Manhattan Inventory Passes 9,000

Can you speak when we were last at 9000 inventory? Also, any idea of how this inventory is dispersed across Manhattan (i.e. huge glut in Harlem, relatively stable UWS).

OT - not sure. JM's charts say we are around 8000, and SE says we are near 9000. not sure which is more accurate. I know SE has the harder job collecting data, but I would love to know what source JM uses to collect his data?

JM? If you can speak out?

Anyway, I'll try to get a neighborhood picture as to where inventory is rising the most. Great call. Unfortunately its not so easy to get. If I had a good data source, and 50K to throw at this, I can do lots of things for you guys!

"The problem is the illiquidity of today's market and the price level that deals are happening at"

That is the money phrase in this post. I'm looking to buy and for the first time in a the past 3 or 4 years I feel like I have control. So why rush to jump in unless the deal is very attractive and if I find one, I will probably bid low anyway!

PatientBuyer - Im curious, what if you find a great property, just what you want, that is asking15-20% below peak levels, but you bid 10% below ask and get no response? Will you consider raising your bid or will you back away and play hardball given your feelings about control?

If I were patientbuyer, I would wait. At the end of the day, all the fundamentals point to greater drop in prices. The slope of the price declines in teh city should be pretty steep next year. I figure, if things go well, we can see a flatening by 2010. No one knows what will happen to the ALT A & Option ARM market yet. Lots of estimates, but after all, we are in uncharted territory.

noah, if the property was perfect, and the discount is in the 20% range, I will first try to low ball and if the seller says no, I will probably back away for a week or two. I doubt that properties are moving so fast right now, and you even said the market was illiquid and I agree with that statement.

If the property is absolutely perfect, in every way, and the seller says no to my low offer, and doesn't get back to me after a week or two, I will strongly reconsider paying closer to the asking price as long as the discount is priced into that asking price. But the property would have to be perfect.

Otherwise, as Brian23 says, I will wait.

15%-20% below peak prices is probably not even halfway to the bottom. Manhattan prices have long been out of whack with incomes and the substitute product(rentals), and economic fundamentals can not be denied (exhibit A: the stock markets of the world). I don't know about Patientbuyer, but personally I don't think it's even worth looking now. Sellers are still in cloudcuckoo land, and don't want to hear lowball bids. Noah's post lists most of the fundamental factors that will affect real estate prices (the list doesn't include the disappearance of the foreign buyers that supposedly buoyed the market, but Noah has covered that many times in the past, and I'm assuming he stopped after 10 factors). Those factors are going to cause incomes in New York to decline to 2000/2001 levels. The stock markets of the world are pretty much at that level now, and the destruction of wealth overseas probably exceeds that. It seems reasonable, then, to expect Manhattan prices to decline to those levels as well (which would put them in line with rental yields).

I think it makes sense to wait another six months or so for sellers to capitulate (that's probably a quicker capitulation timeframe than the historical average, and I'm coming to this conclusion because of the speed with which other markets have collapsed, e.g. securitization). I also think that there are going to be many more properties to choose from than during the boom years, so I would definitely play hardball and be willing to walk away if a seller doesn't respond.

If I got no response, I would not bid higher and the longer the seller waited to respond, the more likely I would be to withdraw the offer (in fact, I would probably place a time limit on my offer to begin with). If the seller rejected my low ball offer and then later came back seeking to do the deal at the old-offer price, I would reject and counter with an even lower offer.

Anyone who has ANY sense of economic realities (not just in the NYC RE market but in the overall economy) will point to the tremendous amount of downside risk still in the current environment. Yes, RE prices have come down but those declines have not been proportional to the amount of damage to the overall economy (ie RE is still relatively overpriced given the dramatic negative changes to fundamentals). Therefore, RE at this moment represents a tremendous LIABILITY, NOT AN ASSET because by buying now, A) you would be moving away from holding liquid assets (cash) to holding an illiquid one (RE), B) you would most likely be increasing leverage (taking out a mortgage) in the face of a tremendously de-leveraging environment, significantly weakening your personal balance sheet and C) price trends are still moving downwards without a clear bottom in sight. As a result, as a buyer, if you must buy now, you would need to price in all these risks into your strategy in the form of a significantly discounted bid in order for you to be compensated for taking the additional risk in this environment versus more traditional (dare I say "normal") market conditions. Additionally, if you are selling one apartment to buy another, you will be doubly hosed because the significant illiquidity means dramatically wider bid/ask spreads on both sides of the transaction. Although it is impossible to time a market bottom (except with dumb luck) it is clear that this is a significantly riskier environment than at any time in recent memory and by choosing to accept that risk, buyers need to be compensated in the form of lower transaction prices. Otherwise, buyers would be taking on significantly additional risk without the appropriate increase in potential reward.

I would take futurebuyer's strategy a step further and demand that the seller pay me to take the property off his/her hands!

Econ Professor,
I completely agree. In my opinion, sellers are still unrealistic and there are very few deals that are worth the risk. Sellers now expect to accept a 10% or a 15% below ask offer, but don't realize that this ship has sailed. Most outragious are those that have priced their properties 10-15% HIGHER in order to get the bid they want. There seem to be quite a few sellers like this out there. I wonder what they are thinking and assume they are missing a few marbles.

Yes I would have to agree with EconProf as well. We are early in the innings here in Manhattan!

As I said in months past, sellers are anchored to peak levels, and buyer confidence is way down and if deals are happening, they are pricing in downturn risk; and that is for deals happening.

The market is very illiquid now and deals are not happening nearly at the levels we are used to. At some point, we find out who is swimming naked. I am still bearish, but LESS bearish only because the down cycle started and I think we are about 8-10 months into it.

Job losses alone here in NYC are about to go nuts, and that will bring out the distress in our marketplace. I dont see buyers returning in full force for a while, leaving those that must sell exposed to market forces!

From someone on the flip side of patientbuyer: I've had my 1BR on the market since May (before the really bad news started coming in regularly). My reason for selling is completely unrelated to the current market; I bought a house in upstate NY and simply wanted to keep only one mortgage. My asking price has been the most aggressive in the my building (out of 8 for sale), may even be the most aggressive in the surrounding area. I've made price drops about once every 45 days to remain aggressive, in line with Noah's seller advice- but normally lower than my broker's and other brokers suggestion.

I only had one offer last month. The buyer first made a clearly insulting offer, 22% below the sale price of the last unit to sell that was identical to mine (the floor just below me), in Nov. of last year- that unit had sold FSBO by the way. My broker balked, and the buyer came back same day with an offer 10% below my asking, 20% down. I had strongly considered it, despite its weakness- and the fact that the buyer stood a good likelihood of not getting the financing. However, my broker more or less talked me out of it, so we wished them luck. If it were 40% down or better I probably would have gone with it.

What I can say about that buyer and future buyers is that I've priced aggressively for a reason: I'm not desperate, but do need to sell, the sooner the better as I'm paying a mortgage and bills on an empty condo and can't do that forever. However, soft market or not I'm not about to dump my apartment at a fire sale price, on the buyers terms and timing just because the current economic cycle isn't that hot. If I have to, painful as it is I'll adjust my near term plans and take it off the market, refinance to lower the payments, or move back in, even if the market continues to move downward. I'll concede some for the buyer's downside risk- not all of it, especially when I'm paying the commissions. Sellers like myself are not anchoring. We're attempting to narrow the spread, and unless buyers are willing to on their side the market will remain illiquid and nobody wins.

NearTermSeller,
NearTermSeller,

I beg to differ with the "nobody wins" perspective. Although it is difficult to time the bottom, buyers can rest easy knowing that when the bottom hits, prices are highly unlikely to go up for a long long time and will stay flat instead (prices will rise with inflation for years after they bottom out). So you will have a very difficult time selling your apartment unless you stop taking things personally (i.e. calling an offer that is only 22% below ask "insulting") and drop the price significantly (not just sand it down a bit like you have been doing). If the fact that your apartment has not moved since May is not proof that you are being unrealistic, I don't know what is.

Anon,
I'm just saying that if RE markets work like every other market, there isn't a magical point all buyers can wait for, then jump in at the same time and expect the market to remain at the 'bottom' while they do. The point is that many sellers anchor to a price- but buyers can do the same for any given unit. My other point is that if realistic means accepting an offer 22% (plus 6% commission) below the most recent sale, for me it's not personal- it just makes more sense to change plans and not sell right now, something other sellers seem to be doing.

NearTermSeller,

Fair enough.

Most economists and educated bloggers predict that market has a lot lower to go, well beyond 22% off peak. So unless you take the property off the market for the next 5-10 years, you may be better off selling now.

Not to bust all the doomy and gloomy consensus above, but this *is* the dip. Q4 09 will beat the prices of Q4 08, median ppsqft co-op resale below 96th. A few sellers I know are simply taking their properties off the market. Very few good properties are for sale now, and smart sellers are *not* lowering prices. Good luck with your "bargain" first floor cave on York Ave. If you find one of the handful of divorces, layoffs or estate fixer-uppers congrats!!

In general, I think very few good properties will actually change hands at low prices. More transactions will occur when the market clears at recent Q3 2008 comps.

given all the pessimism would you buy a brownstone in Harlem today ? renovated for a million?

"this *is* the dip"

Blind hope in the face of reality is a sure way to experience significant pain. I think this downturn, which will get significantly worse, will be even more prolonged and painful for those sellers who keep their heads in the sand.

If NYC real estate "dips" by only 20%, it will probably be just about the best performing asset any where in the world. How (or who) in the world is going to pay prices like these when the stock market is off 50%, oil is off 67%, 10's of thousands of people are losing their jobs, etc.

The funny thing about these seller comments is that they somehow think they can control the market. It's nice to hear that neartermseller doesn't have to sell, but unfortunately thousands of other people will HAVE TO sell, and they will be the ones setting the marginal prices. Neartermseller apartment will only be worth what those in more dire situations are willing to sell their similar apartments for. I think it is wishful thinking it will only end up being 22% below peak.

With all this news out there, I think it's reasonable to expect pressure on brokerage commissions - if it hasn't already happened yet. How can anyone justify a 6% commission with so much downward pressure on home prices?

Chris - I certainly think there could be commission pressure as well. As with the real estate bubble, there was also a real estate brokerage bubble, and I do agree that the commissions in this city got completely out of whack. As buyers and sellers are at a standstill, price is going to be the only lubricant. And if commission is a whopping 6% of the transaction costs, I think it reasonable to assume that that piece is up for negotiation as well.

Chris/Eric - I agree! Might be a good time soon to launch a new idea for a brokerage services for sellers!

ul, it depends where in harlem. Let me know.

ul, it depends where in harlem. Let me know.

Very few people "have" to sell, especially in Manhattan. This is not Miami or Phoenix, so WAKE UP people. Your not going to steal an apartment. There are no supbprime mortgages in Manhattan. There is not an avalanche of foreclosures everywhere you look. This is not the type of market that you are going to see large declines in.

Donald - while sure we dont have the level of shady borrowers here like a Miami or Phoenix, but trust me, there are plenty of sellers that need to move their property.

We are already down 18-20%, and bids are not coming in right now.

Noah/Eric,

I could totally see a performance-based commission structure for brokers. For sell-side assignments, if you sell the place at X (X being your proposed list price), you get 6%. If you sell at 09.X you get 5%, at 08.X you get 4% and so on ... It would bring honesty and reliability to various brokers competing for a listing - advising sellers on what IS a reasonable list price in this market. There are many alternatives here on how to structure this, but I don't see anything wrong with a performance-based fee structure.

Donald -

More people "have to" sell in this city than you think. Let me paint a picture for you which I've heard all too often directly from friends of mine:

Used to have a job in finance that paid $400-$600k per year. Bought a $1.5m apartment 3 years ago, still owe something like 80% of the apartment, have something like 700k saved in the bank. Lost their job and pretty much feeling like they have little hope of getting another job anytime soon or certainly a job that paid anywhere near what they were making.

So, if you look at the asset side of their balance sheet, something like 60-70% of their wealth is in NY real estate and they still have debt that is large on an absolute basis. The mortgage they had was totally resonponsible and within their means when they had a job. But, with little hope of getting a good job, these kinds of people are not comfortable having so much of their wealth tied to real estate. They have seen the destruction in their jobs and are scared having so much of their wealth in an illiquid asset. Also, while NY is a great city, you'd be surprised how many people are interested in getting out of here for a calmer life somewhere else now that it looks like the finance party is over.

Now, granted I am biased to knowing people in finance who have been most directly shaken by this. But I also know people in media and law that are scared shitless about losing their jobs here. People like this don't "have to" sell in the traditional sense that they are going bankrupt. But, I know too many that feel like they "have to" sell because they don't like thinking that this big chunk of their worth could is at risk. Buying an apartment in NY is unlike buying a home anywhere else in this country. It is SO expensive that most people do perceive it as an investment as well as a place to live.

Hi Noah and everyone,

Is there any kind of consensus forming in the RE/finance community about where inflation is headed?

It seems like most agree now that prices (and rents) will continue to drop, and if this is at all like the 80's slump, it will take many years to recover. would a rise in inflation help to counteract some of the loss in housing prices in the next 5-10 years.

is that just wishful thinking?

the consensus 4 months ago was that we were going to have inflation with no growth (stagflation) because commodity prices and oil was through the roof. People forgot that commodities are also supply/demand driven. So now that the growth/demand side of the world is going to hell, lots of people are thinking deflation (notice plummeting prices at pumps). Sadly, deflation is actually more dangerous than inflation because existing debt becomes even more dangerous to pay off and investment can stall because hey "why buy now when i can wait and buy cheaper in 3 months."

So, the new brilliant consensus is that we are going to have deflation for a while and then lots of inflation in a while from now. But i think what all of this back and forth should tell us more than anything is that nobody knows.

Now that commodities are way down and the dollar is up, I would epxect inflation to fall. But rents and house prices are not based on inflation. They are based on supply and demand so lower inflation in now way gurantees lower rents/ prices.

Noah
Since NYC real estate looks to the Wall Street bonus season for a good amount of it's momentum, don't you think that "the season" will be a very telling one?

Eric,
While it's true that people have lost their jobs- or are worried about losing them, they have to live somewhere. I don't see someone who had been making half a mil /yr in finance moving in with their parents. So if they want to sell their pad, where do they go?

I mean this as more of a question than a statement- if there's an exodus from Manhattan, where's it to?

If buying in manhattan is a risk I would think the burbs are riskier.

Joenyc,
Where do they go? They rent or move out of the city all together.

Most of the time, for those that bought recently, renting is cheaper. And those that just lost their jobs no longer have an interest in tax deductions tied in with carrying a mortgage.

If the motivated sellers are planning to rent, then they're presumably not leaving the city and so won't decrease demand for living space, which affects the renting and owning market.

My question is: If those from financial, media, law, etc. are going to move out of the city altogether, *where* will they go? Crisis or not, I don't see where these industries look to be thriving in the near future compared to NYC.

people in nyc have money - most of the buildings require hefty savings and vet the buyer to make sure they can afford the apartment. of course prices will head down now - because the people that have to sell are selling and there are no buyers because people speculate prices will drop. but you cannot compare this market to others - that is like comparing "perfect competition" models to "monopoly" economic models - you can't because you are talking about different markets. yes obviously nyc will be affected. but all these finance professionals will find another job at SOME point when the markets create a new bubble - this has to happen - middle market firms are hiring, entreprenourship will increase, etc. the point is - yes, obviously there is a recent downturn but give in 1 year and you will see that manhattan will not "sink" like others in the US. further, rents are expensive here - look at 1 crappy studio apartment - you cannot find a decent one that is under 2K per month (not incl utilities etc.) - that is still more expensive than buying. i'm sorry to break it to you but manhattan will always be in demand.