Manhattan Inventory Reflects Season
A: Generally speaking, the end of the calendar year for Manhattan real estate is slow. Between thanksgiving holiday, christmas/hanukah/kwanza/festivus, new years and whatever other holiday you may observe, the months of November & December usually see some stale listings removed in an effort to 'freshen up' for what normally is a more active bonus season in the months of JAN - APRIL. This year is certainly going to be unique because the wall street bonus season that usually takes place now, clearly won't. After all, we need wall street to exist if there is to be a bonus season devoted to it. Almost three weeks into the new year, it's pretty clear that inventory has come back on the market in anticipation of any type of pickup in demand.
Here is a 3-MONTH Manhattan Total Active Inventory chart showing you the dropoff in inventory during the month of December, and the sharp uptick of inventory over the past few weeks:
As a trader after a 3-day holiday weekend, its very hard for me to discuss real estate trends when BAC is trading at $5.92, C is trading $3.08, WFC is trading at $15.83, and JPM trading at $20.30. All I can say is wow!
For this morning's doom & gloom, look no further than Professor Nouriel Roubini's prediction that the entire US banking system is insolvent, via Bloomberg:
U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is "effectively insolvent," said New York University Professor Nouriel Roubini, who predicted last year’s economic crisis.Hard to discuss a bottom or recovery for Manhattan residential real estate when the banks that provide the loans are struggling for survival!
"I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers," Roubini said at a conference in Dubai today. "If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis."
Expect more of the same in terms of general trends for our local housing market; slower than normal sales volume, and steadily rising inventory levels. I think we are somewhere in between the ANXIETY & FEAR stage right now for Manhattan real estate, which means we are likely seeing the evolution of the DENIAL stage in full force. As some sellers 'hit the bid' out of fear, other sellers are reaching their breaking point where the powerful force of DENIAL is overcome, and asking price reduced to a level once thought highly unlikely. When the bids disappear, we see who is swimming naked.
Unfortunately, based on the psychology of asset cycles, this means we still have the following stages left to experience:
Savvy contrarian investors usually get rich by putting money to work somewhere in between the DESPONDENCY - DEPRESSION stage of the cycle. As for fierce seller competition, that usually kicks in around the DESPERATION - PANIC stages; anyone trying to sell a home in Miami/Phoenix/Los Angeles the past year or so knows about this stage! This is when sellers compete with each other to lower their asking price to a level that will re-stimulate demand, pitting seller against seller. I recall the process of selling my mothers house in East Northport, LI last year, an 11-month process from initial listing to contract signed. After every price cut, we found the competition reducing their price even more within a week OR a few new listings hitting the market at better prices. So, we had to reduce again and the cycle feeds on itself.
Whether this occurs in Manhattan will depend on HOW LONG THIS MARKET REMAINS ILLIQUID! One thing is for sure, Manhattan may be different, but it is in no way immune to macro forces! Any broker ranting, "buy now or be priced out forever" OR, "Manhattan has sideline buyers that will put a floor on prices", OR, "Manhattan never goes down", has been proven very wrong. This is a market, just like any other, that is comprised of buyers and sellers. So when the buyers disappear, the sellers must adjust the asking price of the asset.
If a seller has to sell, lowering your price is the best option; switching brokerage firms or choosing to list with a broker who specializes in your building is not the answer. Blame will be placed on the broker, but it should not be for marketing efforts! In my opinion, if a property doesn't sell it is NOT because of a marketing problem, it is a MARKET problem. If there is blame to be laid, it should be on the pricing strategy suggested that either puts a seller ahead of the curve, or behind it; now is not the time to list your property with the broker that promises the highest price and suggest a peak level starting price.
So, this broker-blogger will be keeping his eyes on sales volume to gauge how long this market remains illiquid. Its all about the buyers after all and your property is only worth what someone is both willing & able to pay for it at any given time!
Posted by jon
Tue Jan 20th, 2009 10:54 AM
Noah,
Thoughts on NY Times article "For the Brave, the Moment Is Now"? Based on your numbers and analyses thinking was that press would pick up on how bad the market has become and that would spur sellers to lower prices and recognize the market. This article would seem to do the opposite -- to tell sellers that prices have fallen enough that all the sideline buyers are ready to jump in. Curious to hear your thoughts on this, and also whether you think open house traffic has increased. I've been to a few recently just to window shop and have seen no one and sign up lists are empty (this is all on UES).
Cheers,
Jon
Posted by Noah
Tue Jan 20th, 2009 11:16 AM
Jon - Well what are they comparing this too? They are simply focusing on first time buyers that are happy with prices down 15-25%! That is fine. But this market needs a heck of a lot wider a buyer pool to support prices.
I dont think we have even seen the end of the 2nd inning in terms of future quarterly reports that show the illiquid damage done since SEPT. I dont see asking prices in mass, reflecting the current market. Its not like a 1M pad that sold at peak is now asking $825K. Quite the oppposite. Its likely asking $975K or so, and bids are coming in at 825K to 850K.
Sales volume doesnt go to zero, so saying prices have fallen enough to attract some buyers is just spinning data to meet a certain angle for a story. NY Times really doesnt focus on the real negative stuff, the death of wall street, the loss of wall st jobs, bonuses, the state of the banks and how that may affect wall street fueled housing market. I find they tend to see the silver linings. Which is fine! There will be more as time goes on.
I just think prices are still out of whack compared to the severity of this crisis and we are yet to see how this re market absorbs massive jobs losses for the next year or two. If we are down 15-20% now, I think that we are likely about to enter the 3rd inning or so of the slowdown. If market stays as illiquid as it is now, and for record I expect it to get worse before it gets better, prices can easily still fall further. Its price discovery that will be so interesting, and when we see where some deals were done. Its lagging, so while some try to look ahead by glancing into rear view mirror, I will try to look through the windshield at what may be ahead.
I still dont see any sustained increase in buy side demand outside of a few more calls from buyers getting a bit more interested, but not ready to pull trigger
Posted by hsw9001
Tue Jan 20th, 2009 11:31 AM
I agree with Noah that this is just the beginning. I look at buying from a cost perspective and even the "attractively" priced properties cost much more to own than to rent (at least around 30-40% more). And that is not even adjusting for renovations and etc. There are those who say that there is added value to owning, but I'm not willing to pay extra $2-3k/month.
Posted by Kevin
Tue Jan 20th, 2009 11:56 AM
Jon-
The NYTimes Real Estate writers lost nearly all my respect during the last boom. As prices nearly tripled in under a decade, they wrote on and on about how "low rates are giving buyers tremendous buying power!" as if a 3% drop in rates could feasibly fuel such an incredible rise in prices. It wasn't until 2007 that they even started to tiptoe around the question of whether the boom was sustainable.
Remember that the RE section is filled with ads from brokers, and in my opinion, they seem to have lost their objectivity. Either that or the Times only hires former NAR members.
Posted by Aquarian
Tue Jan 20th, 2009 12:22 PM
Good comments and good post. You are one of the few in NYC that tells it like it is. Most brokers are either ignorant of the scale of the problem or in total denial.
The system of credit creation around the world is broken as Roubini and others point out, and it cannot be truly fixed until all the worthless assets/debt obligations are purged from the system worldwide (not just bank balance sheets, but the toxins on the books of corporations, insurance companies, and even the unfunded obligations of governments have to be dealt with sanely).
And governments cannot print their way out of the mess without an even greater price to pay at some point...and assuming this effort is necessary no matter what, banks are swallowing the gift of liquidity from the taxpayer as it is created, knowing they've got a lot more worthless stuff to yet write down. As we all know, the bailout money is not going into loans or increasing the supply of money available for buyers or businesses.
Also, many economists tell us housing prices have to roughly get back to 2003 levels, so debt/income ratios become sustainable for a majority of buyers. That implies peak prices of 2007 have to come down close to 40-50%.
Manhattan may be somewhat different, but as you say Noah, it is not immune to basic economic forces and sustainable realities. You’ve been saying prices have to come down quite a bit more and I agree totally. 2009 will be the year of reckoning for many owners that have to sell. There are no economic fundamentals at present supporting the notion this is a good time to buy for most people (the wealthy are always an exception).
Keep telling it like it is.
Posted by Noah
Tue Jan 20th, 2009 12:30 PM
Thanks Aquarian! I will definitely continue to tell it like it is, or how I see it. I think the gig of brokers fooling buyers or sellers, is almost up.
At this point, attempting that strategy usually insults the buyer or sellers intelligence.
Sellers need to educated about this market, or risk being behind the curve and watch the market run away from them.
Posted by truthteller
Tue Jan 20th, 2009 12:33 PM
You will never ever get the truth from the NY Times when it comes to real estate becuase all the so-called "reporting" is advertising driven.
The only remedy for the illiquid market is a true collapse of prices.
Prices will bottom at a 1995 price point and not a dollar more.
Posted by Noah
Tue Jan 20th, 2009 12:38 PM
truthteller - "You will never ever get the truth from the NY Times when it comes to real estate becuase all the so-called "reporting" is advertising driven."
I'm glad you brought this up. I think it is so true, and I wonder if/when they will do more real-time, like it is, reporting because all the brokerages/developments that usually support ad model are themselves struggling.
OR, I wonder if they will invest in their online systems to actually meet the changing landscape of our local re markets. Their upgrade on re search was not very good, in fact, I think its worse than it was. Im very surprised they didnt save that money/effort, and focus more on making this marketplace more transparent.
Posted by Aquarian
Tue Jan 20th, 2009 12:55 PM
I'm curious about the comment from "truthteller" that prices will bottom about 1995 levels. That would be a decline on the order of 75-80% from peak levels.
I'd think that will happen only if we truly go into something like a 1930's style depression with 15-20% unemployment and no money to spend, because no jobs = no income = no demand; the cycle spiraling down into a situation that could be described as a state of national despair.... and pulling out taking a miracle (or war) of some sort.
Is that what you foresee?
Posted by Noah
Tue Jan 20th, 2009 01:02 PM
a nationalization = a credit event! If some of our biggest banks are nationalized, equity wiped out, and triggering CDS payouts, we will see a chain reaction of events that could be quite scary.
Should this occur, anything can happen. On to 1995 pricing, there would need to be a severe event I think to get that bad. Thing is at that stage, only those that MUST sell are doing it. Few that can handle it and who weathered this economic tsunami, prob wont choose to sell other than if quality of life changes. So, we could be down say 35% in a year from now, BUT have those few sellers taking bids 50% below peak because that is their only out. Pockets of distress may reach those levels but I dont think there will be multiple competing quality units for sale at the same time to produce a correction to 1995 pricing. If there is, than this crisis is a lot worse than I think it is.
Posted by Jose R
Tue Jan 20th, 2009 01:41 PM
saw this, thought might be of interest:
http://clusterstock.alleyinsider.com/2009/1/preventing-the-greatest-heist-in-history
In light of Nouriel Roubini's statement about bank insolvency, shouldn't we just assume that banks are just pulling a squeeze play, not lending on purpose, in order to force that RTC bailout of wiping all the dirty paper on their books?
Also, consider that while Merrill Lynch is causing havoc with BOA, they are still paying out half million dollar salaries to mid-level employees.
Reprehensible is a word that comes to mind.
Despite all the other smucks losing their jobs its good to know that bank employees are still enjoying the good life despite being bankrupt.
Life is like a box of moral hazard.
Posted by truthteller
Tue Jan 20th, 2009 02:38 PM
Hi aquarian-
We've had a totally unsustainable runup in residential real estate prices in Manhattan. This was not based on reality or value, it was based on two things: a) speculation and b) what we call the greater fool theory.
Yes, I think we have many more speed bumps ahead, I'm not sure we'll hit an all out depression but we will have huge dislocation.
So having a significant price pull back is logical and necessary to get us on an even keel again. It's no different than getting all the toxic crap off out of the banking system. The same concept applies to real estate.
Real estate has value, but only a fraction of what the greater fools were paying a few short months ago.
Posted by OT
Tue Jan 20th, 2009 02:59 PM
To TruthTeller - with due respect, I think your comments are the most misguided within the discussion threads on this blog. In the interest of time, I will focus on your most recent.
You claim that the run-up in Manhattan prices was due to speculation and the greater fool theory, yet you believe the contraction in prices will be based on your sound, macroeconomic analysis.
Let me make this very simple for you - prices went up due to a very simple demand/supply equilibrium. Demand for Manhattan property skyrocketed for a multitude of reasons over the past decade, and supply simply could not keep up. This scarcity drove what became somewhat inelastic demand behavior and shot prices ever higher.
The level of speculation in the Manhattan market is minimal, and is mostly foreigners buying into new development condos. Co-ops simply do not allow speculation, and most condos are prohibitively expensive to speculate in. As such, most of the property that traded hands went to people looking to build a home, not flip for a quick profit (as was the case in most other US markets with momentum).
Now, if the economic situation in NY becomes extraordinarily dire and many, many people have to sell their property in order to eat, then the demand & supply lines shift and a price is found in a very different place. I think anyone will agree that if we see unemployment start to creep toward the 20's, then we are in for the numbers you state. If, however, we stay closer in line with projected unemployment figures, I think a more reasonable expectation is 20% down for coops and closer to 30-35% for condos.
Posted by Thisson
Tue Jan 20th, 2009 03:15 PM
@OT,
The increase in supply may not have been from speculation, BUT it could be the case that demand was artificially stimulated by unsustainably high wages in the finance sector. Those days are coming to an end.
I think we'll see studios in doorman buildings back down to about 150k (from 430k). Because in my view, the junior professionals that I think buy such apartments don't have more than 30k to put as a downpayment. The days of getting the downpayment from their rich parents who were working at I-Banks are over.
Posted by Mike
Tue Jan 20th, 2009 04:07 PM
I concur with Thisson. I bank, PE/Hedgefund salaries helped inflate the bubble.
I too anticipate prices falling drastically, but sellers are anchored to higher prices because a 20-25% price reduction still translates into a 30-35% haircut after broker fees, flip tax, etc....not to mention the 4-5% worth of closing costs associated with the initial acquisition.
Basically, sellers will be trapped in their studios well into their 30's before they can unload unless banks are allowing SHORTSALES in Manhattan.
Can anyone shed light on the prevelance of SHORTSALES in Manhattan? Do lenders still have recourse against the borrower/seller in a shortsale?
Posted by cfranch
Tue Jan 20th, 2009 04:40 PM
Let's not forget the developers here. Certainly a good deal of "speculation" occurred in this group as many areas became overbuilt. Who is going to buy all these new apartments?
Posted by Buyer
Tue Jan 20th, 2009 05:11 PM
Speculation did exist in NYC even if one accepts that there were not many flippers (i.e. pure speculators) due to condo/coop rules.
I know of many anecdotal examples... the most common are the parents who bought apartments for kids in college on the assumption that they could sell for a profit in four years.
It was very common in NYC to invest significant amounts on money in a newly purchased apartment since the values were going up so quickly. This is another form of speculation.
Posted by OT
Wed Jan 21st, 2009 09:57 PM
Buyer - by that logic, most buyers are speculators. Everyone takes on a certain degree of risk when they purchase a property - this does not make them a speculator.
The parent that buys a place for their kid is making a calculated decision. If you figure 48 months of rent at $2000/month, that is almost $100,000. A purchase of a comparable apartment at $500,000 brings significant benefit, and even if it doesn't sell for a profit, there is always the option to rent it out. Even a 15% drop puts the buyer on par with having rented. Plus, many people in the position to send their kids to college and buy them an apartment in Manhattan plan to use it as a pied a terre down the line.
A real estate speculator typically buys a property with an eye toward a quick resale, rarely lives in the property, and often owns multiple properties. If you spent any time in Florida between 2000 - 2005, you couldn't avoid specimens of this breed. Trust me, there were very few in Manhattan.