Preparing For Price Reports w/out New Devs
A: Three months ago I discussed why 2008 will not show any significant price drops here in Manhattan. The reason lies in the collection of pricing data at closing, not contract signing, and how a market with plenty of new developments in general works. In short, as contracts were signed in 2007 for buildings that were in construction or conversion, it is only now that these deals are being closed and counted in the price data. This 'lagging effect' often misleads us to believe that the current market is similar to the one when the contracts were originally signed. So, I want to discuss the likely reversal of Manhattan price data as high end buildings and expensive new developments are no longer there to upwardly skew the data. Expect to see ugly year-over-year comparisons and average price drops starting in 2-3 quarters; I would say starting as early as 4Q 2008, but more likely around 1Q 2009!
Manhattan, the creme-de-la-creme of local real estate markets, was never totally immune to market forces; its a market like any other and market forces do work here. While this market has its protections and unique mix of buy side demand, recessions do occur here. Nobody likes to talk about it though for fear of scaring buyers away. It's funny how its OK to discuss a bullish marketplace, with tight inventory, bidding wars, and rising price data; because everybody likes the boom times and the favorable press! But switch that around and discuss the threats to this marketplace or what is likely to occur down the road, and you earn the title of Dr. Doom! Nobody likes a downer. Some will even blame you for having an agenda to bring down the market so that prices get cheaper; love that one as I did get a few of those emails over the past 8-10 months. I have to laugh.
Anyway, as with all datasets, there are anomalies. Over at Comitini.com, Peter Comitini publishes the Corcoran 2Q Manhattan report where CEO Pam Liebman states:
"New development closings typically lag behind the market by one-to-two years and are therefore a poor barometer of what happens when a seller lists the home she has lived in for ten years on today’s market. Moreover, brand new, highly-amenitized luxury properties are much more likely to sell at a higher price point than the average property competing on the open market. In this report, therefore, we examine re-sales in isolation while our colleagues at Corcoran Sunshine analyze new development property sales."Its a good idea to separate the two sectors and even in doing so, the report looks bullish excluding the decline in Q2 sales activity that is significantly below previous Q2 activity! But I wonder how it will look when 4Q 2008 and 1Q 2009 is released and compared to the past year. Here is why.
As new developments and condo conversions started to close, the prices paid at contract signing started to get counted into the data reports. Sales of two buildings in particular, 15 CPW & The Plaza, really skewed the data to the upside. While it was fine to see Manhattan average prices rise 17% due to closings at these high end buildings, it certainly won't be fine when reality takes OUT this temporary anomaly and prices show a drop of 15%! This of course did not happen yet, but it will as the quarter with the upside (4Q of 2007) is compared with the future quarter that doesn't include these high end sales anymore.
As with the seasonal component for BLS inflation data, new developments and condo conversions have skewed the price data significantly HIGHER! I urge you to watch out for this concept: WHAT GOES IN WILL EVENTUALLY COME OUT!
What I mean is, as 15 CPW, The Plaza, and hundreds of more expensive new developments close (units sold for $1,400+/sft skew median prices higher) and get counted in the pricing data released to us, when this wave is over, we will see a correction! What went in, will ultimately come out! Now, human nature is likely to mis-interpret this as a free-fall in Manhattan real estate when the data catches up. Most data is analyzed year over year, comparing say 4Q 2007 to what 4Q of 2008 brings to see the difference in price, sales volume, time on market, and inventory. The year over year data that is coming will show data WITHOUT closings from these high end new developments and condo conversions.
Take this NY Times article that came out January 3rd, 2008, and described the 4th Quarter of Manhattan real estate in 2007, "Apartment Prices in Manhattan Defy National Real Estate Slide":
The average price for an apartment reached $1.4 million in the last quarter of 2007, up 17.6% from the fourth quarter of 2006, according to data tracked by the brokerage firm Prudential Douglas Elliman.Now, the article does discuss the impact of high end sales on this data, but the point is the headline and the whopping 17.6% GAIN in the average price of an apartment that is errantly interpreted by readers to mean that all apartments appreciated at this rate! Wow, amazing right? If you bought an apartment in OCT 2006, and sold in OCT 2007, you made 17.6% even in the face of the young credit crisis that was going on at the time. Ummmmm, no! That is not the case.
The number of apartments that sold for more than $10 million tripled in the past year, according to data tracked by two other brokerages, Brown Harris Stevens and Halstead Property. Many of these deals were at 15 Central Park West and at the Plaza, two buildings in which 94 of the 1,342 condos sold in Manhattan in the fourth quarter are located.
Gregory J. Heym, an economist who prepared the reports for Halstead and Brown Harris Stevens, said that sales at those two buildings helped drive up average condo prices by $500,000
Fast forward to the coming 4th quarter of 2008 (OCT-DEC), whose data will be released in JAN of 2009. The likelihood of that report NOT including high end sales of new developments and conversions is very high; yet we will compare it to the above report from 4Q 2007!
That year over year comparison will be ugly, and the media will go nuts with it. What comes in, will eventually come out. That 17.6% gain, will eventually result in a equal and possibly wider loss down the road! It is only when we will compare existing re-sales, excluding high end developments and conversions, will we see what bloggers like myself have been saying for so long. Price data is lagging and misleading, and just as it mislead on the upside and brought unwarranted happiness to many homeowners out there, it will also bring unwarranted depression and media headlines! Be prepared, be ahead of the curve, and understand that when it happens it will probably cause interpretations to be exaggerated as a market that just eroded!
Posted by Douglas Heddings
Wed Jul 9th, 2008 12:24 PM
Awesome analysis Noah! I think you're right on about Q4 2008 and Q1 2009 numbers but i'm telling you right now that prices have already dropped 10-15% in certain markets across the city. And I know you agree. Kee up the great work!
Posted by Noah
Wed Jul 9th, 2008 12:39 PM
Hey boss! Thanks, lets see if it plays out this way. Hope all is well!!
Posted by Mike
Wed Jul 9th, 2008 12:51 PM
I think that is a fair arguement - but you are also making the assumption that the headlines of this year for those who do not read in between the lines will not encourage people to purchase offsetting the eminent decline 2 quarters from now.
Basically anyway you slice and dice it affordablity, rationality will win in the end. Manhattan rents/vacancies are starting to pull back, jobs are getting cut, tighter lending standards are in place, i could go on and on about the fundamentals that will validate this theory whether the theory is right or not.
Posted by brokerMan
Wed Jul 9th, 2008 02:40 PM
What you are saying is true, however, I seem to recall that prices were still up in those reports across the board even if you remove 15CPW and the Plaza. Also, wont some high end new construction building be closing in the 4th quarter to help skew the numbers all over again?
Posted by Noah
Wed Jul 9th, 2008 02:47 PM
brokerman - yes but there are two things Im concerned about:
1. the very removal of the two biggies, in and of itself will cause a big reversal in headline, and that is likely to get mis-interpreted.
2. the lagging effect of all these low ball bids lately.
I've been seeing low ball bids coming in for past 4-5 months now, at some point in the next 2-3 quarters, the y-o-y data will show these discrepancies. Has to. Question of timing like you bring up is the only real variable here.
Posted by brokerMan
Wed Jul 9th, 2008 03:34 PM
Very true about the headlines being mis-interpreted.
Also true about the low ball bids but I think a lot of them are still being ignored by sellers as the "on the ground reality" has not set in with them yet.
Posted by Noah
Wed Jul 9th, 2008 03:49 PM
well said!
Posted by Donald
Wed Jul 9th, 2008 04:27 PM
What about the resales at 15 CPW and the Plaza? Won't they help skew the data well into 2009? I read rumors that there is a $150 million and a $90 million condo at 15 CPW and a $100 million one at the Plaza being offered for sale by flippers.
Posted by Noah
Wed Jul 9th, 2008 04:36 PM
Did these close? Are we betting on flippers getting 70-100% appreciation on their purchases in this environment, and if so, all of them successfully selling?
They can ask whatever they want, until it sells, it won't help the data. Personally, I think they have their challenge. Im sure some will sell at great levels for the original buyer, but to expect all of them to, is kind of unrealistic.
Lets see how it works and revisit this comment board in early JAN when 4Q comes out.
Posted by Noah
Wed Jul 9th, 2008 04:39 PM
1701 sold for 13.17M a few months ago and was signed into contract prob sometime in late 2006 or 2007. Today is being marketed at $36,000,000.
An appreciation of about 180% is in this asking price. Lets see if/where it sells but I have to think it will be a tough sell.
Posted by Donald
Wed Jul 9th, 2008 06:57 PM
brokerman,
There will always be high end devleopments to skew prices, but not to the same extent as today. Financially, 15 CPW was the most successful building in NYC history. It shattered all types of records. I think it is unlikely that any new building that will be marketed in the near future will have the same level of success.
Posted by Donald
Wed Jul 9th, 2008 06:59 PM
I think the unit at 15 CPW I mentioned above was priced at $150 million merely for publicity. No way will it sell for that price.
Posted by brenda
Wed Jul 9th, 2008 07:36 PM
I think there are still a large number of new development units that will come on the market between now and 2010. When you have tons of Wall Street and foreign money, these units get absorbed fairly easily. Not so much any more, and the developers who bought land thinking that they could do condos/hotels/other commercial depending on the market may be in for a really rough ride over the next year or so. THAT's when things MAY get really interesting, if some developments start having contract cancellations, being unable to make loan payments, etc.
Posted by Donald
Wed Jul 9th, 2008 08:47 PM
Wall Street bonuses will be hit hard this year, (not to mention all the layoffs) and many European economies are slowing down or are in a recession, so without Wall St. and foreign money, I don't see how builders will make the same profits as they did over the last several years.
Posted by Chris
Wed Jul 9th, 2008 09:26 PM
OK, I am in agreement with this analysis. It's excellent. However, why are sellers of medium-tiered properties still in LA-LA Land? I am not seeing the listed asking prices coming down. Would it not be better to SELL ahead of the downward trend? They should. Why don't they?
Posted by Kurt
Wed Jul 9th, 2008 10:31 PM
Glad someone is focusing on this. Thanks, but can you fill in your colleagues so they stop beating the drum that Manhattan is unstoppable? If only!
Posted by Michael Oliver
Wed Jul 9th, 2008 11:12 PM
I think the New York real estate market is going to be in for some serious declines in the next 2 years. All the banks are weak and economy is for sure slowing. The plus is that the dollar is so weak (this shouldnt change much for a while) and tons of out of country buyers will still select to have homes in NYC. Here in Tucson Arizona we have seen a huge increase in Canadian buyers that are helping to absorb our listing inventory.
Posted by Noah
Thu Jul 10th, 2008 08:20 AM
Kurt - Most brokers are clueless of what is going on in the macro economy. Not that this is a bad thing, as many people in general just don't 'get it', and haven't since this thing started mid 2007.
They just think, markets go up and markets go down, but don't really know why. I say this because I was having a conversation at my office about it with an agent, and within 5 minutes, a crowd of like 8 agents hovered over, and nobody had any clue as to any of the problems facing our system at this time.
Looks on their faces were priceless when I said things like frozen secondary mortgage markets, rmbs write downs, corporate spreads widening, abx's, off balance sheet toxic waste, deleveraging, capital raising, etc..Its a wake up call. Most brokers focus on their business and on their world. So that is really what they know; sell sell sell. Not all, but most.
Posted by mh23
Thu Jul 10th, 2008 09:13 AM
Noah:
I could not agree more. I have been following Manhattan real estate closely for years now, and there is no doubt in my mind that every single fundamental that supported high prices over the past several yeas has eroded considerably. I recently closed on a unit that I bought in 03, I sold it last month for 80% more than I paid, and that was after an 8% discount off asking. Many people who did not understand what is going on in the market told me to hold on for asking, or rent. I ignored them, and I am glad that I got out when I did. There is no way that any asset can continue to go up, unabated, forever.
I never did believe that what led to price appreciation in Manhattan was a bubble. Rather, there was a perfect storm of robust fundamentals (strong local economy, multiple streams of demand, low inventory, inexpensive money, high quality of life), that led to the appreciation of real estate that we have seen over the past several years. Each of those areas has been severely weakened, and it will take years before they come back.
Posted by Bee Dub
Thu Jul 10th, 2008 02:27 PM
Don't you think we should look at what co-ops are doing now, to predict what condos will be doing later? Co-ops make up most of the existing housing stock, and if we focus on them exclusively and ignore the condos (which your article says skew the results), we can see what is going on now. Jonathan Miller's latest report shows that all co-op prices went up in 2Q, except 2BRs which dropped 1.8% (2BRs make up 32% of the market. Granted, co-op sales lag by 2-3 months from contract time because of the board approval delay, but co-ops are a better indication of the current market than condos.
Posted by Noah
Thu Jul 10th, 2008 02:44 PM
bee dub - just because co-ops make up 70% of the total housing stock, the question is, what percentage of all closings are in fact co-op sales! In any event, this latest report is not yet showing what I am discussing in this post.
If you want real time state of the market, do NOT look at pricing data, look at sales volume and inventory trends. That will tell you how active or soft the market is...pricing will come out later as contracts are signed first, and then closing occurs some 60-90 days later, usually.
Posted by gorod
Thu Jul 10th, 2008 03:51 PM
Great posts everyone. I just wanted to know if there is a way to know at what price the contracts are signed and if it is proper to ask listing brokers. Is it fair to assume 10-15%
below ask for recent contracts? I am also curious are the classic 7 and classic 8 coop apartments being hit b/c it seems that there are so few of them and all of them seem in contract on streeteasy.
Posted by jrd
Thu Jul 10th, 2008 05:05 PM
I think it might be a mistake to look exclusively at the co-op market since it is difficult to speculate with co-op ownership due to the typical restriction that they be owner occupied. While it true that the uber-luxury condo market keeps rolling along, it will be informative to see the non-owner occupied condo unit will have to say about the market.
Posted by Buyer
Fri Jul 11th, 2008 01:41 AM
Two properties just went into contract across the street from me at 5-10 percent more than I paid for a similar property last summer. The sellers tried for 20 percent more, but did not get it.
Co-op resale is up, just like the reports say. Surprising, given the devastation on Wall Street, but there are almost no good properties for sale in Manhattan.
Time the market at your own risk.
Posted by brokerMan
Fri Jul 11th, 2008 01:01 PM
Anyone who thinks the 2 bedroom co-op market is declining should try buying one in a prime area on the UWS. It just is not happening. Prices are up significantly from last year.
Posted by Peter Comitini
Sat Jul 19th, 2008 01:09 PM
Some great points here Noah. I agree that it is likely that new development numbers will decline in the short term moving forward. The development pipeline will narrow too. I'm probably one of those clueless brokers you mention in the comment above :-), but I think everyone gets it, that we are experiencing a crisis of confidence in the economy.
The housing slowdown is a two year old news story. Manhattan real estate has performed remarkably in that time. The New York market is not unstoppable, but I'm still an optimist. It is taking an overall slowdown of the national economy to begin affecting it. Even best of class products can face challenges in a slowing economy-- that's not a fundamental problem with the product.
Thanks for the mention!