A combination of factors has led to high inventory levels in this consequential market, but could market demand be rebounding?

As we always reference, the adage “location, location, location” invokes three important realms of evaluating potential real estate deals: local, hyperlocal, and unique diligence factors.

The third installment in this series focuses on the New York City Tristate area, including the boroughs and surrounding markets. NYC is arguably the nation’s most consequential primary market. The area’s massive population and economic activity continue to drive real estate and lending activity, and its market dynamics remain unique. Mortgage rates spiked, remote work increased and stabilized, and COVID migration continued, a combination of factors that caused inventory levels to increase throughout much of the market. Particularly in Manhattan, actively listed inventory reached some of the highest levels of anywhere in the country, causing its own market story to play out since then.

Local

NYC is perhaps the nation’s quintessential primary market, with significant population size, innate demand, and powerful economic engines within the geographic market. However, migration trends have been generally net-negative, with a greater exodus of people versus incoming migration, particularly among higher-income earners who have more freedom to work remotely. In the NYC Tristate area, where space has been at a premium for decades, restrictions on short-term rentals are common. As a result, adding units or accessory dwelling units (ADUs) for long-term rental is more prevalent here than in other markets.

Here are some important trends we’re seeing, based on aggregated data from all properties analyzed (but not necessarily purchased) by lenders and investors on RicherValues, either by clients conducting their own analysis or by ordering our evaluation reports.

Market Demand Could Be Rebounding. The market demand scores in the NYC area were some of the lowest levels in the country, and they remain lower than most real estate markets where we see high lending activity. Much of this is led by high inventory levels, which often create price pressure on the markets as well as longer sale times for transactions. However, we can see that although market demand declined in the third quarter of 2023 and remained low, one year later it climbed back above 60 for the third and fourth quarters of 2024. This is partly driven by a healthier correction of inventory levels and doesn’t necessarily mean the markets absorbed the previously high inventory. Instead, sellers could simply have canceled their aspirations to sell, bringing active inventory levels to lower levels currently (see Fig. 1).

Reaching Better Price Stability and Predictability? In a different look at our FSD score graph (see Fig. 2), we think the FSD scores for NYC tell a different story than in other markets we’ve analyzed. Although inventory levels were higher and market demand lower from fourth quarter 2023 to second quarter 2024, this seems to have led to higher price volatility within each market and hyperlocal neighborhood. This is due to greater unpredictability by both buyers and sellers, with some homes selling at surprisingly low prices and others selling at surprisingly higher prices. As inventory levels have moved down in third quarter 2024, so have the FSD scores, which seems to indicate that price predictability is being restored. For lending, this can be a great thing.

You can think of the FSD score as a “reverse confidence score.” It measures the accuracy of analytical models that were used to determine a property’s value. A lower score means the model has more effectively identified sales price drivers, yielding greater confidence in the valuation. A higher score indicates an area has greater variation in sales prices and it was harder for the models to determine what specifically is driving price; therefore, a human touch is likely needed to sort through the details and ensure valuation conclusions are accurate.

Price Declines Continue and Smaller Deals Are Rebounding. In terms of deals that lenders and investors are analyzing through RicherValues, we’ve seen a general decline in average ARV (see Fig. 3) as well as a higher percentage of deals falling in the $400,000-$750,000 range (see Fig. 4), which historically has been a much smaller percentage of deals available to lenders and investors within the Tristate area.

To further emphasize the point about smaller deals, let’s look at buying power (see Fig. 5). For deals to push into the greater than $750,000 bracket within NYC, the age, livable area, and bed/bath counts remain at the smallest size compared to other urban markets in the Northeast. However, with the greater prevalence and accessibility of remote work and sustained demand in more surrounding areas versus Manhattan and the boroughs, the standard deals falling in the $750,000-$1.5 million bracket show NYC homes offer greater size than DC (although still lower than Philadelphia and Baltimore).

Highest Activity in Long Island. In most MSAs, there’s a constant fluctuation between deals in the inner core (urban/suburban) areas versus outer areas (lower density suburban and outlying). NYC sees its share of fluctuation trends as well. Looking at the top 12 ZIP codes where we’ve seen the highest levels of investing and lending activity, we see that eight of these ZIP codes are in Long Island (see Fig. 6).

Hyperlocal

As with any MSA, it’s important to understand a specific location by gathering neighborhood-level intelligence in the immediate area, submarket, and investment dynamics. The metrics you search for should be measured to help quantify hyperlocal activity, supply/demand balances, investment activity, and other factors. If you need help with that, RicherValues and similar software platforms can be a source of quantified data to evaluate hyperlocal supply/demand balances, neighborhood investment activity, including construction and renovation activity, as well as other factors.

Unique Diligence Factors

As with most markets, common factors that can affect real estate and lending at the hyperlocal level include square footage, inventory and market demand, and neighborhood dynamics.

Square Footage. Particularly notable in Suffolk County (Long Island) and other areas of the greater metropolitan area, square footage is often withheld from listings and is not available in public records. This means it’s crucial to perform extra due diligence, not only on the subject property but also on the wide array of sold and active listings in the immediate area. If you’re performing your own valuation diligence, then roll up your sleeves and be prepared to spend more time. If you’re enlisting outside professionals to perform the work, make sure those firms are truly evaluating square footage across all the comps and not just on the few comps they may decide to use to determine your property’s value. This is critical to avoiding valuation skew or bias, whether intentional or unintentional.

Inventory and Market Demand. Due to the high amounts of inventory compared to most markets, pay attention to inventory levels, price trends, and pricing pressure. Look at active listings and potential competition.

Neighborhood Dynamics. In urban core areas, scrutinize blocks, walkability, and quality. In boroughs and outer submarkets, note “invisible lines” where prices seem to differ across arterial streets or other boundaries.

This short look into this quintessential MSA provides an example not only for lenders and investors who are active in the Tristate area but also for all lenders, regardless of their market. This market-based approach provides the opportunity to break down the thought process and to see how local, hyperlocal, and unique diligence factors all play an important role in understanding prospective deals.   

Article is co-authored by both Jill Duke and Keith Tibbles

Jill Duke is the chief operating officer at Level Capital LLC. She has more than 20 years of experience in mortgage and construction lending, including correspondent, whole sale, and retail channels. Through out her career, Duke has led teams in operations, risk, quality control, post-closing, and product develop ment for regional and national banks as well as national non-bank mortgage lenders. She studied political science at the University of North Texas.

Keith Tibbles is a co-founder and partner at Level Capital LLC. He has more than 30 years of experience in mortgage and construction lending, serving as a director of Pacifica Bank, president of Washington Mortgage Lenders Association, and as an advisory board member for Fannie Mae. Tibbles also served on several task forces for the Mortgage Bankers Association. Tibbles majored in business administration and finance at the University of Washington.