Picky & Patient: The Buyer-Seller Disconnect Continues

The rent/own calculator is finally back in vogue.

http://www.nytimes.com/2009/03/29/realestate/29cov.html?ref=realestate

That rent/own calculator was SO in vogue for us when we sold in late 2007. Thanks to that calculator, we ultimately decided to rent, so now are happy sideliners with cash available when the sales market comes back down to earth.

nice sale Otto!

Great piece Noah. It is slowly becoming accepted that the reversion is based on mortgage availability not just discounts. I am hearing more and more anecdotal evidence that is telling me folks who have been looking to relocate to the 'burbs are waiting - since they know that as prices continue to slide on the island, places like Fairfield county and Westchester will fall further. We are so deep in the cycle at this point. I still tend to think that until the equity markets recover the illusive down payment will remain as such - and that of course assumes a buyer is even employed at that point....

Incoming! New comps! All personnel to the ER! :)

Incoming! New comps! All personnel to the ER! :)

Noah
Great piece as always. I must say kudos for having the courage to call attention to what a hack Dolly Lenz and her ilk are. I remember seeing her repeat very much the same line on CNBC. She and the other brokers like her are what give realtors a bad name. Your blog is such a welcome change, I only hope you are rewarded with a ton of business for your honest approach.
Keep up the great work.

thanks sideliner! Im sure Ill get sh*t from the top brokers and Dolly for this one!!

This does sum it up pretty neatly. I looked at another two apartments this weekend. One was 50% overpriced. The other was about 35% overpriced. Both of these units were in the slow moving $4mm+ category. I would spend as much as $12mm if the apartment were priced correctly, but there's nothing in the high end range that's even close.

Some key facts about New York most brokers don't know:

1) There are only 10,000 New Yorkers who earn over $1mm per year - that means there are only 10,000 people who have any hope of affording a $4mm apartment based on income.

2) There are already 1,500 apartments on the market at or above this price.

3) There will be another 1,200 apartments of this type listed by end of 2009 simply due to normal turnover.

4) There are only 1,500 buyers in the market this year who can afford these 2,700 units, as the other 8,500 will not be moving this year (1/7 of households in NY do a sale transaction in a given year)

5) Therefore, 1,200 of the $4mm+ units must be repriced immediately for a lower income buyer in order to be sold

It's not rocket science. It's not seller psychology. It's numbers and sense.

With no expectation of appreciation of capital value in a falling price environment, and no easy mortgage money above Fannie + Freddie limits, high end buyers will only buy if the buy/rent ratio is close to 1.0 and the cost of the apartment is less than 4x income.

Sorry, aspirational sellers + brokers.

A couple years ago, at their apogee, Southern California had much the spin that present RE in NYC seems to have: a basic lingering of the "price never goes down" sprinkled with spices of mild corrections and soft landings.

Indeed, the pricing hadn't gone down much, and the naked underwater sellers were hard to find.

No longer. Zillow reveals the magnitude of the SoCal drop, and a 40% - 60% underwater forclosure sale is a common find, and the overall smell of the rolled stinking whale is finally plain.

I have to think NYC's in that last-gasp phase; its got a much better poker face than SoCal, and a tighter grip on the cards, but the gutting of wall street's a fiercer hit than anything SoCal took.

The true test: in SoCal, one can now buy a house for about what it costs to rent one (and rents have come down slightly...); look for it to happen here too.

Noah - any chance of seeing a longer-term time series of inventory?

westsideman - its coming. But it will be some time. It doesnt pay to upgrade now than have to upgrade again later. Ill be doing a whole suite of analytical tools for this site by end of 3Q of 2009 or so; if all goes well.

out there looking,

Not sure where you got your data and I too believe prices are coming down -- but there are plenty of people who can afford to buy high end apartments who don't have high incomes -- ie. they have high net worths without high incomes.

For example I sold my apartment to a retired couple who make very little right now but paid all cash -- this is just 1 example of the type of buyer without the income, but with the capability to buy.

I have a question to brokers out there do you find it worth going and getting exclusives out there now? Or would you rather wait till the market starts to turn around and sales are a common thing?

Brokers I speak with are becoming more turned off to getting exclusive because they feel the market makes them sit and wait and do nothing.

Noah,

"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."

this statement is spot on -- I think there are many properties even if they are down 10-15% off peak are getting buyers b/c they have a great maintenance, other features (garage, community rooms, etc). Whereas other apartments have sky high monthlys -- these apartments will really suffer... as buyers have started to pay more attention to this.

Regular Anon,

Was your sale $4+ mil? If so, you're good. If not, I don't think its relevant to the comment you're responding to.

First, there are less hi end all cash buyers 'cause the retirees got creamed. Second, Out There Looking fails to account for the fact that historical turnover rate in NYC also got creamed. (Check out sales volume statistics). That means fewer buyers for the growing inventory of $4+ apartments.

I bet Noah may be one of those buyers. Anyone that got the markets as right as he did must have made that kind of scratch. If not, he should be running a hedge fund instead of peddling apartments.

Also out there,

I wasn't bashing what u were saying just simply saying that the only buyers out there are not people who can afford it based on income.

My main point was -- where are u getting ur data from? thx!

"Out There Looking fails to account for the fact that historical turnover rate in NYC also got creamed."

Also Out There:

I think this is a little bit of a 'chicken v egg' problem. There are a lot of prospective buyers who are trying to sell apartments at $4+ mm. They can't move on and buy something new until they sell the unit they are currently in. That is a big part of what is causing the sitting inventory of 1500 units in the category and crushing transaction volume. They need to sell in order to buy.

So logically you can't look at the turnover rate as if it occurs independently of the bid/ask spread. The bid/ask spread is causing a low turnover rate because a restraint on sales is also de facto a restraint on purchases.

Hope that makes some sense.

OTL.

"Anyone that got the markets as right as he did must have made that kind of scratch. If not, he should be running a hedge fund instead of peddling apartments."

Ha - unfortunately I did not make that kind of scratch because I didnt take the risk. I was 60% in cash for the entire time, 20% gold, and played with the other 20%. But I did make money since the peak of the equity markets; so for that I am greatly satisfied. I will say this, in the last 6-8 months I made way more money trading than in real estate deals!

Trading will always be my true passion, and I expect to trade my whole life and I certainly expect to get back into finance down the road after I get UrbanDigs where it needs to go and the markets have time to heal from this crisis and the coming regulation. I have a feeling the landscape will change big time.

"That is a big part of what is causing the sitting inventory of 1500 units in the category and crushing transaction volume. They need to sell in order to buy"

This is very interesting.... If only it were possible to gather statistics on 'upgrade' sellers. I'd imagine current high end buyers must fall into one of three scenarios:

A: have cash and can afford to carry current unit and upgraded unit, looking for ideal opportunity
B: cannot finance upgrade unit without selling
C: renting and can buy upgrade but trying to time the market

I wonder how these are skewed. If a significant number of them are in B: I'd imagine it could be a reason bid / ask spreads are stubbornly wide and may continue to be.

Anyone have insight on this?

"A: have cash and can afford to carry current unit" but want to move.

This is a significant group but it dwindles with each monthly payment.

"A: have cash and can afford to carry current unit and upgraded unit, looking for ideal opportunity."

These are mega-earners who can afford an $8mm personal real estate burden at 50% utility. Your talking about 1/100 of 1% of New Yorkers who make over $2mm per year. A tiny, tiny minority. These are 150 buyers in a normal year and not all of them choose to buy and carry both. Most of them are probably smart enough to sell first and then move the family into the St. Regis while renovating the new place. Most of them will be moving to Florida after Paterson's tax plan goes through anyway !

"B: cannot finance upgrade unit without selling"

This is BY FAR the majority of people as long as you modify the word upgrade to be trade. People move for lots of different reasons even when their income stays the same and that usually means they can't upgrade but simply need to trade.

"C: renting and can buy upgrade but trying to time the market"

This is what caused the upsurge in activity this quarter with no corresponding upsurge in transactions. People who have been renting patiently and after bonus (aka firing) season feel like they will still have a job at least one more year. They are out looking, but not making offers.

B: cannot finance (traded for) unit without selling

"This is BY FAR the majority of people as long as you modify the word upgrade to be trade."

If this is then the case I'd imagine that the high end market will continue to be mostly illiquid. For most in this category, selling and then buying in the same market doesn't make sense when transaction costs are factored in. Would you agree?

More anecdotal evidence of the coming real estate crash in the Northeast:

www.Bloomberg.com reports that the auction of Boston's Hancock Tower resulted in a sale at 50% off the price it traded at just 3 years ago.

Could we see NY real estate at a 50% markdown? Signs point to yes...

Thisson, I agree- that that the sale of Hancock Tower is anecdotal.

If we do see NYC at a 50% markdown at some point, I would not consider this one sale as a significant sign pointing to it.

We have already seen more than a 50% markdown in commercial real estate transactions - in the heart of Times Square no less:

http://ny.therealdeal.com/articles/1540-broadway-sale-should-spur-leasing

1540 broadway
sold to macklowe for $967mm in 2007
resold by deutsche bank in receivership for $355mm in 2009

thats's actually a 60% markdown.

great article in new Atlantic mag, teaser here:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

full article here:

http://www.theatlantic.com/doc/200905/imf-advice

"For most in this category, selling and then buying in the same market doesn't make sense when transaction costs are factored in. Would you agree?"

Doesn't make sense unless they really want/need to move. For example: you live on 5th ave in a 2br. Your wife just gave birth to twins. You know your $4m isn't going to buy you a bigger apartment on 5th, but it will on Lex. So you need to move over to Lex for that 4 bedroom, but first you need to sell the one on 5th. Are you stuck with transaction costs? YES. Is it worth it to pay them rather than having 4 kids in a 2 bedroom? YES.

Now the problem here is your 5th avenue apartment is only worth $3m in the current market. You are asking $4.5m with no takers. It hasn't dawned on you yet that the apartment you want on Lex is only worth $3m today too and its ok to take a loss on the 5th ave unit to make a deal on the Lex unit. So you hold out, and find yourself in category B.

"It hasn't dawned on you yet that the apartment you want on Lex is only worth $3m today too and its ok to take a loss on the 5th ave unit to make a deal on the Lex unit. "

Finally- I'm glad someone here has given a more fair and rational explanation of sellers' anchoring rationale rather than the usual bitter pitchfork wielding rants of greed, disillusionment, denial, stupidity and irresponsibility.

I wish I could say I had the same problem as the one in your example, but that would make me a millionaire, which I am not by a long shot. I am moving back into my 610sq ft 1BR soon, after a grueling 10 months on the market with loads of visitors (often repeat), but no bidders. If I were the one living on 5th though, I'm not so sure I'd be willing to take the leap of faith that the owner on Lex would sell to me for what his is worth- and so I'd probably hold out and find a way to make do with less space for my twins.

I think this may be an indication that the vast majority of Manhattan owners are leveraged adequately. If that weren't so wouldn't we be seeing the spread slam shut by now? Not saying we won't at some point, but I think we'd need to see things get much much worse in the general economy before this happens.

"Not saying we won't at some point, but I think we'd need to see things get much much worse in the general economy before this happens."

Well that's your opinion and of course you are welcome to it. IMHO, the bigger this inventory pile up grows (and it is huge now) the larger the collapse towards the bid will be.

PS.
Despite the logical explanation, I still think there is also a lot of "denial, stupidity" out there too. Look, I also happen to own (as a tiny ancillary business) an interest in a brokerage company and seller denial and stupidity are pervasive among listers. The agents are telling the Sellers flat out at this point that they are overpriced but the sellers are so anchored to "what I paid 12 months ago + 6% commission + 10% profit" that by the time they budge down to "what I paid + commission" they are missing the falling market which has passed them by. Buyers are only interested in the buy:rent ratio now. A good (imprecise and oversimplified) rule of thumb for today's market is 1 month's equivalent rent x 200 = the most you are going to get if you expect to sell an apartment within 60 days.

Advice need: I'm renting and looking to buy a place in Tribeca. Developer is selling a nice big unit, lots of space, light is ok but not super (low floor), building will be nice when its finished. Unit is not complete: bathrooms, kitchen, reconfiguration required. They are asking $1000 sq ft; how much below ask can I bid? My broker suggested I go for 5% below ask.

I am currently trying to sell my 2bed/2ba fully renovated under 1MM on the upper east side and having a very tough time. I went to almost every other open house that is competing against mine and so I know the market quite well and believe that I am priced accordingly but open house after open house, no one shows up. It seems as if buyers can not be found anywhere. If I were receiving low offers at least it would give me some sense of the market. My broker has indicated that all of her collegues that have similar units are also not getting any traffic. I am hoping that things pick up in May. I am willing to lower my price but in this market, I would think that buyers already are aware that prices are highly negotiable so does lowering a price by 25-50k do anything - probably not. The 3-4 month lag in publishing sale prices for resale is causing a delay in the market adjustments.

Enjoyed your article. Same thing is occurring in the Austin Commercial Market and I'm blogging about this similar situation. Great content.