Why Manhattan Price DATA Will Stay Strong in 2008

Posted by urbandigs

Wed Apr 2nd, 2008 10:08 AM

A: The power of the data! Now that Bloomberg came out with a 'Manhattan Slowdown' article that rippled across the blogosphere, I want to explain to you why I would NOT expect future data reports to show a slowdown in prices! The reason is in the new development closing dynamic and the fantasy of perceived timing; deals signed 10 months ago that close two weeks ago are considered recent and reflective of current market conditions. If you want to monitor the health of the current NYC real estate marketplace, stick to watching sales volume and inventory trends as a reflection on buyer confidence.

NOTE: I wrote this two days ago after I read the Bloomberg piece, not after today's Q1 report; so I referenced the older Bloomberg article to make my point.

nyc-real-estate-misleading-sales-inventory.jpgIf a contract was signed in 2007 for a new development that closes 12 months later in 2008, the price data reported will reflect the market conditions for when the original contract was signed! However, human nature will perceive the future report as current and in line with the market at the time of the reports publish date! No this is not an episode of LOST with Desmond jumping back and forth through time! Its a simple acknowledgment that: PRICING DATA THAT IS YET TO COME WILL REFLECT PRICES PAID FOR NEW DEV CONDO'S MANY MONTHS EARLIER!

Because of this dynamic and the fact that Manhattan has plenty of new construction deals waiting to close at high prices per square foot, if we are to grasp the health of the CURRENT market we should look at inventory and sales volume trends! Otherwise we will likely be confused by stale misleading data.

Let me show you an example of what I mean. Did you notice that the Bloomberg article published Monday showed the following trends:

a) Year-over-Year Sales Volume SLOWED 6.4%
b) Inventory ROSE 15% Since Start of Year

...leading us to believe that the market was softening, sales volume slowing, and inventory rising. Yet, the article later stated...

c) Property Prices ROSE 14% to Median $850,000
d) Condo & Co-op Prices ROSE Throughout Year, UP 6.4% in Q4 from year earlier

...leading us to believe that prices are in the process of rising!

So what gives? How could prices rise as sales volume slows and inventory rises? The reason is because the prices component is NOT registered until after the deal closes; some 1-3 months generally from contract signing! For new development deals, a contract can be signed over a year in advance of the closing. Which leads me to tell everyone that 2008 will see the closings of thousands of new development units that were signed into contract in 2007!

QUESTION: How will the prices paid, especially the price per square foot paid, ultimately affect future quarterly price reports for Manhattan?

: Positively! As new dev deals close, it will help to offset any weakness that may be occurring in the current existing resale marketplace causing a misleading and mysterious report that probably will not be in line with the sales volume & inventory trends at the time!

So, given the method of collecting closed sale prices, I would expect future Manhattan price data to remain strong as inventory & sales data (especially contracts signed data) more accurately represents the current marketplace at any given time!

Lets face it, sales of 15 CPW & The Plaza skewed last quarters pricing report and gave a very bullish yet misleading picture of our marketplace. According to Bloomberg's article, "Manhattan Home Prices Rise on Sales at Plaza Hotel":

Manhattan apartment prices rose 6.4 percent in the fourth quarter, boosted by sales at two new luxury developments, the Plaza Hotel and 15 Central Park West.

"A lot of the gain has to do with the unique circumstances of these two major buildings closing about the same time," said Gregory Heym, chief economist for Terra Holdings LLC, the closely held company that owns New York brokers Brown Harris Stevens and Halstead Property. "The high-end properties really pushed up the average price."

Apartments at the Plaza Hotel and 15 Central Park West, which accounted for 7 percent of total condo sales in the quarter, sold for an average $6.95 million, Heym said. The median price of a Manhattan apartment, including condominiums and co-ops, was $850,000, compared with $799,000 in the same period in 2006, according to Radar Logic Inc., a New York real estate data firm.
Now we have hundreds of new developments that will be closing deals in 2008, that will do a similar thing!

Jonathan Miller, of Miller Samuel & Matrix blog, chimes in on this topic:
"The record prices we saw in the current quarter don't reflect the "on the ground" activity of the market this quarter due to the high number of closing within new developments that actually went to contract last year. There was an unusual weighting of high end properties that skewed the mix of sales this quarter. The barometer of the market for 2008 will be largely measured on 3 factors: number of sales, listing inventory and days on market. Sales activity leads price direction."
Today's NY Times story, touches on this exact phenomenon after reporting on Manhattan real estate's Q1 report:
Sales in the first quarter were strong in part because nearly a third of the apartments that closed were for condos that buyers signed contracts for at least a year ago, according to data tracked by Brown Harris Stevens and Halstead.
So, when a broker or a friend says to you, "yea but look, Manhattan prices are up 15% since last year..." you can brush that off as just babble! We are at now now! If you want to know what is going on now, stick with sales volume and inventory trends!

PS: Now you know why I am trying to track contracts signed & new listings! Lets try to stay ahead of the curve so that we can expect the unexpected!!