006, the market felt a softening that pushed vacancy rates up to 2.4%, but a 56% cut in construction has cut vacancy rates in half. The increased access to credit, thanks to the new Fannie Mae and Freddie Mac limits, and the lack of available properties plays to sellers' interests.
Behind The Numbers To find the other cities on our list, we looked at the country's 40 largest metro areas and assessed how friendly conditions are expected to be for sellers this year. Each city was ranked by its 2007 unsold vacancy rate, calculated by the U.S. Census American Housing Survey, and how much the market had tightened or loosened when compared with 2006 conditions.
Then we looked at construction starts, as tracked by the National Association of Home Builders, to see if building starts would compound or alleviate vacancy woes. Next was job creation, from the Bureau of Labor Statistics, as a way to measure the local economy's ability to absorb or offset housing losses.
Last, we factored in the degree to which new conforming loan limits from Freddie Mac and Fannie Mae will improve each market's lending conditions. When Freddie and Fannie get more involved, lenders get the implicit backing of the Federal Government, something that softens the risks that have slowed lending elsewhere, as jumbo, or nonconforming loans, can be expensive losses.
"There is still an unwillingness on the behalf of lenders to bear the higher risks of jumbos given the potential loss severity," says Anthony Sanders, a professor of finance at Arizona State University. "Recent price declines are scaring investors and lenders alike."
San Jose and San Francisco came out on top because they fit the profile of a sellers' market--low inventory rates that were still shrinking, good job creation, a large scale cutback in new home construction and a boost in the credit market from new Fannie and Freddie loan limits.
But one look at the rest of the spots on our list will remind you that the term "seller's market" is relative. Many, like Denver, have experienced consecutive quarterly price declines. Prices here dropped 6.3% last year, according to the National Association of Realtors. Seventh-place Denver also has a 3% unsold vacancy rate. Still a 2% jump in new jobs and a 49% cut in construction are reasons to be optimistic about the next year or two.
Seattle has experienced similar construction rate cuts. The city went through its own bust in 2002 and 2003, as the result of mass overbuilding. Since homes take a few years to finish, when construction rates plummet, as they did in Seattle from 2003-2005, it takes years before those adjustments are felt. By 2006, Seattle had the lowest vacancy rate in the country, and wasn't as prone to the price adjustments felt elsewhere, making it our 10th best sellers market today.
While job growth, new construction and vacancy rates and access to credit are important barometers, the bottom line is this: When there are more buyers chasing property than sellers looking to unload, that means a relatively quicker sale, which in this market is the best that can be expected, even if it's a small or flat price gain.