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!