Where Some Deals Are Being Done
(Posted by Toes)
I am eating some of the words from my post entitled "The Sky Is Not Falling" last year; yea yea I know the timing was way off! I'll leave the macro to Noah & Jeff, but continue to try to pass on to you what I am seeing out there in the field so you have as much real-time information as possible.
Maybe the sky isn't falling, but the weather sure isn't pretty & the near term forecast isn't so fabulous either. Yesterday's market reports analyzed in the NY Times barely scratch the surface of where sales are actually being done. Because it takes two to three months to close on an apartment in New York City (perhaps more given the difficult lending environment), the numbers for Oct-Dec 2008 may not show up until 2Q 2009 reports.
I feel very lucky that I have had a few listings go into contract in the past few months because it has been a very challenging market to navigate. Sellers and buyers have been so far apart (Noah's post on "The Buyer - Seller Disconnect" was both timely and accurate), it takes hours of educating and negotiating to bring people together. So here is some anecdotal information about what I have experienced happening in the market since October.
Although these were all priced around where the comps sold, deals are being done 10%-18% below recent comps. Take it for what it is worth, and what I am seeing out there in the market right now.
The studio and one bedroom market is where most of the deals seem to be happening. Larger apartments are not faring as well; clearly a result of the dismantling of wall street, high paying jobs, need for cash, and the difficulty in financing larger deals. Since smaller units are selling and fewer new developments are closing, the median and average prices in NYC are going to correct as the next few quarterly reports come out.
We seem to be back to around 2006 prices. For my buyers, I am looking at the building's sales from 2006 and making offers in that price point, or looking at recent sales and taking 10% off of the price, if not more, depending on how much competition there is for that type of product.
Unfortunately most sellers haven't come to the realization that prices are down more than 10%. They can keep riding the market down, or they can do some soul searching, realize that they probably (hopefully) made their money, swallow their pride, and take the offer. I know how hard it must be, but if you have to sell your apartment in the next six months, that's what you have to do.
Toes says: If an apartment is being marketed everywhere possible, the most serious buyers will come in the first three weeks on the market. If you don't get an offer after 30 days on the market or if 30 buyers come through the door, the apartment is not priced appropriately for the current market conditions. Time seems to be a seller's enemy right now as the market is trending down and appraisers started to do negative time adjustments on their appraisals.
Toes says: 3% price drops are ineffective in this market. A 5% to 10% price reduction is needed to get buyers' attention.
Toes says: Buyers: put in a few offers, be patient, and look for sellers who really need to sell. Don't forget that if interest rates go from 5% to 6%, but prices come down 10%, your monthly payments are exactly the same. It's impossible to try to time the bottom of the market, so try to combine finding an apartment that you love, taking advantage of low interest rates, and getting a great deal. The key is buying an apartment that makes you happy, that you can afford, and where you can see yourself living for at least the next 5 years.
Posted by Noah
Fri Jan 9th, 2009 10:08 AM
TOES - first off, props for bringing up that old piece but dont worry about it. Granted we talked about firms failing, who knew when or if they would be saved/bought out/injected with private capital. Nobody knew for sure that Lehman would fail and I thought the fed would have saved them before I left for Europe for those crazy few weeks.
Your game is NOT studying macro, and there is nothing wrong with that. These real time reports I fin VERY useful and hard to find outside of Doug over at Truegotham
Please keep em coming as you see or hear of deals being done so we know where market is trending!
Thanks
Posted by OT
Fri Jan 9th, 2009 10:11 AM
This is heartening news. If deals are being done 10-15% below market peaks, in the ugliest economic environment in decades, in the worst quarter for home sales, I feel much more secure. Banks are starting to release numbers and the verdict from where I sit is down 25% for strong performers, 30-40% for above average/average performers. This is still a massive amount of money that will enter the market in Q1.
Can you provide more info on the 2-bed co-op? What neighborhood, what floor, views, etc.
Posted by Anon
Fri Jan 9th, 2009 11:15 AM
You cannot time the market, but this will not be a V recovery and buyers are not going to miss anything, but a possible depreciation of a newly acquired asset. Most educated buyers know that deals at 15% below peak are not enough of a discount. Prices are falling below that as we speak.
Posted by Noah
Fri Jan 9th, 2009 11:22 AM
for what its worth, Im getting a sense of a tickup in demand in my business from buyers who I advised to wait about 6 months ago. They see and acknowledge that deals are happening around 15-20% below peak, and they seem to be getting interested in at least looking seriously again in case a good deal happens to pop up.
I think they will still bid cautiously, but I get the sense from talks with buyers that they are much more comfortable bidding right now, and feel like they have control to walk if they dont get the deal they like considering future uncertainties.
Still its interesting to see this change from about 4-6 months ago, before the market got so illiquid.
Posted by Buyer
Fri Jan 9th, 2009 12:52 PM
Low interest rates are tempting me, but interest rates may well be low for years to come (see Japan).
Posted by SRealist
Fri Jan 9th, 2009 01:49 PM
Jan Hatzius, Chief Economist at Goldman, Sachs just released a piece on his expectations for the Manhattan real estate market. Too long to post the entire text here, but his basic assessment is that the market could decline anywhere between 35% to 44%, depending on the measure he is using to estimate overvaluation in the past few years. He looked at three ratios: Price/Rent, Price/Income, and Affordability. Price/Rent was the most pessimistic (the 44% decline estimate).
Hatzius used the data in the Case/Shiller price index, which relies on resale data, and so is relatively uncorrupted by a change in the mix of properties sold, for the analysis.
The income and rent data used in the analysis are old (2006 for income). It appears that rental rates have been declining in the past few months, which means that the Price/Rent ratio is likely to result in an even greater potential decline than 44%. Income data for 2008 are not yet available, but it's pretty clear that the bonus season on Wall Street this year is not going to be pretty; again, the pressure is on the downside.
The only upside would be if the spread between jumbo mortgage rates and conforming mortgage rates narrows. If jumbo rates were to decline from the current 7% to 5%, the report determines that the decline in prices would be 19% (compared to 35% if rates don't drop). However, this drop assumes that incomes and rents stay relatively unchanged. It's also clear that a decline of this magnitude in rates is unlikely.
Bottom line, the market is seeing huge downside pressure, and it appears that a 50% decline is not necessary the worst possible outcome.
Posted by anonymous
Fri Jan 9th, 2009 02:24 PM
Is Hatzius really doing work on just the Manhattan market? I believe Case/Shiller only goes down to the entire NYC metropolitan area, not Manhattan. Informative nonetheless..
Posted by lars
Fri Jan 9th, 2009 02:38 PM
Sorry, but I have a very hard time believing that the market is anywhere near stabilzation at levels of 15-20% off peak.
The process in NYC is just getting started. What tells me it is going to get substantially worse (other than the horrendous loss of jobs/incomes)is the astonishing pace of declines already achieved. The 15-20% off peak has basically happened in four to six months! That is staggering.
Wait until folks realize how bad the economy really is... oh, baby.
IMHO, the only justifiable reason for pulling the trigger on an apartment now is that the alternative is living on the street. Any other reason will only cost you money.
Posted by Fred
Fri Jan 9th, 2009 03:32 PM
where do folks see rents stabilizing at? i am seeing newer bldgs on the UWS asking $2450 for a one bed and 3,500 or so for 2 beds. this kills the pre-war and walk-up markets. i wonder if this doesnt mean one bed walk ups are heading back to 1,500 or even less? under that scenario there would also be a flood of brownstones that were unable to refi without cutting a check, right?
Posted by Squirrel
Fri Jan 9th, 2009 04:56 PM
Toes/Noah, regarding the inventory spike, are people just putting their place on the market to feel it out? Do you think they'll just pull their listings if they get bids below 20-30% ask? Or do you get the sense there is some distress out there?
Posted by SRealist
Sat Jan 10th, 2009 08:45 AM
I was surprised myself that Hatzius was doing Manhattan-only analysis. His rationale was that the Case/Shiller data for condos is heavily weighted in Manhattan, both by number of units, and more importantly, by value. That's why he covered Manhattan specifically.
Posted by henry
Sat Jan 10th, 2009 02:54 PM
If Christine "The Sky is Not Falling" Toes thinks the market is down by 15-18%, then it is a good bet that it is down at least 25%.
Posted by Donald
Sun Jan 11th, 2009 05:38 PM
"Toes says: Buyers: put in a few offers, be patient..."
I hope your not recommending making multiple offers SIMUTANEOUSLY because that would be horrible advice.
Posted by Toes
Mon Jan 12th, 2009 03:06 PM
Hi guys, thanks for the comments.
Donald, I'm not recommending putting in a few offers simultaneously. Noah is the investor/finance guy, I am the intrinsic value, "find something that you love, buy when it makes sense for you" girl. It's pretty rare that you would find three things that you love at exactly the same moment. So I'm saying to find something that you love and make an offer. If you aren't happy with what the seller comes back with, move on and find something else that you love. You never know when/if a seller will come crawling back with a better counter (I had it happen this weekend).
Henry, I am giving you real numbers as to where actual deals are being done since October. What incentive would I have to lie? When these sales close, you can check property shark yourself.
Posted by Toes
Mon Jan 12th, 2009 03:14 PM
Hi Squirrel, I think you are right - I am seeing some sellers who seem to be testing the market. There are a LOT of "TOTM" (Temporarily Off of the Market) listings in our database from sellers who finally realized that prices are down. If they don't have to sell, they are pulling their apartments off of the market.
Originally, I thought the "TOTM" listings would come back onto the market after the holidays, but so far, most of them aren't.
Hopefully we will get to a point where the people selling are people who are serious about selling! Right now, prices seem to be all over the place. You have to put in a few offers before you find someone who "gets it."
Posted by old timer
Thu Jan 22nd, 2009 01:44 AM
Toes,
Your "Sky is not falling" piece amused me, as does this one. You are like a nurse taking the pulse of a dying patient, "his heartbeat is 60, and he's still breathing!" I don't doubt the accuracy of your broker observations at all. But reporting on buyer/seller behavior is not what is required to figure "intrinsic value". That is an economic calculation, not a market one. Market observations are quite valuable to buyers and sellers, but they don't predict prices longer term.