Hamptons 'Plunging'
A: If you were at the Yale Club panel two weeks ago, you saw me repeat a few times that..."the Hamptons is done, just wait 6-12 months and compare prices". OK, so maybe I used trader jargon to describe the situation, but people should know by now that I will not say something as strong as this, without confirming it first! Today, the news is out and this high risk/high reward market seems to be rolling over.
According to Bloomberg, "Hamptons Home Prices Plunge as Wall Street Upheaval Cools Sales":
Home prices in the Hamptons, the summer resort of Wall Street bankers and Hollywood celebrities, plunged a record 19 percent in the third quarter from a year earlier as stocks tumbled and the financial industry shed jobs.Imagine if you heard that Manhattan fell 19% from year ago levels just to put this price movement into perspective. In my opinion, Manhattan is down about 8-10% from peak levels and the price that deals are being done at right now may be a bit lower; depending on quality of product. Of course, it will take a few quarters for what I say to you here today to be reflected in lagging price data.The median price for a home on the eastern tip of New York's Long Island fell to $830,000 from $1.03 million, the biggest drop in at least five years, according to a report today by New York based appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate.
The number of home sales fell 29 percent to 257 during the quarter from 361 a year earlier, and the inventory of properties on the market rose to 1,561 from 1,422, Miller said.
It's all about the buyers! When buyers disappear, we find out who needs to sell and at what price! The first wave down from the peak can be fierce depending upon the size of the bubble and the market. For the Hamptons, a summer retreat and second home market directly exposed to this wall street crisis, was overly exposed to a combination of absentee buyers & sell side margin calls and forced liquidations. So this market was very risky and prone to more severe price movements once the roll over began. As prices flew higher, the inevitable 'reversion back to the mean' was sure to begin on a high note.
In terms of Manhattan residential real estate, you can't really compare it to the Hamptons on various levels. However, you can get an idea of what the wall street crisis is capable of for a market exposed to the loss of these buyers and distress of these homeowners. Our market will not fall this fast, but pressure surely is on the downside right now. I am still not sure which year over year price report will reflect the contraction from peak levels, probably Q4 2008 (released in JAN 2009) or 1Q 2009 (released in APRIL 2009). It's the Hamptons headline shock and the news articles to come that may further depress buy side confidence, adding speed to the cycle. As I said many times since late 2007:
1) Expect 2008 to be the year inventory rises
2) Expect 2009 to be the year that shows the lagging price decreases
It's no surprise that buyers are waiting. It's also no surprise that sellers are more eager to adjust their asking price lower and entertain a lower bid. In fact, sellers don't even expect full ask anymore, they know that bids will come in below their asking, unless the property is severely under-priced which I am not seeing yet. The tides certainly have changed.
Comments (13)
Noah, your 100% on we saw this in Tucson and Phoenix one day the market is Hot the next day you know things have changed dramatically. The hardest part of all this is getting sellers in the correct mindset and it's about impossible a lot of the time. Sellers that want to sell or think they may need to sell within the next 3 years should just do it right now price a couple percentage points BELOW market and get out now....In Tucson we have dropped in a lot of areas 40% from the highs! Now our market is in a somewhat recovery mode however so, so many sellers wanted to get that high price and chased the market down costing themselves tens of thousands. With NYC prices being on average at least 5 times more expensive sellers could potentially be costing themselves hundreds of thousands by messing up on the pricing strategy.
Posted by Michael Oliver | October 30, 2008 1:32 PM
Noah, When do you think the peak was in Manhattan?
I think the cost of borrowing is a big driver. From personal experience, I was looking to buy in Manhattan from mid '06- mid '08. Once I realized it would cost me a 7.5% interest rate it pushed me over the edge - and I couldn't be happier with this decision now! I believe that prices could easily fall another 25% from here.
Posted by Anonymous | October 30, 2008 1:43 PM
DISCONTINUOUS MARKET
Noah, I can't speak for you, but I know I have not been in the real estate business in a down cycle. My experience of down cycles comes from the stock market....a continuous market. And although I followed small banks in the late 80s when the last real estate cycle hit, it's not the same as actually transacting in the product. Real estate markets are discotinuous they don't have dealers and day traders, they are chunky. We are about to see the downchunk in both residential and commercial real estate in NYC. Yes it has everything to do with financing and banks. It's the banks that will eventually force people to sell or will sell themselves and the minute those marks to market happen, the world changes, the old prices are swept away....not like in stocks where you might catch a short cover rally and get out somewhere near where the stock broke down.
Posted by jeff | October 30, 2008 3:27 PM
Noah
Lov'in the blog by the way. Some front line reporting coming up.
I'm actively looking to buy a 2 bed 2 bath new build condo in Manhattan. I'm focusing on what I call the real UWS and Chelsea. I've spent the last 2 weeks probably visiting every new development in these areas. What I'm seeing is a lot of flexibility on closing cost concessions, but no serious price drops. Maybe $50,000 give or take.
I fully expect at least a 10% drop come Feburary on remaining units in these buildings, but certainly nothing in the 25% drop range.
Step outside of these prime areas, and developers are really able to be pushed hard on prices though. I've been having fun with developers in midtown and the east village.
Keep up the great work Noah.
Posted by Chris | October 30, 2008 3:28 PM
Jeff - great point on DISCONTINUOUS statement. Real estate is illiquid, and when shit hits the fan and buyers leave, chunkiness hits the market.
Great way to describe it. The price deals are happening at now, are prob 10-15% below peak levels, and perhaps more for distressed sellers. Im seeing reductions everywhere and inventory is clearly rising.
Posted by Noah | October 30, 2008 3:47 PM
Chris - thanks! And thanks for real feedback. Keep it comin! Im curious to know what price would get a deal done at this point.
Posted by Noah | October 30, 2008 3:49 PM
Though deteriorating fundamentals of new york/manhattan economy justify a significant drop in prices (30%-40%), the slide down will be slow and bumpy. Many of the buyers who bought during 05-07 will loose their equity (if forced to sell) and will try to hold on long as they can.
Posted by TG | October 30, 2008 4:38 PM
Chris,
One thing I didn't quite get. The East Village is so prime it's ridiculous. There is VERY little inventory and the prices are extremely high for very small spaces. Zoning was very slow to change there (Bloomberg wanted the EV to remain evocative of traditional NYC) so demand far outstripped supply.
Midtown I can see, particularly if you include Murray Hill.
Look at coop prices for your initial view of pricing changes. Particularly those that closed over 7 years ago. They have a lot of equity and more flexibility in terms of price cuts.
Posted by brenda | October 30, 2008 9:44 PM
Noah, with all due respect, the term "is done" is not quantifiable. While I have gotten significantly more bearish than I expected to become about Hamptons real estate, I see it far from being "done".
Fact is, a more significant figure is that the number of sales is down over 50% in the Hamptons 08 vs. 07. There are some incredible buys in this market, yet highly desirable properties, such as oceanfront, bayfront and high quality construction has not lost a dime of value in this last year.
Also, take into account the number of former, or soon-to-be-former financial folks who will leave Manhattan, sell their co-ops and move to their Hamptons home to re-evaluate their careers and plan their next move. Many of the most successful real estate agents, restaurateurs, builders, yoga instructors, gym owners, media moguls and retailers on the East End are those who have been downsized from Manhattan and taken the opportunity to lick their wounds "at the beach" and ultimately follow their bliss.
Sure, business is ebbing at the moment, but it wouldn't surprise me to see thing flow more smoothly in the spring of 09.
Posted by Michael Daly | October 31, 2008 1:00 AM
Hey Michael, by 'done' I meant rolling over.
Posted by Noah | October 31, 2008 8:12 AM
Michael - something tells me the unemployed manhattanites who own in the hamptons aren't going to prop up prices...
Posted by Anonymous | October 31, 2008 3:34 PM
Re: Hamptons...All I know is that with the whipsawing markets and grim times to come, I am grateful to have a modest home I bought 10 years ago in the Hamptons as a retreat and not as an investment. It could slip 50% and I'd have doubled my money, but that doesn't matter since I'm not selling it. Speculators, people who over extend themselves abandoning all fundamental personal financial responsibility and fundamental rules of conservative investing, well, I'm sorry but this is the rainy day you pretended would never come.
The under $1MM category will see a dip, but the $2MM-4MM range will be killed out there. Over-building of stupid huge houses of dubious architectural merit and taste on 1/2 acres bought with tons of borrowed money that the owners could only afford if their unhinged bonuses continued into eternity. I don't think that category can even guess as to where the bottom is.
Just wait until you see the fire sale on rentals next summer as those owners who acted recklessly with their finances stare blankly and wonder how this could happen
Posted by kylewest | November 3, 2008 6:46 PM
Re: Hamptons...All I know is that with the whipsawing markets and grim times to come, I am grateful to have a modest home I bought 10 years ago in the Hamptons as a retreat and not as an investment. It could slip 50% and I'd have doubled my money, but that doesn't matter since I'm not selling it. Speculators, people who over extend themselves abandoning all fundamental personal financial responsibility and fundamental rules of conservative investing, well, I'm sorry but this is the rainy day you pretended would never come.
The under $1MM category will see a dip, but the $2MM-4MM range will be killed out there. Over-building of stupid huge houses of dubious architectural merit and taste on 1/2 acres bought with tons of borrowed money that the owners could only afford if their unhinged bonuses continued into eternity. I don't think that category can even guess as to where the bottom is.
Just wait until you see the fire sale on rentals next summer as those owners who acted recklessly with their finances stare blankly and wonder how this could happen
Posted by kylewest | November 3, 2008 6:46 PM