A: Everyone wants to know what is going on with Manhattan residential real estate, as if it changes daily. As if it is a liquid market. For the past 7 months it has been anything but liquid, but it does seem like prices have been changing daily. What is liquidity and how should we define it for real estate purposes? Is it simply how easily the asset could be converted to cash, or something deeper? I would argue that in terms of real estate transactions, the most liquidity could possibly mean is for the asset to be easily 'sellable' AND near a value that the seller deems reasonable considering market conditions and transaction fees - a somewhat tight bid-ask spread. That would describe a liquid RE marketplace, and does not interfere with the fact that the property is only worth what a buyer will pay. If one of these things don't fall into place for whatever reason, well then, the market becomes more illiquid. It would be wise to think about the market as such if you are a seller. It may even save you valuable 'denial' time that is usually wasted because the seller is unrealistic about the current market value of the asset. Do sellers truly understand the importance of liquidity or lack thereof, when the asset likely comprising the biggest portion of their net worth is at stake? Do they understand why the 'bids' are where they are? Do they see where their 'ask' is? Do they even know where the market is right now, and whether it is liquid or not? Chances are they don't and that is why this market will remain illiquid for the foreseeable future.
Let the proctologists pick bottoms (not the brokers or brokerage executives w/ vested interest in sales volume), for now, I'll focus on how this credit crisis ultimately affects our local housing market. In my humble opinion, despite the countertrend pickup in activity lately, the market is still for the most part illiquid. But its the definition of illiquid that may be in question here. Sure there may be OH traffic, private showings and low ball bids, but does that make this market more liquid?
I would argue that in regards to real estate here in Manhattan, liquidity is a sell side phenomenon, not a buy side one. The most liquid this market can be is if the property is:
A) easily sellable - meaning bids are being received for the asset, PLUS
B) near a value that the seller deems reasonable considering market conditions and transaction fees - ahhh, the important part and the emotional aspect of the process of selling. Let us not forget that a property is worth only what a buyer is willing & able pay for it, but its the seller that makes the call whether or not to ACCEPT/HIT THAT BID!
Right now the market seems illiquid because the bid-ask spread is too wide creating a disconnect; meaning that either sellers are still in denial about the price drop of their asset (current market value) OR buyers are too cautious to bid more aggressively for the asset. For me, I follow the buyers because in my opinion, they make the market. AngryBear goes into detail about this:
2) Liquidity - A property of an asset which indicates that it can be converted into money quickly and with low transaction costs.
This implies that if an asset is illiquid a rational person would not be willing to buy it intending to sell it again in the near future. People selling things are very unhappy when their market price has suddenly fallen. What if I can sell my asset right now, but I am extremely displeased by the price I am offered ? Is it less liquid ? Certainly not according to definition 2. Certainly according to people who say that the problem with financial markets is a loss of liquidity. This gives third definition:
3) Liquidity - the property of a price being as high as sellers think it should be.
Since Manhattan is illiquid right now, for a number of reasons remove all those speculators and short term buyers that look at purchasing and selling for a quick profit. That train left the station a year ago.
This is really a high end recession in the Manhattan real estate market, that is rippling through to the lower price points. That is the best I can describe it. If I were to divide Manhattan into a few categories and where deals seem to be happening now, it would be something like:
HIGH END ($5M+) - down aprox 25% - 40% from peak
HIGH/MIDDLE ($2M - $5M) - down aprox 25% - 30% from peak
MID END ($1M - $2M) - down aprox 20% to 30% from peak
LOWER END (Under $1M) - down aprox 15% - 25% from peak
Notice the structure of the ranges and all just my gut feeling of course on where I think trades are occurring right now. This is what happens when Manhattan gets illiquid and we start to see where sellers are hitting bids at - the range has to be wider at the top. It doesn't mean every seller will hit a bid down around those levels, because that seller may not be ready to accept the current market valuation of their property.
You should get the idea of how an illiquid market in a city like Manhattan is impacted when the core of the crisis is on wall street and the high end. If you have to sell a high end property, strong bids are not easy to come by. The studio markets seem least affected as of right now, but not immune by any means to a higher percentage discount. In the end, level of desperation of seller and willingness to acknowledge current market valuations of their property plays the most crucial role in the painful process of acceptance.
I am hearing stories of some high end properties hitting the bid at levels 40% or so below peak. But don't take my word for it, the NY Times wrote a story about it:
After he signed the contract for 823 Park, Mr. Singh listed his prior home, a full-floor 4,225-square-foot co-op on the fifth floor of 860 Park Avenue, at 77th, for $13.4 million.
Prices were moving higher in spring 2007, and Mr. Singh, brokers say, rebuffed offers of more than $12 million for his place at 860 Park. But as the market deteriorated he repeatedly cut the price, first to $12.75 million, in February 2008, then to $11.95 million in March, and $10.995 million in April. Finally, in October, after hiring Carrie Chiang of the Corcoran Group, he lowered it to $9.5 million.
Property records show that the 860 Park unit closed on Feb. 23 for $7 million, a bit more than half of the original price, and 42 percent below the $12 million that Mr. Singh reportedly turned down.
Now maybe that original $12M bid wasn't real, maybe it would never have produced a signed contract, and maybe it would never had closed in spring of 2007, but one thing is for sure ---> the Manhattan peak was exactly at that time, ranging from contracts signed between early 2007 up until fall 2007. Mr. Singh eventually
'hit-the-bid' of $7M when his asking price was $9.5M.
You never know how much your property is worth until you list it on the open market and procure a bid that produces a signed contract, and ultimately is able to close. Which means, your property is only worth what someone is both willing & able to buy it for at any given point in time. Your property is NOT worth what your broker insists it is, what past comps claim it should be, or what the owner expects it to trade for. Those dynamics are meaningless to me. The market will do what the market wants to do, and pressuring a buyer to up a bid in this environment is proving to be a very difficult task that has more risks than rewards. In the end, a buyer will bid what they want to bid, and too-pushy brokers will scare away the rabbit. If anything, your seller should know where the market is valuing the property; and if that bid is in the above stated range, I would seriously consider taking it because that is where the market seems to be right now regardless of where you think it is. Adjust your asking price to BELOW that level and you will probably realize that the market is significantly more liquid than it was at the higher price. What does that tell you?
This market is a fast moving animal right now, and you never know how a prospective buyer will value any given property, any given view, any given exposure, any given renovation, any given layout, any given building amenity, or and given amount of raw usable space. The usual valuation formulas (getting $1.50 back for every $1 of renovation you do, getting $15K per floor premium, etc.) simply do not apply in illiquid markets.
With equity prices down about 55% from peak, more and more buyers are becoming alienated from this marketplace (probably because nobody likes to buy a depreciating asset - a great discussion from late 2007 on the warning signs to our local marketplace) because of the correlation between this local housing market and wall street. Is there a correlation? Yes there is a level of relation, but it is more of a wealth effect and psychological one then anything else. I doubt there are studies proving that if stocks rally 30%, real estate will follow soon after and vice-versa. If anything, there is more of a correlation on the downside than upside because its hard to argue the negative wealth effect of a plunging equity market's effect on people's perception of net worth, confidence, and how much property they may or may not be able to afford.
Almost every broker out there discussed the 'sideline buyer' theory up until the tipping point here in Manhattan to support rising prices and floors. Well, its time to put that theory to rest already! It doesn't exist! There are always buyers waiting on the sideline, but to design a theory to support a bottom for a local housing marketplace because buyers will rush in if we fall 10%, is outright stupid and a product of a car salesman desperate to defend a rising market. The opposite is true and even though you can pick up a deal today at 20%-25% discount from peak, and perhaps more, it's clear buyers are NOT rushing back in.
Want some insight into what buyers are actually thinking? Check out this Streeteasy.com discussion thread titled, "Sideline Buyers - How Have Your Circumstances Changed?", where commenter Faustus discusses a personal situation and how he/she feels now about buying in this market:
I'm one of these sideline buyers that real estate brokers, owners and sellers are hoping will save the day. Doesn't it make sense to check in with me and other sideline buyers to see how our circumstances have changed?
I'll start:
i. My net worth. Since the market hit its peak, of course my net worth is down substantially. Down approximately 18% as of today from the peak in 07, which is actually relatively good but nonetheless pours a bucket of icewater on any burning desire to buy a piece of Manhattan.
ii. My job circumstances. Still employed, but highly uncertain as to both longevity and comp levels.
iii. My commitment to NYC. Related to (ii) of course, but I love NYC and would like to stick around (though it's not an absolute).
iv. My general outlook for NYC and the local real estate market. Bloody, grim and worsening. I fail to see what the catalyst will be to bring it back.
There are plenty more on that thread spilling their guts on how they are thinking. Interpret at your own risk, as anything can be made up, but still it is in-line with what one would expect given the unfolding events of this credit crisis.
Lets just keep it real and acknowledge what is going on out there. Lets not make excuses or poor arguments for bottoms & recoveries when the buyers are in total control and the market remains for the most part, illiquid for mostly sell side reasoning and buy side caution. You want a more liquid marketplace? Get those ASKs closer to the BIDS!
This financial crisis has been like an AIDs virus attacking the machinery that usually protects the system. That machinery is the creation of credit. It is being attacked the way acquired immune deficiency syndrome attacks the body's defenses by using the immune system itself to hide and multiply. When you think further about the analogy, one is an amazing piece of viral evolution and the other is an amazing piece of market evolution. Both lay bare weaknesses in the systems they have infected. The former crisis was only forestalled by instituting safer practices and the same will be the case for this one. Let's hope the patient can survive long enough for the safe practices to be instituted. One wrinkle with the financial crisis is that safe practices when instituted all at the same time can make the crisis worse rather than better.
This is one of those 'look ahead' pieces that describes what ultimately will be an unintended consequence of a declining market. Like I discussed a year and a half ago, when the mortgage markets began to seize up causing the bid for RMBS to disappear, I thought there would be a problem with future new development closings, "
As long as unemployment continues to rise, debts remain on household balance sheets, and a huge negative wealth effect from plunging equities takes hold, housing prices will continue to be pressured. Last I checked it was the consumer who buys homes, not corporations with access to TARP funds. Yes we will see signs of life in distressed markets where sales volume surges due to record amounts of foreclosure activity; but that is hardly a sign of a strong market now is it! I mean, could you see how silly a statement like the following would be, "Sullivan County local real estate strengthens as foreclosure buying surges!"
According to the NY Post, "
Back in 1999, Ed Yardeni, an economist and stock strategist who identified the huge impact of technology on the economy and the tech stock theme very early on, got very worried about the Y2K software bug. He warned very consistently that this software bug could cause major dislocations in the economy by disrupting businesses, utilities and perhaps most importantly, payment systems. In the fall of 1999, Yardeni was asked to speak at a Y2K conference in the Middle East. He was beside himself; if these folks were just waking up to the Y2K issue, there was no way they could do anything to help themselves before zero hour struck. This suggested to Yardeni that the world was nowhere near ready for Y2K, particularly outside the U.S.
