Picky & Patient: The Buyer-Seller Disconnect Continues

Posted by urbandigs

Mon Mar 30th, 2009 12:40 PM

A: Four months ago I did my best to explain the Buyer - Seller Disconnect taking place in the Manhattan residential real estate marketplace. As we entered the normally busy wall street bonus season (JAN - APRIL or so), we had to deal with the fact that wall street was quite different than it was in years past. Brokers expected to get many deals done, sellers expected high traffic and strong bids, brokerage executives maintain that it is always a great time to buy, but buyers sang to a different tune. Hopefully by now everybody understands that real estate is an illiquid asset class that really is all about the buyers. When the bids disappear, the rest of the players (brokers, sellers, brokerage executives) in the game must adjust to the changing world. When they don't, you get very low sales volume and surprising deals taking place. As other brokers call this a temporary lull, I would argue that the marketplace is in medium term correction process, with the asset re-adjusting its value on the open market to a world significantly different than the one that powered the boom. It seems to be happening at lightning speed, and come 4Q 2009 or 1Q 2010, I would not be surprised to see the bulk of the correction complete. A muddled L-shaped picture then appears in my head. In the end, the new buyer in this new world is more picky and patient.

That is how I view the current marketplace; I'm a trader so if you have issues with looking at the world as a trade, you may not understand why some properties are not selling even though the asking price has been reduced to pre-peak levels. I discussed the recent pickup in foot traffic as a counter-trend surge in activity embedded in a longer term correction; via a Real Deal audiocast in early February. The world has changed, and so should your view of it - higher foot traffic does not necessarily mean the market is reversing course.

In December, I described the Manhattan real estate market (story):

Why is the market illiquid? Two main reasons:

a) sellers are anchored to peak pricing; yet to realize the significant decline in buyer confidence OR that their property is likely worth 15-20% below peak levels

b) buyer confidence has not only declined, but has been shattered; as prices fall and fundamentals deteriorate, more buyers have rushed to the sidelines rather than jump into the market to take advantage of deals. The sideline money theory (the argument, mostly by brokers, that there will be a floor on prices because buyers will flock to pick up deals from the sidelines on even the most minuscule of price adjustments) was proven wrong once again

...the disconnect is making the market illiquid. Lets discuss each.
Today we get word from The Real Deal that, "Sales off 60% in 1st Quarter":
According to preliminary first quarter residential data, apartment sales are off more than 60 percent compared to last year. Condo sales in the first quarter totaled $1.8 billion, down from about $5.1 billion during the same period last year, the data showed. "The buyers and sellers have gotten different memos of what the price should be and no one is budging," said Dolly Lenz, vice chairman of Prudential Douglas Elliman.
Sellers got different memos because their broker probably promised a sky-high transaction price to secure the exclusive listing. Buyers don't need memos from anybody; all they need to do is look at what is happening to their portfolios and their job security.

I discussed the high end nature of this slowdown, and the NY Times recently stated that "Only 10 co-ops costing more than $4 million sold in the first quarter"; that is quite a statistic reflecting the nature of this crisis.

If we look at residential real estate (in declining markets) as a curve, the buyers would be the leaders and the sellers would be the followers. So we must ask ourselves, are sellers ahead of the curve or behind it? To hear Dolly say it, sellers are still way behind the curve. But should we listen to a person who claimed last year that Manhattan real estate "hasn't worsened and most of the bad news is already factored in...prices have not slowed down; two red flags are inventory levels & buy versus rent analysis, right now it absolutely pays to buy..."; ummm yea, sound advice that wouldn't have turned out too well for those listening. Yes it was a year ago, but even at that time UrbanDigs warned readers to keep their head out of the sand, in regards to the severity of this credit crisis and the ultimate hit on the macro economy.

Buyers today are both picky & patient, and who could blame them considering the macro economic forces and negative wealth effect taking place. This is NOT a market where brokers can convince buyers to aggressively bid, because "the property is worth full ask and if they don't act now they will be priced out forever". Rather, this is a market where buyers bid what they want and set the terms that they are comfortable with. Brokers and sellers alike have to deal with this trend.

In my opinion, most sellers are just not ready to accept that current bids submitted are the best they will receive. Now you can't just expect to submit a bid 70% below peak for a property and then complain that the seller is unrealistic. To me, the market seems to be in a trading range of down 25% - 40% or so depending on the price point, property features, location, light & views - the high end is significantly more illiquid than the sub $1M market. Manhattan property features vary so greatly that it is impossible to generalize that the entire market is down x%; sorry, it doesn't work that way. Given the range that I suggested, if your bid is in that ballpark and the seller is not biting, it is highly likely that the seller is just not ready to accept the reality of where the market is today. That is the core of the problem here, and a big reason why sales volume is off so much. The disconnect continues and the inventory trends reflect this:

nyc-trends-inventory.jpg


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