Chasing A Moving Target

Noah, just about the best analysis and advice for sellers in today's market (NYC and elsewhere) that I have read. Congrats, Howard

Great advice Noah. To add to your arguments, are there any forward (Manhatton or NYC) housing price curves that you can highlight. If there are any, I am sure they are predicting further declines.

Thanks Charleston!! tryin here

EV - the only curves I have are the real time trends data from SE..

http://www.urbandigs.com/charts.html

Notice:

1) Inventory levels in past 6 months and the move it made
2) Weekly average for PRICE REDUCTIONS since mid AUG..Remember this one is weekly average so it basically doubled
3)GAP widening between weekly average for contracts signed and new listings coming to market. Again, weekly average. Level of contracts signed drop is significant

Very good post Noah. Everthing you say is correct I think. I'd add something more to the discussion though: it seems to me that in addition to the fact the market is roughly 20% below recent peaks today, a savy buyer would want an additional "risk discount" deducted on top of the 20% to get to a final contract price.

This additional discount of course would be for taking the risk of buying now when we clearly have not reached the trough. And of course no one ever knows where the trough is and how deep it will go; but if I were buying today I'd want some additional protection/acknowledgment from the seller of the fact that lower prices over the next year or two are inevitable, for all the reasons you state (and things could become even much worse than any of us yet can know or imagine).

What that additional discount should be is a judgment call of course. Might be another 5-10-15% in my view.

great point Aquarian! I think buyers are pricing in future downturn risk in some bids today

I think that psychology is embedded now. Great point!!

Yep, April '09 is going to be a real SH*T SHOW, and as a potential buyer in Manhattan, what I have been waiting to see for the past four years. Looking forward to it!!

Great Real Estate post ... I found it very interesting.

Noah, this post is an absolute read for any real seller who has their apt on the market or is thinking about selling. Unfortunately, the vast majority of sellers will not allow themselves to beleive this or are in complete denial. I passed on taking two exclusive listings in the last month because the seller failed to understand what you are talking about. You hit the nail on the head!

Your best post. I completely agree with your analysis.

Brokerman - Thanks and I did the same thing! I went on 3 pitches in past 2 months or so, and 2/3 were totally unrealistic and I had no interest in working for the prices they wanted to ask, and what they told me they would only sell for. They were in total denial!

Thanks mh23! Tryin my best here to tell it like i see it!!

It is times like these (which you, Noah, aptly describe) that remind me of why old adages continually make sense.

To wit: you can bring a horse to water but you can't make him drink.

I am afraid that, in most cases, your excellent advice will fall on deaf ears.

I have followed your postings for a year now and, with the exception of one area, I find your analysis to be honest and intelligent. When the issues have to do with jobs, bonuses, credit fallout, depression like scenarios, you have been keenly accurate in your predictions and unafraid to lay out dire scenarios now existing and that are still to come. However, given your firm grasp of the macro issues, it is always disappointing to me to watch you tiptoe around any discussions about where the Manhattan sales market is really headed and your resistance to put a number on it. In this regard, you are mostly reactive in reporting 15%-25% price declines but do not venture out, as you have done liberally elsewhere, to project impending price decline of 40%-50% or more that seem inevitable and unavoidable in the context of any meaningful macro considerations. The only pillars that have held up Manhattan apartment prices are finance and foreigners and as they crumble before us, what conclusion is there other than that a 25% correction of apartment prices are quickly becoming a mirage in the rear view mirror?

Having said that,I appreciate that you work in an industry that would look none too favorably on you if you were to post such brutal projections and I would probably do the same if I were in your shoes. Nonetheless, whether you can say so or not, knowing what you know, I'm sure you would agree with this view. After all it's just another falling shoe.

Monte - thank you and great comment. I have never been through a debt deflation scenario like we are going through now. I dont know how bad it could get. I dont want to be doomy, I really dont. I like to be real, and tell it like it is, but I dont know how the fiscal and monetary stimulus will slow down this cycle?

Does anyone else know? I dont think anyone does. My worst fear is we have a lost decade like Japan and Manhattan real estate stays illiquid for 5-7 years. If that is the case, sure, we can see 40-50% declines because those that have to sell will be forced to hit the bid they receive. But I just dont know.

Trust me, I wish I did because I would be a multi millionaire and prob wouldnt be blogging here. I would own a bar, in jamaica, with a reggae band, on the ocean, overlooking the susnet. Ahhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhh

Noah, you are absolutely right, I wish there were more real estate professionals like you out there.

This is exactly how we sold our house in June. Our first agent last year told us that it is such a great house (which is true, but what does it really mean versus real estate market situation?), put a high price on (without telling us that her own agency advice was at least 50K lower). The house was on the market for 8 months, lowered in price 5 times, before we de-listed it.

This spring after we prepared the house and changed the agent to one who was pricing right, once again, the agent loved our house (many people did, it was a great contemporary) and could not believe that we wanted to go aggressive. I convinced her and my spouse to price it on a higher end of the aggressive price, so we have our absolute minimum in mind, if a serious buyer negotiates. And the place was sold within a month - because we had a beautiful house, that was unique, and priced so aggressively that others could not compete and did not really understand yet that they are losing money by staying on the market with their 'ideal' price for 1 year or more.

Now we are looking at Manhattan, and feel for sellers as we went through this just few months ago. But you are absolutely right - it is the buyer who is always right, and the buyer is the one who prices in this market. We will probably wait a bit more to save more cash, and hopefully go for an all cash or larger portion cash deal - this seems to be a right thing to do in this illiquid situation.

Thanks again, great post,
Alex

Noah,

I would have to disagree with the buyer "always" being right. I know of many examples where buyers have lowballed, only for the apartment to sell for more money down the road to a different buyer. While there are certainly greedy sellers out there looking to mae a killing, there are just as many greedy buyers out there looking to get something for nothing.

Donald - then the buyer who ultimately bought the place was right. Try not to over analyze that statement, although I do see truth in your comment.

For example, if seller is asking 1MLN, and buyer bids 750K and doesnt go higher, that doesnt mean the buyer was right and the place is worth 750K. It means at that period of time, that is what a buyer is willing to pay for the apartment AT THAT TIME and that is what its worth AT THAT TIME.

If a month later you get 850K and the deal is done then, then this buyer just made the market and revealed what the property was worth!

That is what I mean. In the end, a property is only worth what someone is willing to pay for it. And right now, bids are scare and low. A different market. In boom times, a bid could go well over ask, meaning that is what the place was worth. It was right. But now, its quite the opposite.

When no bids come in, well, what is the seller to do? In the end, a property is only worth what someone is willing to pay for it. If it happens to be 750K today, and 850K tomorrow, whatever, that is what happens in free markets.

Did I back this up properly?

As always, great comment and I do see your point

Donald - fantastic comment now that I think about it. Let me give 2 real life examples but leave the property address out to protect my clients.

CASE 1 - I had a seller asking 2.2MLN about 200K over market value in my opinion at the time in late 2006. After 3 months, and about 40 showings, no bids. None. Then in early 2007, we got 1 bid of 1.9MLN, after tough negotitations I got it up to FULL ASK. My seller backed away and delisted. After another week of talking to the buyer, I got it up to 2.3MLN, 100K over ask. My sellers refused. This was one buyer bidding against themselves and I tried to talk sense into my client. They still refused.

So, they relisted with another firm, at 2.595MLN, cut price 3 times, in late 2007, and sold for 2MIL! 300K lower than the qualified buyer I procured. They sold and closed. Proof how the place is only worth what a buyer will pay at that time.

CASE 2 - Another seller drastcially overpricing at 2.1MIL, prob worth about 1.5MIL. We got a bid of 1.2MIL after 2 months, my client had no response. later on we lowered price and after 10 months and a listing extension, we were asking 1.4MLNM. We ended up selling for 1.01MLN. By waiting and disregarding the low ball, the market moved against them and later she got a bid much lower. More proof of the other side of the argument.

So, what does this tell us? Well, you never know what bid may come down the road, where it will be, or how the market may improve or deteriorate in the meantime. Its a game. Question is, is the seller ultimately right to neg the bid? Or ultimately wrong? In these two real life cases, they were wrong. In your case they were right.

Hence is Life as a broker!

That's a very interesting post, and great comments as well. I do agree that buyer sentiment is a key factor in THIS market, but don't forget that in the end valuations always revert to fundamental affordability ratios (rent/buy, value/income, Case Shiller etc.), Based on that, I predict a further price decline of 20% during 1Q 2009 to get some deals done, followed by an awful summer as the Wall Street crisis fully hits the real economy in NYC. During 4Q we'll see the current $2.0 million listings of classic 6 apts on the UWS listed at 800K, if that much.

Allow me to be one of the few not to join in on the bear festival. Yes, I'm probably the only poster here trying to sell in this market, so I must be either delusionally in denial or desparate, right? Down with those greedy owners! ;-)

But seriously, I just wanted to say that I too agree with Noah- on everything. It works against me but I also believe that real estate is only worth what a buyer is willing to pay for it. I have a medium sized 1BR (yep, no shortage of them right now) in a downtown condo building desirable for its view, amenities and comparitively low
monthly maintenance. There are 2 units identical to mine for sale, my asking is 10% below the next lowest ask, 20% below the last sale price (FSBO) for an identical unit, a year ago. Is my asking still too high? Maybe, maybe not- I have no way to tell because one of the symptoms of this illiquid market is that visiting buyers only seem to be window shopping. The ones that say they really like the apartment never make an offer. That's been puzzling; there's nothing to lose by lowballing. It's not I'm going to choke someone for offering 70% below peak, the most I could do is say no- but who knows? Comment?

I do think one of the comments made here is a little ridiculous though. It is just to as nonsensical for a buyer to say "my offer is x, but I'm going to subtract 15% from it because the market will go down by that much in y months", as it would have been in 2004 for a seller to say "I will accept your offer of x but I'm going to add 15% to it because the market will go up by that much in y months". We may have many indicators, but noone knows exactly where and when the bottom is- or whether we're on a truly straight line or there are some bumps on the way down. I'm in agreement that we're probably looking at an L shaped market. I feel fortunate that at the current time I'm not forced to sell, though time on the market is inconvenient and an expense. If I can actually see what the curve is, I'll price ahead of it but I don't pay attention to arbitrary predictions I hear- whether overinflated or underinflated.

Just curious- are any of the posters here also currently selling, or even just owners?

Seller - what a great comment. This is why I love blogging. Finally, I hear from the other site outside of potential sellers I have pitched recently (cough, cough, who decided not to use me)...

Its hard to know exactly w/out the unit # and address, which I wont ask for here, but what you describe is what I hear from a broad group whom I keep in touch with. When many agents and customers feel a certain way together, its ok to chat about the current real time market here in detail on urbandigs

What you describe is the problem with an illiquid market and when buyers disappear. You seem to be at least acknowledging this environment, and trying to stay ahead so I would take a look at how you are marketing. Even the best marketing wont work in this type of market though sometimes.

It seems you have a nice apt, maybe cookie cutter, but with a condo, with low monthlies and desirable view, so I assume light as well, and amenities. And your priced most aggressively. So that leaves me with 2 issues in my deranged head. Either its:

a) the price still, sorry, hate to say it but that only means curve is running away from you faster than you thought

b) marketing?

Its most likely A. If your listing is on NYtimes online and print, streeteasy, streeteasy featured, e-blasts within brokerage community, and internal RLS sharing system, then its your price and you should get more aggressive when you reach that point that you just want to sell. Question is, do you do it sooner rather than later. I don't want to consult you, but I think the next quarter will remain illiquid, how it is now. So ask yourself what you are willing to move the property for now, and go just above it.

Seller - great post. I remember searching through real estate listings periodically from 2004-07 thinking things could not get more insane. Luckily I was not wedded to the idea of buying, had even sold because I thought a bubble was forming rapidly, but the never-ending upward carnage took my breath away.

I would imagine it's a bit like that now on the flip side for sellers. Of course sellers would like to get a reasonable amount for their units, and just like I was almost in disbelief at the increasing prices, sellers must feel the same way about the declining ones. But just like that upward momentum, the downturn has a life of its own as well. Good luck.

Seller wrote: "I do think one of the comments made here is a little ridiculous though. It is just to as nonsensical for a buyer to say "my offer is x, but I'm going to subtract 15% from it because the market will go down by that much in y months", as it would have been in 2004 for a seller to say "I will accept your offer of x but I'm going to add 15% to it because the market will go up by that much in y months".

But that is exactly what sellers did when the market was booming. They looked at what something sold for (just) and tacked on 10, 15, 20% and sat back and waited for the market to run up.

Resorting to "fundamental value" arguments is best left to college professors. I resent the notion that there is some singular point for asset prices that is a true value..IT DOESNT EXIST. As for rent/buy equations, to me, it too misses the point at a time when income levels are being fundamentally impaired. And if underlying cash flow of the NYC resident is taking a step function down, perhaps it's not buy vs. rent, but BOTH buy AND rent are wildly overpriced. If Wall Street bonuses are down 50% and back to '02 levels, and many other professions (RE agents, Ad salesman, retailers etc.) feel the burn, rental prices are in for a real adjustment as well

sfone, you can ignore fundamental valuation analysis at your own risk and peril. That is exactly why there are bubbles - because people ignore fundamentals.

Interesting discussion on the buyer being right issue. I've been watching the market for over a year now looking to buy on UES. I made 2 offers, both rejected. One ended up calling me several months later to try and accept (I said no thanks and they ended up selling for $100k less than my "obnoxious" bid). The other pulled the apartment off the market after telling me how many offers they got.

Point I want to make to SELLER is that I'm no longer making offers, because I have no idea where prices will go. At the time I made my previous offers I thought they would be good prices even in a slowing market -- today the rest of the market has come down to where I made my "lowball" offers. Plus, my job security isn't as good as it was previously.

What is the "fundamental value" of a house/apartment other than what a buyer is willing to/can afford to pay? The replacement cost? That would tie it to the price of commodities and labor.

I'm a seller too. I own a house in northern NJ that I have been trying to sell since 2006 (I know, pathetic, huh?). The house is a real POS so I'm not surprised that it has not sold. It's very difficult to judge whether the asking price is fair because, unlike in Manhattan, no two comps are exactly alike. The closest comps to my house only has 1 full bathroom, but mine has 4 so I thought being priced $80,000 more than that house sold for is fair.

My point wasn't ignoring "fundamentals." I was taking exception to the notion of a "fundamental value" as a singular assignment, as if values are static. If everything reverted to a commonly accepted "fundamental value" activity would stop. There would be no investment, no risk-seeking, because everything would be perfectly priced, both absolutely and relatively. This is the buggaboo of quantitative finance. Measuring each "piece" of risk on a matrix as if it's a Connect4 board is the height of arrogance. My point is, values are relative. That is why bubbles occur. The NYC Dept of Finance uses Cap rates of 20% to determine market value for the city's properties. Why is that? Private investors use 1/2 that, even in one of the worst performing years ever.

I agree with you and was asking an honest question. As a potential buyer, the rapid boom and bust have left me clueless on how to figure out what a place is actually worth. It seems to be all about psychology and not "real" value. How do I buy if i can't get a sense of what a fair price is or the intrinsic value?

I thought the post by "seller" was very interesting. I am a serious cash buyer and I can tell you the reason I am not bidding anymore is that I believe that brokers and sellers are delusional and still don't get it. For example, I really liked a 1.3mil apt. I know I can rent a similar apt for 6000 (I think 5500 now). I offered 1mil cash and there was no counter offer. Apt has not sold. Broker told me that they believe they had priced it at market value. There is another apt listed at 1.49 on the UWS. No price cuts for 3 months. Seller is now trying to rent for $6400-- no takers. You do the math. No point bidding-- this seller doesn't get it. Also sometimes I see apts bought in 2006 for 1.2 and listed for 1.5. I don't think they are worth 1.2 now, why bother bidding? Sellers aren't going to take a loss unless they have too. I used to go to OHs every weekend. I used to engage the broker just to get a sense of what they were thinking. Only one broker understood that the market had really changed. The other brokers would give me broker babble. So why waste my time? I am waiting for the news to hit the front page. When we all agree that there is a real and significant downturn, I will start making offers. I have better things to do with my Sunday than look at overpriced apts. As long as its significantly cheaper to rent the same type of space, the apt is overvalued. That is how I determine value.

I thought the post by "seller" was very interesting. I am a serious cash buyer and I can tell you the reason I am not bidding anymore is that I believe that brokers and sellers are delusional and still don't get it. For example, I really liked a 1.3mil apt. I know I can rent a similar apt for 6000 (I think 5500 now). I offered 1mil cash and there was no counter offer. Apt has not sold. Broker told me that they believe they had priced it at market value. There is another apt listed at 1.49 on the UWS. No price cuts for 3 months. Seller is now trying to rent for $6400-- no takers. You do the math. No point bidding-- this seller doesn't get it. Also sometimes I see apts bought in 2006 for 1.2 and listed for 1.5. I don't think they are worth 1.2 now, why bother bidding? Sellers aren't going to take a loss unless they have too. I used to go to OHs every weekend. I used to engage the broker just to get a sense of what they were thinking. Only one broker understood that the market had really changed. The other brokers would give me broker babble. So why waste my time? I am waiting for the news to hit the front page. When we all agree that there is a real and significant downturn, I will start making offers. I have better things to do with my Sunday than look at overpriced apts. As long as its significantly cheaper to rent the same type of space, the apt is overvalued. That is how I determine value.

great advice. we are seeing a lot of sellers in our market pricing condos hirer because they think it is special. But so do the other 12,000 property owners that have units on the market

>>As long as its significantly cheaper to rent the same type of space, the apt is overvalued

That makes a lot of sense and is in a nutshell why I have not purchased yet.

Jon wrote: "Point I want to make to SELLER is that I'm no longer making offers, because I have no idea where prices will go. At the time I made my previous offers I thought they would be good prices even in a slowing market -- today the rest of the market has come down to where I made my "lowball" offers. Plus, my job security isn't as good as it was previously."

I think that really sums up the 1-2 punch of this market. The potential buyers aren't just worried about overpaying into a decline - - their own internal situations are shakier.

That's just another moving target to add into the mix.

seriousbuyer: I can see how you feel based on your experience that making an offer on the listings you've seen is futile- but I still don't understand that thinking.

If you have nothing to lose by making an offer why wouldn't you? If you've gone through the effort of actually going out to view the property and like it enough to have a price in mind, it only takes a two minute phone call to make a verbal offer- which you aren't bound to without a contract. That seller didn't counter your 1 mil offer- are you any worse off because of that? If anything it gave you more information about the seller.

If brokers and sellers are delusional, let them be. It doesn't cost you anything to see them balk, and on the contrary could even result in a seller chasing you some time in the near future at better terms- if the experiences being reported here are true.

As someone currently trying to sell, I understand that buyers have the control. If someone were to offer a lowball to me, I might turn it down- but not until I've slept on it, weighed in all the factors and came to the conclusion that the risk of short changing my asset is more severe than the risk of missing an opportunity to sell at the present time. That's not delusional in any market, and not all sellers are delusional.

I just seems to me that the majority of buyers currently going to OHs and requesting viewings are only window shopping with an intention to buy when the market has reached its "bottom".

I was at an open house in Harlem on Sunday. I was interested in one apt. and was given the Sponsor's "best offer". Half of the line sold in Spring 2007 at similar prices, adjusted for floor premiums, so I was able to determine the Spring 2007 price for the unit I was looking at. Assuming Noah's view of a 25% drop from peak (lets say 20% if April is not at peak) the price I was offered was only discounted by 7%. I made an offer based on the 25% and was given a higher counter offer than I was told at the open house.
I don't think some sellers realize that the market has changed.

Possible Buyer, the sponsor for that building may well be pricing significantly behind the curve. It makes no sense to me at all that they would actually counter your offer with one higher than their original price in this market- unless they already have one or more strong bids from other buyers, which you didn't mention so I'd imagine that's not the case.

If it were me and I didn't like your price but thought you were well qualified I'd at least try to meet you somewhere in between. Just wanted to say that your experience here reinforces my point that you had nothing to lose by making an offer and in the process gained some experience in understanding the anchoring mentality of some- but not all sellers in this market.

Seller - thanks for your comments. My thought is to price the apartment for a little below what I think it is presently worth and then go up 5% if the Sponsor is willing to negotiate. In a few months, as mentioned in an earlier UD blog, closings for contracts signed in the 4th Quarter will come in and will reflect current market conditions, which will result in much lower values in appraisals. This will force reluctant sellers, even Sponsors who are clinging to year-old pricing, to lower prices or have deals fall through because Seller's cannot get financing on inflated prices.

Noah is 100% spot on.

Is a one BR condo at say 200 Chambers of 325 Fifth or anywhere else for that matter, worth $1-1,750,000?

Of course not. The NYC real estate market became a huge Ponzi scheme, but there are no more fools and suckers, all these people have been wiped out.

So what's the 1BR condo worth now? At most between $500-600 PSF.

So what's going to happen? When the Alt As and Int. only mortgages reset, a huge wave of forecolures.

So many people who bought at these ridiculous prices, could not afford what they were "buying", and now won't be able to pay the mortgage.

But the idiot moroon brokers keep saying, "my seller will take xxx". Huh? Those days have long passed.

I'd say we may see a few buyers when we start to see 1999 prices and not a nickle more.

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- Allan
Founder Realty Price Target

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