NEW YORK (
) -- In the tiny island of Manhattan, supply of homes has always been limited and homeownership has been the privilege of a lucky few.
But the supply-demand dynamic in the city is now so out of whack that even a million dollars in the bank and pristine credit doesn't do you much good.
Buyers who are re-entering the housing market after waiting on the sidelines for so long are waking up to the cold reality that there are few homes left to buy.
"The market is absolutely insane," says Jacky Teplitzky, managing director at Douglas Elliman Real Estate. "It has completely changed in the last five weeks. There is just no inventory."
Also see: Saving for Retirement
Manhattan inventory has been steadily declining over the last couple of years as new developments stalled in the aftermath of the financial crisis and sellers held off from listing their homes in a tough market. But the inventory levels are now at their lowest levels in over a decade, as you can see from this
from real estate appraisal company Miller Samuel.
The absorption rate -- the number of months it would take to sell the amount of listings in the market at the current sales pace -- fell to 5.5 months at the end of the fourth quarter of 2012, compared to the 10-year average of 9.3 months. Listings have dropped even further since then in the early months of January and February.
Doug Perlson, CEO of online real estate company RealDirect.com says prices are on the rise with bidding wars among buyers starting to drive offers above the asking price. "It is amazing how in such a relatively short time, Manhattan has gone from a neutral
housing market to a buyers' market to a sellers' market now because of a lack of inventory. It is frustrating for buyers who have been sitting out for so long only to find out that there is nothing left."
Also see: Tax Tips
Manhattan is certainly not the only market with a shortage of homes for sale. Nationwide, inventory levels are at a 13-year low, with the absorption rate last reported at 4.2 months. In a balanced market, it should take six months to clear all the existing inventory.
Supply of homes has plunged nationally for a number of reasons. New home construction came to a standstill following the bust. Foreclosure activity has declined reducing the inventory of existing homes in the market. Some homeowners cannot sell their homes because they continue to owe more than their homes are worth. Others can't sell because they can't qualify for the loan they would need to "trade up" to a bigger home, owing to tight credit conditions.
In Manhattan, however, there are other factors at play. Unlike the rest of the country, there are relatively fewer underwater borrowers in the city and foreclosures are also low.
The shortage of supply stems from two factors. Post crisis, almost all new construction has taken place at the high end of the market. Many projects that were originally meant to be condos were also converted into rentals because they were seen as safer bets in the depths of the recession.
>>>> Also see: Retirees: Consider Downsizing to a Rental
But as Jonathan Miller, CEO of Miller Samuel points out, this explains only part of the problem as new construction accounts for only 10% to 20% of supply.
The real reason why there are not enough listings, he says, is because potential sellers are staying put in their homes due to lack of supply. "When sellers sell, they become buyers or renters," says Miller. "If you are a homeowner and you want to trade up, but can't find anything to buy, even though you still have plenty of equity in your home, what do you do? Nothing." says Miller.
Perlson of RealDirect.com says the inability to trade up to larger homes has dramatically reduced the supply of middle-tier housing, effectively freezing the market.
Some of the market dynamic also has to do with changing demographics. Previously, people moved to the suburbs once they had children. Now more and more families are opting to remain in the city, one reason why competition for larger three bedroom apartments is particularly stiff.
Then there has been a steady flow of demand from rich foreign buyers from countries such as Brazil, Russia and China who see New York as a safe haven for their second or third home. Teplitzky of Douglas Elliman says about 40% of her clientele tend to be international buyers.
Brokers expect tight supply conditions in the market to last for the next 12 to 18 months, as it would take time for new construction to come into the market.
Miller does not see supply easing in Manhattan or elsewhere for that matter, unless credit conditions improve and sellers can get a loan that would allow them to buy a bigger home. The catchphrase he uses to describe the constrained supply conditions nationwide is "housing is local, but credit is national." Tight credit conditions, he points out, have contributed to rising home prices because they have choked supply.
In Manhattan, demand for housing is not going away, although the process of buying a home is proving ever more frustrating for buyers. The city's sky-high rentals continue to rise and fear that interest rates will not stay low forever means buyers aren't prepared to wait on the sidelines for much longer.
>>> Also see: 5 Big Benefits to E-Filing Your Taxes
"People are tired of waiting," says Teplitzky. She expects prices to rise between 5% and 10% this year and advises her clients to act quickly. "Get your pre-approval from the bank, keep your documents ready and have your attorney ready to go. You need to work ahead of time."
Perlson expects the first quarter to see a huge jump in prices in Manhattan and Brooklyn. "It is going to be a very hot quarter. People who spent the first two months of the year bidding and losing out on properties are trying to get a deal done by spring so that they get a place to move in. There are a lot of people chasing apartments and we are seeing aggressive bids, some significantly over ask."
Are there concerns of a brewing bubble? "We are still in a rational housing market," says Kathy Braddock, co-founder of Rutenberg Realty. "Everything is not flying off the shelf. When you hit the sweet spot, you get multiple offers. But there is no stupid money."
Miller does worry that prices might be rising a little too quickly in some areas, but believes that buyers this time are a little more cautious. "Back then
in the boom, buyers were panicked. This time they are more skeptical and less willing to become totally irrational. But if inventory continues to fall and the economy improves a little bit, that could change," he warns.
-- Written by Shanthi Bharatwaj in New York.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.