Low Ball Bids & Cold Feet

A: That is how I would describe today's Manhattan real estate marketplace. If you come here mostly for the front line, real time conditions here in Manhattan, I would have to describe the buyer confidence level as one of low ball bidding and cold feet. Sellers seem to be waking up to this reality, and entertaining lower bids with more seriousness. To see what I'm saying in the numbers, we must look at sales volume trends, both quarter to quarter and year of year, and you will see exactly how the drop in confidence is affecting our local marketplace.

I have always stated that 'its all about the buyers, and buyer confidence' when it comes to a local real estate market. Today is no different. Some will argue that interest rates are what drives a real estate market. Others will argue that it is inventory, or lack thereof, that powers the housing market. Or is it jobs? The stock market? The lending environment? Fact is, all of these things play a role in the overall trend of any local housing marketplace, but in the end, its all about buyer confidence. To put it simply, if there are no buyers, how will product move without a significant reduction in the price? The question of WHY buyer's lost their confidence, brings us to answers like higher rates, tighter lending, will the asset depreciate, job insecurity, negative wealth effect, etc..

Today's Manhattan real estate market is one of caution and proper pricing. Show me a good deal, and I will show you a buyer. Price it high and try to offset it by offering brokers' incentives as Toes discussed, and watch it sit. With a few waves of the credit tsunami behind us, we are now experiencing the after-effects of the major credit hurricane that has been hammering our economic and financial system for 8-10 months now. As has been the case since last August, the credit markets are leading the stock markets; the preferred gauge as to the health of the overall economy. As stocks fall, the risk of a recession and the slowdown in general becomes more real.

Like after a very powerful hurricane, the economic/credit recovery will be painfully slow. Buyers, especially wall street buyers, and those in the higher echelons of the affordabaility range here in Manhattan, know first hand how bad it is out there. After all, these are the guys on the front lines of wall street with jobs in the fixed income & derivatives trading desks. You know the old saying, "its a recession when your neighbor loses a job, and a depression when you lose your job"? Sadly, plenty of high wall street earners are about to enter a depression as we go from job cut announcements to actual pink slips. By this time next year, it is estimated that 100,000 wall street jobs will be lost and with the damage embedded deep within the financial system, these job's ain't coming back anytime soon.

On the streets, brokers are learning very quickly these days that the used car salesman approach to selling properties doesn't really work anymore; and in fact, only makes the agent using the tactic look like an idiot and way behind the curve. I am finding buyer's to be very savvy these days, very cognizant of what is going on around them, even if they do not fully understand the depth or severity of credit deflation that is currently occurring. It all adds up to the same thing, continued decline in buyer confidence. This results in cautious bidding. If the bid happens to get accepted, the chance of that buyer backing out because of cold feet during the diligence phase of the transaction, is considerably higher than in years past.

At the right price, buyers are there. At the wrong price, buyers are pricing in potential downturn risk via low ball bids. The true motivation of the seller comes out at this time. In the past 3-4 years, a bid 10%-15% below ask would result in a convincing NO RESPONSE by the seller; unless there was a desperate situation on the sell side. Today, that is generally not the case. A bid 10%-15% below the ask is now getting a response most of the time. Every bid must be considered in today's environment and it is up to the seller's level of motivation to decide just how that bid is responded to. In the seller's mind, the risk of not getting another bid at that level for a while, is far greater.

A serious buyer who is financially qualified and ready to go, is gold right now; in my humble opinion. As a broker, in past years it was prudent to focus your business on gaining new sales exclusives; as more listings equals more power and allows the agent to have a credible sell side business that ultimately generates its own buy side business as prospective buyers come to see the listings. Today, personally, I would much rather work with a ready, willing and able buyer than an overpriced, unrealistic seller! Not that I am avoiding new sell side business, just trying to explain to you the current environment that I see out there right now.

This environment is not unexpected, and certainly not a shock for UD readers. I've been discussing the credit crisis in depth since last July because of the severity and future risk it posed for our local market. Now that it is here, many agents are realizing that times have changed and that they need to tweak their business model to adjust.

The data seems to confirm everything that I have been discussing here since late 2007, up until today. Sales volume is down, inventory is up, and pricing continues to defy logic for reasons discussed. Expect 2008 to be the year inventory rises, and 2009 the year that shows the price drops; with both years showing sluggish sales volumes. According to the Streeteasy.com Q2 2008 Market Report:

The number of closings has continued to decline. The number of closings has dropped to about 3,085, a decrease of 20% since last quarter, and 44% since this time last year.

Eventually, this will cause a media problem for us; because what went into the price data to skew it upwards, will eventually come out and skew it downwards. As the upside data came out, it painted a misleading upside picture. When the downside data ultimately comes out, it will be equally misleading as a market that just fell off a cliff. I will do a piece on this topic tomorrow. For now, feel free to speak out on what you see out there in the streets of Manhattan real estate.

Related Bidding Discussions on UrbanDigs

Timing A Low-Ball Offer

When Good Bids Go Bad

The Sellers First Response: The Probe Bid

Bidding When The Price Is Right

Bidding Strategy 101: Reverse Psychology

For Sellers: How To Handle A Bidding War

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