Price Discovery Phase 1 Begins

Posted by urbandigs

Fri Jan 30th, 2009 03:54 PM

A: I started discussing the change in buy side psychology in late 2007, the low ball bids & cold feet in mid 2008, and the illiquid nature of the market in late 2008. Notice a trend there? It's all about the buyers, and it always will be. If you want to keep it real and stay ahead of the curve, then stay tuned with UrbanDigs as this adjustment plays out. It turns out what is happening in the economy truly does matter, making consulting for buyers/sellers that much more critical in times like these. For now, we are about to get the first wave of closings from the very illiquid market in the 4Q of 2008, following the failure of Lehman and rescue of AIG. As we get price discovery, it will confirm the real time reports written about here, and will set a new benchmark for comps analysis and bids received.

Here we go. Hard to ignore when you see a 16% decline for the exact same unit sold and resold within 16 months of each other, case in point 201 East 80th, APT 11D:

201-e-80.jpg

Please recall my 2009 Prediction for Manhattan housing:

For a real time guess on where we are right now, I put the deals being done right now down around 15%-25% from peak levels (peak being deals signed into contract in early/mid 2007).

With that said, everything has a price and this adjustment is all about price discovery. We are in that illiquid part of the process where price discovery ultimately surprises us, yet only the guys that transact and appraise the property know where the deal was done; UNTIL IT CLOSES. After the closing takes place, the world discovers the price and issues in the next level of price discovery that will set the new benchmark for comps and pricing analysis. The downturn is defined.
Sure enough, this is one pure example because it is the exact same unit; thereby removing the variables that differentiate one property from another whether it be a different line, a different view, a different renovation, etc.. With the same unit selling at a 16% discount, you can't argue the change in the marketplace.

There will be plenty more of these same unit deals selling for between 15%-25% less as time goes on, but most of the comparisons defining this downturn will be of different units in the same building. I don't have time to go researching for how many others there are out there like this, so I'll leave it for you guys to post in the comment section.

It's clear that the buyer bought this place right around peak levels, likely signing the contract around May 2007, and its even clearer what the new buyer perceived as the proper value when signing their contract in November of 2008. This seller seemed to hit the bid, which was 16% below what they paid for it. Calculating in buy & sell side closings costs and it appears to be about a $350,000 hit or so. I wonder what would have happened if this seller priced more aggressively when the listing was back up for sale in DEC 2007, instead of pricing $250,000 above the original level only 4 months after the deal closed. That was not the case, and five aggressive price cuts had to occur before a buyer was procured; a classic example of chasing a moving target.

I see that inventory took a big spike up in the past week or so, as we approach the 10,000 level. While we may be seeing traffic and getting calls, I wonder how many deals are really being done right now during what normally is an active season. In my opinion, there is still a disconnect between bids received and the seller's expectation on what the property should trade for. The next month or two will reveal similar deals that took place when the market froze up in the 4th quarter of 2008; setting up the new benchmark to compare future bids to against current active inventory. Truly interesting times.

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