The 'Disconnect' Continues - It's All Relative

Noah,

Will a new development such as the Toren in Brooklyn lower their prices even if the developer has to take a hit on some of the units? Or will most developers like them who are similar positions wait until they go into default with their loans?

The real question is can some developers who built in Brooklyn cover cost at a lost at closing. Which would mean why many new developments in Brooklyn (Toren, Oro, etc.) have not lowered their prices.

Again keep up the great work with the blog don't change your writing style.

It gets tricky with new devs because terms of their construction loan may limit what they can do with pricing. Usually they will offer incentives first before lowering prices. But then again, appraising at the # may be difficult if pricing is too in line with peak and not anymore reflective of current conditions and valuations.

I think we will see interesting stories about individual developers over the next 12-24 months.

Some of the desperate developers have lowered their prices, like 20 Pine. Then there are devleopers who are chossing to go rental or hotel rather than deal with the market, such as the Jasper. If a devleoper has a decent amount of cash, I do not think they will lower their prices.

Just wanted to say first that I congratulate Noah as well for his recent press with the NY Times. Despite the negative things that have have been posted about them there, I think the Times reports reasonably objectively, and does not try to spin the RE market to cover up the downside- it may sometimes appear that way because IMHO they tend to report on trends while they're occurring, rather than being in the business of trying to predict them.

I keep up with the UD blog because it is very informative, especially for those of us without a macroeconomic background to help parse what's happening in the world economy. It also appears that the views have proven mostly accurate throughout the past several months.

I do think though that while informative and accurate, the topics covered are not complete. To illustrate what I mean:

In order to explain the current illiquidity of the Manhattan RE market, it has been said repeatedly, in the blog and postings here on a very regular basis over and over that:

* Sellers are in denial about their property value and anchor to unrealistic prices

* Because we can't yet see a bottom in the market and confidence is low, sideline buyers are remaining on the sidelines.

* For the most part, properties are moving only when motivated sellers hit a lowball bid

I happen to accept all of these as true. They seem to be the only accepted reasons for the buyer-seller disconnect. However, from my own direct experiences trying to sell in this market, the above reasons alone simply do not explain the illiquidity by themselves.

They seem to paint the picture that all a sideline buyer needs to do is wait for their dream property in prime Manhattan plummet to his or her price range (whenever/wherever that is), then simply walk in, buy it and live happily ever after. This leads to some of the more irrational speculation that's come about recently. My favorite is:

truthteller: "Another word to sellers, price your crappy apartments to sell, that means price then at 2000 prices and you'll get a few buyers to come out." I think he mentioned he's a broker. For his sake I sure hope he doesn't say things like that to his clients.

I can give two more pieces of this picture that have yet to merit a blog topic or in depth discussion:

1. FINANCING: Last I checked we're still in the midst of a credit crisis, are we not? I had a buyer make a bid on my property in late December for what I thought was a reasonable price for the current market, and I agreed to it. The buyer had viewed the apartment several times during Nov-Dec. and despite my doubts assured me she had pre-approval for 80% financing from two different banks, had a perfect credit rating and solid income. Around the time we were going to contract, the banks had done some due diligence and said they would not guarantee financing after a closer examination of her income and the developing economic conditions. I consider this an example of a would be buyer, focused on buying a particular property for several weeks, but was kept out of the market by credit tightening- NOT an unrealistic price.

2. ECONOMIC EVENTS: About 3 weeks ago I had an all cash offer from a business owner Hong Kong, in town for a few weeks. My broker had also convinced him to put up a non-refundable walk-away deposit for a few thousand. As timing would have it the Hang Seng index took a bad tumble the day before he was to sign the contract. Per my broker, this event changed is mind as he wanted to retain cash at that point. For those out there who say it's just a matter of enticing buyers by using the price slider, I tried doing just that by knocking 5% off the price on the spot to keep him at the table, process moving. His responded by saying he was happy with the price as it was, and had changed his mind for a completely different reason. I also believe as part of this topic that a lot of buyers are not put off by prices nearly as much as they are worried about losing their job in the coming months.

As a buyer, I don't need to see prices at 2000 levels to get interested. However, I do want to see them more like 2002 to 2003 levels, which represents an annual growth of 4-5% since the start of the runup in 1999. Even that level of appreciation is generous since it represents inflation plus and doesn't permit for any overshoot on the downside correction. And I believe that level is also in the ballpark of a valuation that equates with current income levels in the city.

Noah, sometimes the simple explanation is the one that most people can embrace.

We need to put the car into reverse. What I mean is, as a nation, we need to internalize that we have been living on junk debt and in a fantasyland.

What this means for us is that nothing, I repeat nothing will happen in terms of sales, until and unless prices approximate income. We are nowhere near this level when it comes to Manhattan real estate.

People have no money. People will buy an apartment if it is a necessity. Period.

Sadly, brokers who as a group are among the most uneducated and sorry bunch you might ever encounter, are responsible for perpetuating this fantasy land nonsense. Many of them bought junk real estate and now have apartments worth only a tiny fraction of what they paid.

Noah is correct, for brokers, it's all about getting the listing.

So my caveat to any sellers is, sell now for one price or sell six months from now at a much lower price.

And by the way, the alt As haven't hit the system, when that happens, you'll see another huge wallop to the system.

Seller,

As to...

1. FINANCING

Your property wouldn't be 'worth' anywhere near as much as you (or the market) think it is worth if not for the easy financing (to put it mildly) that developed over the preceding 10 years or so. Such easy financing drove the market everywhere, a positive feedback loop with higher comps and higher sales prices. The removal of said easy financing is a permanent change in the market, however, as with the upside, the price adjustment caused by this change will take time to work its way through to the downside. You have given us a glimpse of exactly how this works, as your next contract in all likelihood will be at a lower price. This story that you have shared will be repeated thousands of times over the next couple of years. Do not make the mistake of presuming this is a one-off or temporary setback and you just got unlucky.

If a buyer can't pay, then the price discovery that led to the contract is of very little use. You say she "was kept out of the market by credit tightening- NOT an unrealistic price". Correct, but she was the only buyer willing to pay that price (otherwise you would have just sold it to the next person in line), so now you have to move on to the next buyer who is at a lower price point, and may not be qualified himself. See how this works? The alternative is to assume there is another buyer willing to pay the same price; you just haven't found him yet (the broker's pitch). Only the lucky few will run into the few sleepwalking buyers left out there. There are still some out there, but their numbers are shrinking every day, you were almost one of the lucky ones with...

2. ECONOMIC EVENTS

Okay, this is just nonsense. The Hang Seng fell from 32,000 to 10,600 from Oct '07 to Oct '08. Yeah, it's been volatile since but nowhere near making new lows (not even below 13,000 until a few days ago). This is a buyer who "woke up" and told you a story because he had to say something.

You wrote; "I also believe as part of this topic that a lot of buyers are not put off by prices nearly as much as they are worried about losing their job in the coming months."

Well, what is the difference? It seems to me you are rationalizing the reasons for the deals falling through to cling to the price you want. But you only got that price from two unqualified and/or uninterested buyers, their opinion are worthless. I may be a millionaire and think a rare baseball card is worth $100k. But if I am unwilling to write the check my opinion is worthless. I also may be dirt poor and be willing to pay $100k for the same card. Again, my opinion is worthless because I am unable to pay. People who are either unwilling or unable to pay for something are useless in determining fair market value. The card is worth where a buyer and seller transact at arms length.

You are a seller who has no buyer, and you are in very crowded company. Although judging by your comments you are in much better mental shape than your competition, so I expect you will not still be clinging to your price a year from now as so many of them will be.

Good luck to you,

John

John,
The statement that people who are unwilling or unable to pay are useless in determining fair market value maybe true for any given property, or class of property. However, it may not hold true when you look at the aggregate of listings available. The buyer I had that could not secure financing very much wanted to move to Manhattan but did not want to rent. If that's still the case, she may well have continued her search for a another property in the same area, say a studio as opposed to my 1BR, for which financing would be less of a hurdle. Likewise, buyers that are enticed by price drops in the 2BR market may be discovering that available financing is keeping them out of that market and bringing them to mine, etc. My point about financing was that it certainly contributes to the illiquidity of the current market, and that including or excluding buyers facing financing challenges is not a black and white criterion; there are shades of grey and obtaining financing in the new market is a discovery process in and of itself.

I wrote: "I also believe as part of this topic that a lot of buyers are not put off by prices nearly as much as they are worried about losing their job in the coming months."

You wrote: "Well, what is the difference?"

The difference is that while there are a lot buyers who are put off by prices resulting from the bubble, there are definitely some who simply want a place to live and prefer to own. They aren't glued to market news every minute of the day, and aren't trying to time the market to the bottom- but they are concerned about being able to sustain carrying costs or tying up capital while economic forces are in flux in an unprecedented way.

If I used either of these arguments to rationalize anchoring to a certain price for my property, I'd be doing so at my own peril. I'm just trying to point out that while I agree prices have adjusted down- and will likely continue to, many here are using faulty analysis to rationalize precipitous price adjustments. If these rationalizations were true, the market would instantly become very liquid again if every seller in the market cut their price to some previous level. To say that because a market adjusted irrationally during a certain period it will adjust an equal and opposite amount to become "rational" again is ludicrous.

Thanks for your response.

John,
The statement that people who are unwilling or unable to pay are useless in determining fair market value maybe true for any given property, or class of property. However, it may not hold true when you look at the aggregate of listings available. The buyer I had that could not secure financing very much wanted to move to Manhattan but did not want to rent. If that's still the case, she may well have continued her search for a another property in the same area, say a studio as opposed to my 1BR, for which financing would be less of a hurdle. Likewise, buyers that are enticed by price drops in the 2BR market may be discovering that available financing is keeping them out of that market and bringing them to mine, etc. My point about financing was that it certainly contributes to the illiquidity of the current market, and that including or excluding buyers facing financing challenges is not a black and white criterion; there are shades of grey and obtaining financing in the new market is a discovery process in and of itself.

I wrote: "I also believe as part of this topic that a lot of buyers are not put off by prices nearly as much as they are worried about losing their job in the coming months."

You wrote: "Well, what is the difference?"

The difference is that while there are a lot buyers who are put off by prices resulting from the bubble, there are definitely some who simply want a place to live and prefer to own. They aren't glued to market news every minute of the day, and aren't trying to time the market to the bottom- but they are concerned about being able to sustain carrying costs or tying up capital while economic forces are in flux in an unprecedented way.

If I used either of these arguments to rationalize anchoring to a certain price for my property, I'd be doing so at my own peril. I'm just trying to point out that while I agree prices have adjusted down- and will likely continue to, many here are using faulty analysis to rationalize precipitous price adjustments. If these rationalizations were true, the market would instantly become very liquid again if every seller in the market cut their price to some previous level. To say that because a market adjusted irrationally during a certain period it will adjust an equal and opposite amount to become "rational" again is ludicrous.

Thanks for your response.

@Seller,

Your comments do shed further light on these issues, so thank you.

I think you may also be right about people lowering their expectations from a 2BR to your 1BR -- the market (read, the banks) is telling some of them that they can't afford 2BRs, even though prices have declined somewhat.

However, I still think prices are divorced from incomes. In my opinion, 2BR apartments going for $1m+ are unaffordable at the wages earned by Manhattan professionals. Even with financing, the carrying costs are huge. 20% down = 800k+ mortgage, which is $4800+/month (before maintenance charges).

So I think 2BRs will lead the entire market lower. The question is - how much lower? I'm guessing we go back to at least 2004 prices, and maybe even lower.

Seller,

You are still missing the fundamental issue. There is a price at which your apartment will SELL (actually a transaction will occur). You, as John correctly pointed out, are not at that price.

How do I, and John, know? It hasn't sold. You can postulate all sorts of reasons why it hasn't sold as of today, but the simple truth it is PRICE.

Now, where that price will be next week, next month, next year is subject to massive currents. I believe prices will be considerably lower for all the reasons many have laid out. You may not, in which case hold the apartment and take your chances.

The fact still remains there is a price at which your apartment will sell today and you are not at it. Keep cutting and I promise you will find the clearing price where your apartment will change hands.

Seller,

"I'm just trying to point out that while I agree prices have adjusted down- and will likely continue to, many here are using faulty analysis to rationalize precipitous price adjustments."

Yes, well I can't really argue with you there, none of us know the path or destination of future prices with certainty. Some buyers have anchors just like sellers. I am more pessimistic on prices than most. The collapse of Wall Street will be felt for many years to come. There is no precident for what has and is continuing to happen. And this is all happening on top of a housing bubble. I think the results will be catastrophic, but that's just my opinion. Maybe inflation will bail out the market as the Feds are hoping, I am suspicious but anything is possible.

Good luck,

John

seller, very simple. Sell today at a price someone will pay or sell in six months at a much lower price.

But don't believe us, time is your enemy, that much I can guarantee.

I wonder how many people have come to look at "seller" Unit? Also I wonder if the unit is a condo or co-op? How long has this unit been on the market? What is the reason they are selling there unit? I just thought maybe these questions could be added to clear up some things with this unit.

Seller,
Why is it "ludicrous" that prices adjust to become rational? No one should be suggesting that the vulgarities of the bubble are completely undone such that pricing returns to its pre-bubble level (though there is certainly the possibility of an overshoot of pricing to the downside). But over the long term, shouldn't prices refect underlying fundamentals of affordability and value of alternatives (i.e., rents)? Aren't there long histories (i.e., decades) in the history of this asset class where prices did not appreciate in real terms? Aren't there examples of other asset classes that have remained seriously depressed after their bubbles broke (e.g., Nasdaq, Nikkei)? Not surprisingly, sellers are anchored to their perceptions (hopes?) that their house is "worth" what it was worth a couple years ago. It will take time for the perception (hope) to fade to reality, but building inventories, lack of marginal buyers and ultimately distressed sellers will force the price down to a clearing price. That will then become the new comp that RE agents love to quote.

Craig- I'm saying it's ludicrous to *assume* that the market will behave rationally. It makes perfect sense in theory that a RE market will eventually adjust to meet the means of its buyers- but Manhattan is just a different animal. We've seen the PSF for even tiny living spaces in Manhattan soar for 5 years straight. It has defied plain logic that one could purchase a 3500 sq ft house in some suburbs not all that far away for the cost of a high end 500 sq ft studio in Mahnattan. I acknowledge that these irrational prices were driven in no small part by Wall Street excesses, and that these excesses have come to an abrupt end. I'm just not (yet) convinced that this end will cause an equal and opposite reversal as some are suggesting. I won't be completely shocked if this happens, but I don't think anyone can credibly predict it just by applying empirical data.

pitsky- 1BR cookie cutter condo, 'above average' features (take that term as you will). Put it on the market in May '08 FSBO, gave an exclusive in Sept. With just that much information, posters here have quickly concluded that I've been anchored to an unrealistic price the whole time, and that alone explains why I haven't yet sold.

I had decided to sell for reasons completely unrelated to the economic mess; I had bought a house from my recently retired father to keep it in the family, and simply did not want the exposure of 2 mortgages, good economy or bad. Moved out and am renting, currently paying carrying costs on the empty unit. When I first went to market I was much like a fisherman out for the day, completely oblivious to the tsunami heading my way; I hadn't been in touch with brokers, blogs or any other significant data indicating what was brewing. I did know that for my building, 2-3 months on the market was the norm for several years. While I had the most attractive asking price in the building (never less than 5% lower than the next lowest comp), I hadn't realized until September that I was priced behind the curve, and so I acknowledge now that during THAT period my price wasn't attractive enough (incidentally 3 out of 4 brokers that had bombarded me for a listing during that time told me I was setting my sights too low). I did have a regular flow of viewing buyers (3-4 a week), but no offer.

Since Sept. I've had my asking set at 15% below peak sale price, and have lowered from there, currently asking 23% off peak. Viewing traffic has remained constant throughout. Many here are saying asking price is the only thing preventing offers from being made, but that isn't supported by the feedback I'm getting from my broker and occasionally from buyers directly. I'd be interested to know what % off peak the current clearing price is, where as has been said a sale is guaranteed to occur.

Seller,
Thanks for your response. I guess we just have a difference of opinion. I believe that the market is rational in the long term, albeit with pockets of silliness like that experienced in the beginning/middle of this decade. I also believe that Manhattan isn't different than anywhere else in how it responds to market forces. Its income levels will probably always be higher (although they got out of hand in the last few years) and its supply is somewhat limited by rent control and land (though you can always build new and up), all of which will lead to higher psf prices than elsewhere with less favorable fundamentals. But prices have recently far outpaced where these drivers suggest they should be. By the way, the people of Hong Kong, Tokyo, San Francisco and now London all said the same thing about how they were different - before prices plunged at various times in the last 25 years.

I think we can all agree that there has been and needs to be a correction to bring prices back in line with fundamentals. Where there is disagreement (because no one really knows) is how much of a correction. I agree with you that the correction does not need to be "equal and opposite"; in fact, we shouldn't see a 100% correction because income levels should be higher, even after the current economic crisis, than they were before the bubble started in the late 90s. And I don't think that supply has increased all that much or population shrunk (ironically, the fact that people can't sell their house prevents them from moving out of the city even when they want to). Even with the possibility of an overshoot to the downside, prices should eventually stabilize above where they started.

But given the massive price increases (150%?) seen since the start of the bubble, and the long term return expected on real estate given its historical level of risk and risk/return characteristics of other asset classes, I would hope that you would agree it is rational to believe that the miniscule price correction seen so far is no where near what one should expect. I don't know where it is going to bottom either, but as a buyer will not be buying anything that I can't get for prices approximating those in the 2002/3 timeframe, which seems like a reasonable correction to me given the fundamentals I believe in and where prices would be today given expected long term appreciation rates. Plus I am not even sure I can get financing today - even though I don't have to sell an existing home, have an 800+ credit rating and plenty of cash to put down 30+%.

Craig, I do agree that the price correction seen thus far is most likely just the beginning. In fact, that is why I've set my asking price so much lower than other listings for close comps in my building; and I'm not very popular around other owners in the building at the moment. My priorities are: 1. Get a qualified buyer to commit to an offer. 2. Get the best price I can. These were very much reversed during the summer. If I knew of a magic price level at which a bidding war would happen, I'd set it there without thinking twice- but I'm not going to set it somewhere arbitrary, like 50% below peak to find this out- this is just foolish. Why? I believe that right now illiquidity is a far bigger enemy for me than the declining market. I'd imagine most other informed (and not desperate) sellers feel the same way. If I'm right price drops will not be precipitous- but they are sure to come.

you said: "ironically, the fact that people can't sell their house prevents them from moving out of the city even when they want to"

Exactly- and I'm one of those people, though I'm currently thinking about moving back from the apartment I'm renting in to my empty condo in April if I haven't found a buyer by then (when my lease is up), which would subtract one from available inventory.

In any case, congratulations on being positioned to buy. You seem well qualified and have a lot to choose from right now, and stand to see more so in the coming months- at better prices.