Understanding 'Liquidity', or Lack Thereof For Manhattan
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.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 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.
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.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.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.
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?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.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.
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!
Comments (25)
Another great post, Noah. I think when all is said and done, prices in NYC will be off about 70% to 80% off peak 2007 prices.
Posted by Sideliner | March 9, 2009 11:13 AM
thanks sideliner - are you waiting to buy? If so, does FAUSTUS comments ring true for you?
Doesnt matter what I say here, market will do what it wants until process completes.
Posted by Noah | March 9, 2009 11:37 AM
Regarding buyer and seller mentality, below is a fantastic NYT article from May 2008 that epitomizes how I - a potential buyer - view the market. Of course, I'm biased, but I have to admit that I'm in no rush whatsoever. In fact, upon attending some open houses on the UES in the $900k - $1mm asking range, I mentioned potentially offering $750k, which much to my surprise, drew no resistance from brokers. I think I may have UNDERestimated where the market is heading.
May 31, 2008
Your Money
Negotiating for a House? Start With ‘Dear Seller’
By RON LIEBER
A few years ago, when multiple bidders would show up at a real estate open house, the truly desperate resorted to writing love letters to the sellers.
Their plaintive scribblings painted a picture of first-time buyers chasing the American dream or growing families hungry for more space. The letters dripped with compliments for the property and ended with a plea for mercy (and a signed contract).
Today’s real estate market, however, calls for a different kind of letter, less a fuzzy valentine and more like a cold splash of water. It’s what you write to accompany a bid that is so far below the listing price that it cries out for explanation.
Inspired by the success of a friend who used this tactic, I drafted a sample letter that buyers who fear overpaying might send to homeowners. Then, I crafted a reply that confident sellers could fire back.
No seller would be happy to get a letter like this. The most powerful missives stoke doubt and create fear. Sellers who get them may be tempted to write off the bidders as lowballers. But it makes little sense not to at least reply, given the number of competing properties in most places and the difficulty lately in getting mortgages.
The sample letters below, which I wrote after conversations with representatives of the National Association of Realtors and the National Association of Exclusive Buyer Agents, don’t mention local economic conditions, comparable sales or other such data. You’ll want to fill in those details yourself. But the templates below should work as a starting point.
One caveat is that you’ll generally be relying on real estate agents to deliver your letter. Ask them point blank whether they intend to do so.
Dear Seller:
I’m writing to let you know that I would like to make a bid on your property. I love the area and am committed to buying a house nearby. And your home fits my needs.
But given that my offer is well below your asking price, I also feel I owe you an explanation.
First, consider the big picture. Nationwide, home prices in the first quarter of 2008 fell 14.1 percent compared with the same period a year earlier, according to the Standard & Poor’s/Case-Shiller U.S. National Home Price Index.
That’s the biggest decline in the 20-year history of the data. And just in case you’re wondering, during the housing downturn of the early 1990s, the decline was never worse than 2.8 percent.
Not only that, earlier this month, the National Association of Realtors pointed to the huge number of existing homes on the market. As of the end of April, the total number was 4.55 million. At the rate people are buying right now, that represents an 11.2-month supply.
So buyers have options right now. A lot of them. I’m no different. Your home is great, but it isn’t unique. Few homes are. I know this may be hard to hear, since you’ve spent years creating memories here. But you may be waiting a long time if you hope to find a buyer with the same emotional connection that you have.
My mindset is hardly unique. We’ve all been reading the headlines. The accompanying articles appear prominently in major newspapers and sit on the Web pages where people check their e-mail every day. Everyone sees them, and the psychological impact is real.
Has your real estate agent laid any of this out for you? Maybe so, and you didn’t want to believe it. But it’s also possible that your agent, afraid of offending you and losing the listing, simply doesn’t want to initiate that sort of discussion. It may be worth sitting down for a candid reassessment.
It will be tempting to view my low bid as an insult. Please don’t make that mistake. Your home is genuinely appealing, and I wouldn’t have written this note unless I was serious about buying it. Getting a firm offer in this market is an accomplishment. So congratulations!
Oh, and one more thing. You presumably need someplace to move. My guess is that you’ll find these same points compelling when it’s your turn to buy. You just might succeed in buying for a better price, too.
I look forward to hearing from you soon.
Yours Truly,
The Realist
Dear Bidder:
Thanks so much for your note. I’m truly glad that you like our home as much as we do. You’re right that my family and I have many great memories of this place, and we hope someday you will, too.
And I just want you to know that I’m not insulted in any way by your offer. The fact is, none of us are very good at buying and selling homes. We don’t do it often, and as much as we know we’re not supposed to let emotions get in the way, it’s hard not to. After all, few people buy or sell anything else as expensive as a home in their lifetimes.
That said, your offer disappointed me. You seem to believe that I’m not aware of how bad things are out there or that I’m in denial. But I do read the headlines, and I priced the house accordingly. I knew I might have to wait awhile to sell it.
I should point out that your data draws on what has already happened in the housing market. Instead, I’d ask you to consider what’s about to happen.
One big reason for the falling prices is that it’s harder to get mortgages. Lenders went from giving money to anyone with a pulse to demanding higher credit scores and larger down payments. All sorts of buyers simply couldn’t make the numbers work anymore.
That may now change. Starting June 1, Fannie Mae and Freddie Mac, which buy mortgages from lenders and help make it possible for them to lend more money, are loosening restrictions on the sorts of loans they’ll buy in many markets. That is supposed to make it easier for people to buy a home with a down payment of 5 percent, or even less. Many more qualified buyers should mean more bids, and I’m willing to wait to see if it turns out that way.
I know you talked about having choices, but presumably we wouldn’t be engaging in this correspondence unless you liked my home best. Given that, I’d ask you to think about something: How often do you find a place that you can actually imagine living in? Sure, there are a lot of other properties out there. But an increasing number are in foreclosure and probably have problems lurking within the walls. So don’t let fear of a falling market keep you out of a home that you truly want.
It’s probably obvious by now that I’m not going to counter with a particular number. This doesn’t mean that I do not want to negotiate. I’d just like you to consider what I’ve said and see if you find it convincing. In the meantime, other shoppers who are interested in my home now have a price to beat. So thanks for helping me out with that.
Just one more thing. Please take another look at whatever mortgage calculator you’re using and see how your monthly payment will change if you brought your price up a bit. It almost certainly is not going to be enough to break you. But it may be enough to get us to a deal.
I look forward to your reply.
Yours,
The Undaunted
Posted by John Galt | March 9, 2009 11:40 AM
I just closed on a 2 BR/2 Bath condo on a contract I signed in December. I have wanted to purchase in Manhattan for years and looked occasionally but never thought the prices were reasonable. When I began looking in Nov. it was obvious that a few properties were listed at prices that were intended to bring offers now.
The narratives for those listings contained language indicating that the seller was realistic and motivated. The prices were substantially below most of the other comparable listings.
The unit I purchased was priced 20% below the already discounted listings for the same space in the same building, and I ended up getting it 13% below that. I looked at similar sized units in other buildings priced 50% higher than what I ended up paying!
I have continued to follow some of the other listings I was interested in and I am amused when I see serial substantial price cuts. Even with these price cuts they are still priced higher than what I was willing to pay. I was prepared to make offers on some of these other properties but when I "felt out" the realtor with my price range I knew the offer would be rejected out of hand. One of my friends made an offer on a property and the counteroffer took $10 off the ask, now the property's listing price has been reduced 20%! A lot of sellers need to get real!
Realistic asking prices will generate offers.
Just a note for all the ecstatic people that celebrate while they imply that anyone who has purchased property is a fool. You may want to start looking, there are great deals out there, mortgage rates are very low. Furthermore, real estate is not uniformly priced like stock, if you find a motivated seller, you can get a bargain price that you will not regret. By the time the "bottom" is indicated by statistics you will have missed a lot of great opportunities and the mortgage rates may be higher. Take a chance...
Posted by Rob | March 9, 2009 11:48 AM
Rob - thank you for sharing your experience. So you would say you got your deal around 30% below peak?
Nobody can pick a bottom, but I do think it will take time for confidence to be fully restored. It took 10 years, 5 parabolic ones, for Manhattan to reach its peak, and now we are about 12 months into the slowdown. Deep down I think the bottom will be a muddled L, and stay there for a while. I just dont see an engine that can power a new bull market.
We havent seen household deleveraging and distress yet here, and I think that is here and coming for the next few quarters at least. But that is how I think. Certainly, there are deals compared to 12 months ago right now, but I think many buyers feel there will be better ones.
Cant call these guys vultures or bottom feeders, its just that there are real reasons to be cautious, and its all about your individual situation.
Thanks again!! Love to hear real stories like this. Please come back again
Posted by Noah | March 9, 2009 11:59 AM
I agree that there are some great deals out there where the seller has the ability to separate emotion from reality. While I do not believe we will see 70% + drops from the peak, 50%-60% isn't out of the realm of possibility; especially when one considers the price-to-income ratio compared to the Manhattan-to-national income ratio.
According to a New York Times article published this weekend - as well as others that look at Miller Samuels data - at incomes of twice the national average (we've been at 3x for the past 8 years or so), apartment prices would have to drop 58% to maintain the same price-to-income ratio as at the peak. The other major differences this time around as compared to other historical dips are:
1. availability of credit
2. wall street jobs are unlikely to return in their previous form at least a decade - and that's conservative
3. 22,000 brand new condo units city-wide are slated to come on the market by Q3 '10
4. rents are going down! - this phenomenon is contradictory to any other time in history when buyers were "waiting on the sideline"; I happen to be one of them renting a great space on the UES for about what I would be paying in CC + taxes alone. That doesn't give me much incentive to move
5. the dollar is strengthening against currencies formerly used to fuel the boom in Manhattan; according to many statistics, from 2004-2008 1/3 of all Manhattan purchases were made by foreigners. They're all pretty much gone now.
6. taxes on the "wealthy" are going up, and there's pending legislation to reduce the mortgage interest deduction for that same group
I can go on, but I think the point is clear. This will not be a mere dip. When the "bottom" is "found", it will remain there for many years as we - and the world - try to pull ourselves out of this mess. I think many buyers realize this, which is why there is not, and will unlikely be ANY sense of urgency on the part of buyers - even for "great" deals. Why? Because those deals will be there next year, the year after that, and probably beyond. Sellers will either have to indefinitely postpone selling, or lower prices significantly - even from current depressed prices - to attract buyers such as myself: married, well-educated, higher income level, well versed in historical real-estate trends, and cognizant of where prices will inevitably go.
Posted by John Galt | March 9, 2009 12:18 PM
Another sideliner here. Sold my co-op and Sullivan county home about 5 years ago to move to the 'burbs. Survived one year there. Moved back to Manhattan 4 years ago and rented. Lease is up in May but have decided to continue to rent. My partner and I are both in health care and it has proved to be fairly resistant to the recession. In fact I am busy than ever. I also day trade but, in this market, scalps are the only way to go. However I think the market bottomed last week. I am not looking for the absolute bottom in real estate but some signs of capitulation. I want even the most bullish brokers sounding glum. No more advertorials posing as journalism in the New York Times(yesterday's article about the bottom in real estate is a great example). A huge surge in inventory in a short period. Some noticeable fire sales and more developers going belly-up. When everyone has thrown in the towel I would be willing to buy with no expectation that prices will rise at any great clip. I want value and prefer buildings devoid of silly amenities(cigar and yoga rooms). I would expect the stock market to bottom first, then employment, then housing. By my measure we have only achieved the first.
Thanks Noah for bringing some clarity to the most opaque real estate market in the world.
Posted by cfranch | March 9, 2009 12:29 PM
Noah,
It is hard to pinpoint where these units "peaked" because it is a smaller building that has not had a lot of turnover. Some similar units within a 2 block area peaked around 40% more than I paid on price per Sq Ft basis.
One factor that I have not heard anybody mention that I feel is important for a buyer is thinking about the association finances. I intentionally looked for an established building with a stable income for the association. A friend purchased a condo in Miami in new construction. Many of the units remain unsold and in January his charges were raised 33% just to keep the association solvent. A similar situation in NYC could result in a monthly increase of $600 or more!
In NYC I think you will see many new construction units being discounted but the buyer needs to be wary that the projected maintenance charges may be based on the flawed assumption of full occupancy. This can result in unforeseen hikes.
Maintenance charges vary greatly and can substantially impact the cost of ownership. A change in purchase price of $75,000.00 will frequently affect the cost of ownership less than finding a building with reasonable & stable maintenance charges. I would be sure to include a realistic assessment of the maintenance charges when looking at any potential purchase.
Posted by Rob | March 9, 2009 12:29 PM
This is just one little story from the sidelines in the lower price brackets in Brooklyn . . . .
I am hanging out on the sidelines, albeit the fairly low-priced sidelines. I sold in 2008 because of a change in relationship status - - yes, I feel incredibly fortunate that I did not get divorced a year later. Yikes.
I have about 300k in the bank but only make in the mid-50s since I work in non-profit. My job is pretty stable. However, my salary means that I am looking for a (relatively) inexpensive place with manageable maintenance - - my search is in line with my financial reality.
I am looking in nice, but not top-dollar prime neighborhoods (i.e. not prime Brooklyn Heights or Park Slope or that sort of thing). I agree for the most part with Faustus' caution. I am actively looking, but cautiously and patiently.
I check listings and do attend open houses. On average, I've been at 1-2 open houses every other week, depending on what's new. I continue to look because I feel that it's important to keep up on what's out there, but even if I found a place I fell in love with, I would absolutely do hard, hard math before even making an offer.
In January, I did make one offer on a place in a not-quite-gentrified but definitely nice neighborhood in Brooklyn that I liked quite a bit (and please forgive the Brooklyn references on your Manhattan-based blog!) I was extremely well-qualified given my credit score (over 800) and the amount of cash I was willing to put down. My bottom line price was calculated to end up at 20% below peak comparable sales in the building, and I started negotiating accordingly. The seller didn't even bother countering, even after I came back again with my bottom line price and the full rationale for my offer.
Because I thought I was *already* taking a bit of a risk with only a 20% discount in that neighborhood, I moved on without a look back, but did notice that they have since lowered their price yet again.
I am not trying to bottom feed or time the market, I am just trying to be realistic about everything I am reading and seeing. The run up in prices was astonishing, and yes, I benefitted from it when I sold. I do think that the right thing is out there at the right price. I'll be educated and ready when I find it.
Thanks for this blog - fascinating insight, discussion, and info.
Posted by Jay | March 9, 2009 12:54 PM
No, I am NOT sideliner, though I totally agree with him/her.
Manhattan real estate would be liquid tomorrow morning if prices dropped on average 60-70%.
The reason people aren't buying is because Manhattan real estate is in a deflaionary downward spiral. Why buy today when you can buy in a couple of months for 20-30% less, and a couple of months after that for even less.
And Noah, most important, how's our friend Stella doing?
Please let us know. Thanks, TT
Posted by truthteller | March 9, 2009 1:11 PM
I was a sideliner as of a year ago, but cannot call myself that at this time. I have retracted from the sidelines and now expect to buy sometime in 2011. My net worth is down almost 30%, my job security is in question (work in the legal industry--layoffs have been aggressive recently), and I am no longer certain about my commitment to NYC. Don't get me wrong, I love NY, but if I cannot be confident that the neighborhood I'll buy in will remain in good shape (descent schools, parks, garbage removal), then I'll consider going elsewhere. Until I am certain that I'll still be in NY seven years down the road, I'm not buying.
Posted by Waiting | March 9, 2009 1:37 PM
TT - she seems to be doing fine, but prognosis is not good. No options. We will spare her invasive radiation and chemotherapy that may give us an extra few months. We are just spoiling her, playing with her, and giving her all the attention she deserves; and we will wait for her to let us know when its time. Thanks
Posted by Noah | March 9, 2009 1:39 PM
Oh dear, Noah, so damn sad.
Be strong dear friend, we're all here for you and her.
Posted by truthteller | March 9, 2009 2:09 PM
Noah: I am getting a good real estate education from your blog and informed readers. Thanks for all of the cross referencing, too. Since I am reading many of the same sources it helps pull it all together.
As for today's post. . . it is sad to see so many apartments being placed on the market at last years prices.
My question: Aren't some of the unrealistic prices encouraged by brokers that don't have a clue?
Posted by citygirl007 | March 9, 2009 2:44 PM
I'm in the money, hello my honey! Come urbandigs readers, sing along ... I'm in the mon, oh never mind.
Anyway, I've got my $100,000 certified check in hand and I'm ready to hit the $1,000,000+ open houses this weekend. If sellers can see I am serious about offering 10 cents on the dollar as a cash buyer I'll be in a new home by July 4th.
Posted by condo_shmondo | March 9, 2009 3:59 PM
"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."
That's what I've been telling all the brokers for apts I've been bidding on unsuccessfully, and they should know it since it's what I was taught in the real estate class I took, and they presumably did too.
Posted by Be | March 9, 2009 4:49 PM
It is not just a liquidity issue. There is no guarantee that if a seller waits long enough, he/she will find someone to hit their ask. In fact, this behavior is likely to prove injurious in a free-falling market (down 15-40% in a PERIOD OF MONTHS).
On a fundamental basis, the value of manhattan apartments has gone down dramatically. There are many ways to look at it. From a high level, risk has gone up for most assets (including manhattan real estate), so it makes sense that the risk premium (here cap rate) demanded by investors/buyers has also increased. Compounding the problem, the earnings (here avoided rent) for most assets is also decreasing. Then add in that, as I would argue, manhattan apartments were trading far above any reasonable fundamental value in recent years. Finally, consider that prices could overshoot on the downside. It is really bleak.
Posted by henry | March 9, 2009 5:43 PM
Be - that is exactly the issue. You talk to the broker, NOT the owner. The broker probably received a low ball bid already, which was rejected. Many sellers then tell the broker, dont bother unless the bid is above X. Then if it doesnt come, the seller will tell the broker to follow different rules.
As a broker, we MUST submit any and all written offers, so make sure your bids is sent in writing via an offer letter + financial statement. Even if it is below X stated by my client. If they dont respond, fine. But they must receive it.
Its all a matter of when the seller comes to that acceptance. It takes longer for many sellers to get there.
Posted by Noah | March 9, 2009 5:47 PM
As Urban Digs readers may remember I did a piece about Fair Market Value vs. Orderly Liquidation, vs. Forced Liquidation Value, the differences between them being, how much time the asset was "exposed" to the market. The rule of thumb being that Orderly Liquidation Value was 50% of "Fair Market Value" and "Forced Liquidation Value" 25%. Another way to think about discounts for liquidity comes from the market for corporations. When valuing a company a public company with stock that floats and is traded on an exchange, a 30% liquidity premium is given vs. the valuation attributed to an identical company that is private and therefore cannot be sold easily. I think looking at it in both these ways the slow pace of sales in NYC argues for a decline of at least 30% from current trading levels to facilitate more normal liquidity with current financing rates and availability. The latter could obviously change for the better or...gulp....worse.
Posted by jeff | March 9, 2009 7:15 PM
Well business conditions are terrible and my company's profits could fall 30% this year. But I have saved carefully for this economic winter and I am still willing to buy a really great apartment and even spend up to $12mm if I can find what I want. I have been on the sidelines since I sold my loft downtown in 2005 and have been waiting for the "after-tax-benefit" purchase prices to come within 125% of rental value. Still not even close. By my evaluation, sellers are still asking 165% - 210% of rental value in the high end of the market. They still seem to think some hedge fund knight in shining money is going to ride in and pay them more than they (foolishly) paid or pay them whatever an irresponsible broker convinced them they could get.
NOTICE TO SELLERS: If your property is more than 20% over-priced, potential buyers like me will not even waste a minute of our own valuable time to look at your unit because we assume you are too unrealistic. I know, you figured you'd keep it overpriced and just negotiate when someone makes you an offer. But at your prices, you will get no offers.
Its crazy. Co-ops with huge flip taxes, no rentals and awful financing rules asking $3-4k/sf ?! Massively overpriced 15 CPW sitting with like 25 for sale listings and 12 rental listings and no offers near ask. Between now and then, I am more than happy to keep renting park views on Central Pk South and calling my Landlord whenever something breaks. When these fools come down to reality, I will buy something.
Posted by onthesidelines | March 9, 2009 8:53 PM
Excellent post. Your Manhattan analogy describes an eerie parallel with the abs markets. I know this is a little off topic but the cmbs (commercial mortgage backed securities) market has been suffering widening basis pt spreads.
You can see them here:
http://debtsofanation.blogspot.com/2009/03/debts-of-spenders-commercial-real.html
Posted by In Debt We Trust | March 9, 2009 10:30 PM
speaking of 15 CPW, all these people who bought there at the top of the market then flipped gave all these other owners the false impresssion that the sky was the limit.
Clearly this is nonsense. There were several high profile bubble sales in the building, those days have passed and will never return.
So 15 CPW turns out to be the Emperor with no clothes. Yes, prices will even collapse at 15 CPW. Take that to the bank. Save those pennies to buy a spread there.
Posted by truthteller | March 10, 2009 9:40 AM
Well just to give everyone an idea on placing an offer. There was a condo for sale at 375K and equal to 750 per sqft midtown west. I had a buyer place an offer through me for 290K. they ejected but they are going to contract full offer and all cash for this unit. Mind you the kitchen needed renovation about 10K worth. Now this unit sat on w 58 and 6th ave an older building. But so far I can think units that need renovation like this are going for 750 per sqft. One open house also was done.
Posted by pitsky | March 10, 2009 10:39 PM
Great discussion of sideline buyers noah. my wife and i are sideline buyers. we both still have jobs tho uncertainty levels are high, since we both work for recognizable financial firms. We'd been saving cash for last few yrs to buy home and were thinking 2009/2010 to buy.
Now, we're sidelined for the forseeable future for several reasons. First, the depreciating asset problem. There's NO WAY we're buying property now when all prices are falling and falling rapidly. We have NO IDEA when prices bottom or at least stabilize, particularly as unemployment rises, which is single biggest determinant of housing prices. Low mortgage interest rates are NO DEAL/irrelevant when the price of the property you just bought falls another 30%.
Second, renting is such an easy and readily available alternative, both in the city and outside. There's no lifestyle compromise, even though we have young children.
Third, we have NO FEAR that prices will start to rise for years, perhaps a decade, so could care less about so-called 'deals'. We're in a deflationary period, particularly in housing, so waiting as long as possible is the smartest thing one can do, in our opinion.
Fourth, we are convinced the stock market will appreciate much earlier and more significantly than NYC real estate over the next 5 yrs, so would prefer to push a portion of the real estate downpayment cash into the market, at the appropriate time, and for a few years, rather than real estate.
Fifth, though less significantly in our minds, our job uncertainty prompts caution.
Importantly, there's one reason we're NOT sidelined. We have the cash available for a substantial down payment and enough other assets, such that we could even buy a reasonable property outright. We have no barriers with down payments or obtaining a mortgage, even though we'd prefer to get a reasonable mortgage rather than pay for the property outright.
We know two other couples that are sidelined for exactly the same reasons as us.
None of us even bother looking at real estate, other than to discuss, amongst ourselves, how happy we are that we never bought and took on those ridiculous mortgages. We're sad, however, that so many are suffering and that the numbers will only grow over the next few years.
Posted by sirwinston | March 12, 2009 11:43 PM
You can search and add your real estate property (or company locations
etc) in google maps for FREE at ProperMAP.com
Then you will get a unique link (to use in your website or blog) that
shows all the listings by you. Street view and different category other
than real estate is also available.
Posted by worldwision | March 22, 2009 4:42 AM