Manhattan Inventory Nearing 11,000

We ain't stoppin' at 11,000. We'll be well into the 12-13,000's by this time in 2010.

agree - all of the hype about a pickup in activity is just that. With incomes stagnating, Wall Street dead for the foreseeable future, bank lending standards significantly tighter, collapse of the securitization machine which fueled non-bank credit extension, all of this adds up to less ability to take on jumbo mortgages. Which means one thing for Manhattan RE - it's coming down big time. The build up in inventory just reflects the disconnect between buyers and sellers. Once more sellers get with the program, we will see significant price reduction (i.e., beyond the 15-25% off peak prices that has already occurred).

This is what I call a Spring Bounce.

Buy now or be priced out forever. LOL.

So when I saw inventory tick up to 10,000 (2.5x normal levels) I started going out looking at apartments. I've been looking at 2 units every weekend, creating 'activity.' The thing is, most of the apartments are so over-priced its a joke.

I mean 25-40% over priced or more. Brokers have done a terrible job communicating reality to sellers. I am just now hearing from brokers that 'its a real seller and I should make some kind of offer.' Two weeks ago the story was 'you can probably get this for 2006 pricing - such a deal!

My stock response is 'call me when you're at 2003 pricing.'

The issue here is that there are now buyers looking for a realistic deal, and sellers still caught up in the top tick of 2007 + 10% profit + commission + closing costs as their best and final discounted price.

Out there looking - I am with you...my wife and I have been very "active", by which I mean we have gone to 2-3 open houses most weekends since the New Year. But we are not active buyers, at least not at these prices...plus, I want to make sure that the bank bailout plan isn't botched before I feel comfortable dipping a toe in...

out there looking - you are absolutely right. The key problem with sellers and brokers is that buyers have all the patience/time in the world. By renting, we are essentially being paid to wait given the difference in costs of renting/owning. This is going to be a long, painful ride down.

In this deflationary environment, the standard approach is "It'll be cheaper tomorrow." If not, there will be 5 others that will.

I say place a 2003 price offer what do you have to loose? Why wait till next year or when ever owners decide to make there prices that low? Why not just make them 2000 price offer see what kind of counter offer you get?

I tried that, and explained my offer in a 3 page letter with comps to a range of similar properties all over the city to show that my offer was based on what is actually happening in the market, and in much nicer neighborhoods than I'm looking (high end new development in Harlem). The developer came back with a ridiculous counter-offer. Since I made the offer, the developer now has to compete with two resale units in the same building. The problem is that buyers are being guided by logic, while owners are making decisions about pricing and counter-offers that are clouded by their emotions.

I too am interested in buying in Manhattan and I am looking for prices to return to a level that are backed by the underlying fundamentals.

Now, that being said just a couple months ago I was a seller. I sold my place for 10-12% below peak prices -- and I got an all cash offer that closed quickly (under 2 months) . VERY LUCKY. I priced fairly aggressively compared to the comps in the building and got a deal done -- the other apartments for sale have since lowered their prices.

I wanted to comment on this notion that all sellers are being clouded by their emotions or are being duped by their brokers. Owners/sellers are simply trying to get the highest price possible and make the most profit (or lose the least). For all of you who are looking to buy at 2003 prices (I'm hoping for 2001 prices personally) -- I suggest you simply sit back and relax -- cause you're not going to find a deal at those prices this year. I agree with you guys that real estate prices in NYC will continue to go down -- but i don't think it's falling off the cliff this year.

slightly off topic but relevant to NYC real estate. in today's NYT Krugman takes on Geithner's public private plan, saying:

"But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets."

Krugman goes on to tout the Swedish model (again, big surprise!). But here's my concern, does a Princeton professor really not get it? Does he not understand the basic concept of having skin in the game? If he misunderstands that the private participant's equity takes a ride up and down, and he continues to get ample press, what does that say about the media's ability to actually process far more complicated nuances? Not much. Andy Warhol would be smiling to be sure, but there seem to be a legion of media-ites who have had far far more than their deserved 15 seconds.....I had a dream the other night that I shaved half of Krugman's beard so that when he talks out of both sides of his mouth, the Marxism is accentuated......

"I wanted to comment on this notion that all sellers are being clouded by their emotions or are being duped by their brokers. Owners/sellers are simply trying to get the highest price possible and make the most profit (or lose the least)."

I disagree with this, RegularAnon. What is happening is that Sellers do not realize that the Broker is not also the Buyer.

The Sellers have high expectations that they have maintained from back when they overpaid for the apartment in the first place, guided by a Broker who told them that they were buying a 'very special trophy asset that could always hold its value.' Now when they turn around and try to sell the 'special trophy' using the same broker who sold it to them, the Broker has no incentive to disabuse them of his original story. Instead, he will take the listing at the Seller's aspirational price, spend no money marketing it and just hope that some fool comes to pay for it while he is still on the listing.

The Seller is immediately satisfied because their mistaken notion of the value of the apartment has been validated and reinforced by the Broker who has not yet told them the real price for fear of losing the listing. Only after going through a couple of 6-month listing stints with brokers will the Seller have noticed that the problem is not the Broker's marketing, but rather their price! All the while, the market will have been falling, falling, falling with the price always playing catch up and never finding a taker.

By the way, an apartment that is more than 15% over-priced will get only a small fraction of the traffic it will receive if it is priced correctly. Most buyers will not even waste their own valuable time to go look at it if they perceive the Seller is too unrealistic.

Out there looking,

I'm sure there are some sellers and brokers that are as you describe.

But when I look at listings I see that the large majority of them are not insanely priced compared to the other listings out there. Of course there are outliers but for the large majority they fall into a very reasonable range based on maybe 10% under peak (listing price).

Now maybe they won't get a deal done at those prices... certainly not with me. and certainly not with you looking for 2003 prices. honestly -- based on your statement -- call me when we're at 2003 prices -- nobody is going to be priced right for you.

If i'm a seller -- I don't care what you have to say since you're not my market right now. I'm going to be looking for the person willing to pay about 10-15% under peak (selling prices)-- and work on those buyers.

Out there looking, cherrywood, West Side Man: you are all essentially on one side of the market, have a bid in mind and are complaining that the other side won't hit it. Isn't that kind of pointless?

It's a market after all, with a wide spread. Sure, there are some sellers that anchor to inflated prices for emotional reasons, bad broker advice, etc. There are other non-stressed sellers who know that prices are trending down and are nonetheless taking a bet that they'll be better off (for varying reasons) holding out for a higher price than yours or not selling at all. I think it's more likely that prices would reach 2000 levels before 2007 levels, though I think both are unlikely in the near term. Just because you believe a unit is worth its 2003 price doesn't mean a seller is obliged to sell it to you for that.

I had been aggressively trying to sell my unit until last month but came to the conclusion that we'll be perfectly happy to move back in to an apartment we liked living in and take advantage of the great refinancing rate. I haven't yet taken down my listing. If a buyer offers me a high enough price between now and the time we move back next month, I'd consider changing my mind. If a buyer offers less than that, I won't sell. If that buyer went around complaining I was x% overpriced, unrealistic, in denial or whatever, then it's the buyer that's being emotional about it, not me.

As I've mentioned in the past, if you can flip your argument upside down and it would seem rational during the bubble (ex. "buyers are out of touch- only offered me x% above 2003 prices") then it would be rational now- otherwise, just move on and wait until more deals are happening at the prices you want.

Former Seller - I take your point, but I honestly think that your personal experience is going to prove the exception rather than the rule. We are coming off a decade (really, three decades) of massive credit extension which saw broad credit - taken on by corporates, households, and the government - reach 350% of GDP (unmatched even in the great depression, by the way). Who facilitated this? Wall Street. Who got paid insane amounts of money for facilitating this? Wall Street. Who is now dead for the forseeable future? You get the point...I agree there are some sellers who will be happy to refi and remain in an apartment they otherwise would have sold, but those are the people who still have jobs, or whose incomes haven't been cut in half.

Ok lets just say for some reason the plan that the gov started to impose on everything from the taxing to lending to banks and so on starts to work. Then what? Wouldnt it mean that more jobs start to come around and people start to have money agaim to spend?

So wouldnt it also mean that prices dont have to come down so far in value?

I mean isnt that what we all want to happen? More jobs, more money avail, people able to pay there debt, people able to buy property.

It would be a good thing if all of these things resulted in a marked improvement in the real economy. However, even if that happens, it will take years for consumers to work off the legacy debts they have incurred. Literally, years.

My bid is extremely low- I want prices to clear out 2000 levels. I'm a big believer in mean reversion, and we have to undershoot the mean after such a marked climb in asset prices. We have had what, three months of depreciation in nyc so far? After nearly a decade of appreciation?

drtomaso -- i too want prices to be at 2000 levels.. I jumeped into the stock market at 1998 levels -- i'd be happy to do the same for real estate at 2000 levels.

drtomaso, as a current owner in Manhattan I stand to be much better off rooting against a reversion to the mean. However, I consider myself somewhat of a populist and always believed that people should be able to afford housing in a place close enough to their employment as to allow a reasonable commute.

Anyone who agrees with that and believes there should be a "reversion to the mean" must start defining the mean. I think most of those who use the phrase here do not offer any nuance. Manhattan is just 1 borough in NYC. I don't know the statistics, but I'm sure that daily, millions of people commute to and from their place of employment in Manhattan, and live in other boroughs and loads of suburbs in NJ, NY and CT- for decades now. A Manhattan address has always been desirable but clearly not necessary to benefit from a Manhattan income. I therefore believe the argument that Manhattan prices must fall far enough to be affordable for everyone who is employed in Manhattan is very flawed. People have historically been willing to trade a far larger floor plan, quieter living and free parking for a better commute, being close to the action, varied culture, etc. I think that will continue to hold true barring some major anomaly outside of what we've seen so far- but also believe we will see further price corrections, which should be good news for every sidelined buyer out there.

Former Seller,

Instead of defining the mean by income level, you can also define it by equivalent rental cost.

Historically, in Manhattan's most 'reverted' moments, you could purchase an apartment with 20% down and have the carrying cost (inclusive of tax benefits) equal the equivalent rental cost of the same or a comparable apartment.

In other words, 'reverted' Manhattan is when the premium to purchase is only 20% greater than the cost of renting. Buyers will gamble that there may be enough upside potential against the 5:1 leveraged investment to make it worth their while to pay the upside spread.

In this past bubble, we saw purchase prices requiring as much as 85% down payment (ie. 15% loan) to achieve comparable rental carry cost. We also saw buyers neglecting the problems posed by co-ops such as flip taxes, financing limits and challenges to easily exit the investment. All of these were diversions from the mean.

Buyers (such as myself) are waiting for a 20% down payment to equal rental cost, bearing in mind that we are also in a declining rental market where rents have been cut 15-25% over night and incentives such as free months and OP commissions are customary.

Hope that helps.

Otl- thanks, that's exactly the missing nuance I was looking for, which will lead to a more meaningful discussion on market price dynamics.

To your point, it's undeniable that rent equivalent carrying costs are a strong factor for market prices, and that is surely playing out in the current market and will likely continue to.

I would point out however that the equivalent carrying cost dynamic does not exist in a vacuum. If it were the main factor in price discovery, the irrational bubble never could have occurred the way it did. One might argue that easy credit had the effect of negating higher carrying costs, at least psychologically

It ignores several factors. Obvious are mortgage interest tax deductions which are very significant in the early years, prop tax deductions. Less obvious is the fact that some neighborhoods are mostly rental (like midtown west), others, especially coop neighborhoods have few available rentals. Family oriented neighborhoods tend to favor ownership. Finally, what about the elephant in the living room- investment? Whether right or wrong about the market, investment buyers will always skew prices higher. I believe the reason why many current sideline buyers are confounded that sellers just won't drop their prices is simply because owners have optimism- whether foolish or not- that their investment will hold its value long term. My personal view is that as bad as things are, incomes reduced, jobs lost- there aren't as many owners that will be forced to sell as it's often portrayed here. That argument assumes that the majority of owners who bought during the bubble leveraged themselves with all the credit a bank would give them. In other markets maybe, I highly doubt it here.

"If it were the main factor in price discovery, the irrational bubble never could have occurred the way it did."

I must disagree with you on this one. But your own point later will explain why . . .

"Finally, what about the elephant in the living room- investment? Whether right or wrong about the market, investment buyers will always skew prices higher."

YES! The 'INVESTMENT' value is why there is always at least a 20% premium to purchase on a tax effective basis. A 20% premium means that if the property value appreciates by 3% per year, the 20% equity investment will have a leveraged return of 15% which is a reasonable leveraged return to invest in illiquid at-risk real estate. During the peak moments of the bubble, people were willing to invest with an 85% premium purchase price relative to rental cost. That means that if the asset appreciated by 3% per year, they would only earn a 3.4% return on investment. What was really happening was that during the bubble people actually believed that the asset appreciation rate was more like 12% per year (yielding close to a 15% ROI)and for the first few years of the bubble, THEY WERE RIGHT! Once prospective buyers no longer believe in appreciation rates but now believe in falling values, the pricing must quickly revert to the original 'rental only' value with no forward looking appreciation. As the market settles, the 20% 'investment' premium returns as Buyers are willing to pay rental value plus an assumption of 3% annual asset appreciation (3% is an historic norm).

I have no disagreement with you that the investment premium would need to fall to 20% to more or less be in line with historic asset appreciation- though I'd be interested to see data comparing historical averages of this premium for Manhattan vs. other markets.

I just think the huge spread in the current bid/ask market illustrates that there's not enough liquidity for this reversion to happen soon enough for many sideline buyers. I mean, there's no divine moderator that can wave a magic wand and force sellers to lower their prices all at once to close the spread and make everything happily liquid again. That process can only occur when arbitrary dynamics like the current crisis have passed, and both sides of the market can take action with better predictability. So in the mean time, activity will occur primarily when buyers who have no patience or care for market timing want to buy now- or when sellers are highly motivated or forced to sell.

I'm also arguing that for those not forced to sell there are a host of intangible factors that will further impede a complete reversion any time soon, like:
- transaction costs (both real and situational)
- life situations (ex. 2nd home sold to finance manhattan residence, reluctance to change kids' school district, lack of commute options outside the city)
- a general belief by many owners that the RE prices will reverse and return quicker in Manhattan than elsewhere (again, whether this is rational or not is irrelevant)

Of course, this is all barring some catastrophic anomaly beyond the current catastrophe.

"I'd be interested to see data comparing historical averages of this premium for Manhattan vs. other markets."

I wish I still had it handy, but HSBC's economics group produced a terrific study of Manhattan vs. rest-of-country pricing (and buy/rent ratios) going all the way back to just after the depression.

On a marked annually basis, 20% purchase premium was the bottom for Manhattan while -5% was the bottom for the rest of the country. Of course there could have been interstitial months when Manhattan was lower than 20%, but the implication is that when Manhattan gets lower, it corrects to the 20% level very quickly (or at least within the same year).

"I'm also arguing that for those not forced to sell there are a host of intangible factors that will further impede a complete reversion any time soon,"

No quarrel with the examples you provided which represent possible hold-out Sellers who may hold out at length. However most Sellers are 'forced' Sellers but not because of personal economic catastrophe, et.al.. Most Sellers include:
*Apartments of people who have died.
*People who need to move for a job.
*People who need to move to a bigger place to make room for a kid.
*People who need to move to the suburbs for quality public school in exchange for commuting costs/time.

These sellers have no reason to hold out and no luxury of staying. They simply need to sell, and they make up the majority of the Sellers in the market in any normal year.

That, in a nutshell, is why the hold-out is so puzzling to me in this recession/deflation. There are always people who just need to sell and have no reason to hold out, yet those people, in this recession, are indeed holding out and a huge wave of inventory is building. . . .

Out of curiosity, do you know what region the -5% was? My guess would be Detroit.

"*People who need to move to a bigger place to make room for a kid.
*People who need to move to the suburbs for quality public school in exchange for commuting costs/time."

I will likely be in this category myself in a few years and hope the storm will have passed by then. -and so I would have to concede that this offsets at least one of the hold-out points I made to some degree.

I was giving my explanation for the hold-out mentality when I said in my previous post that the spread won't narrow until the crisis has essentially passed its climax. With the all the crazy experiments the government is trying (scary indeed), my guess is that sellers are waiting to see if they pull a lever that eases credit and restores buyer confidence.

"Out of curiosity, do you know what region the -5% was? My guess would be Detroit."

Essentially almost the whole rest of the country drops below 0 at times. Remember, the only locales where one has been able to expect long term appreciation of old homes are those areas with a high concentration of wealth AND very high barriers to creation of new homes. That identifies only New York, West Los Angeles, San Francisco, Back Bay of Boston and a tiny smattering of other micromarkets like Palm Beach. In all other markets, a new home is always worth more than an old one next door. In other words, the real estate actually depreciates over time. Would you, for example, buy a used home in Tulsa for $200,000 or a brand new home next to it for the same amount of money?

"I will likely be in this category myself in a few years and hope the storm will have passed by then. -and so I would have to concede that this offsets at least one of the hold-out points I made to some degree. "

Understood. Of course, if your need was immediate, you would accept the low (but market) sale price on your current apartment because you would be paying a comparably low purchase price for the big suburban carbon hog you are moving into :) You only lose one trade but gain the same or more in the other for a net equal. By waiting, you may get more for your apartment but you will pay up big time for the shingled roof and swimming pool ;)

"With the all the crazy experiments the government is trying (scary indeed), my guess is that sellers are waiting to see if they pull a lever that eases credit and restores buyer confidence."

I agree - that's totally plausible. Gov't interference always makes the market inefficient.