Media Begins Manhattan 'Plunge' Effect

Posted by urbandigs

Thu Apr 2nd, 2009 08:31 AM

A: And here we go. Lucky for UrbanDigs readers, you were prepared for this exact report way back in July of last year, when I said, "expect to see ugly year-over-year comparisons and average price drops starting in 2-3 quarters; I would say starting as early as 4Q 2008, but more likely around 1Q 2009!". Well 1Q 2009 reports are out today, and with that begins the media effect of a market that just fell off a cliff. The reality is, the market started experiencing a shift in buy side psychology (confidence) way back in late 2007, and low ball bids and cold feet in mid 2008. Of course, brokers would never talk about this but I'm sure they will join the party now to protect their credibility as 'market experts'.

Bloomberg reports, "Manhattan Co-Op Prices Fall Most Since 1995 as Demand Plummets":

Manhattan co-op prices dropped the most since 1995 and transactions for all apartments plummeted 48 percent in the first quarter from a year earlier as the recession and Wall Street unemployment cut demand.

The median price for co-operative apartments fell 22 percent to $587,500, according to a report today by New York appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate. The median for all apartments rose 3.1 percent to $975,000, led by sales of new luxury condominiums. The median price of condos, which account for about one- third of New York’s owner market, climbed 5.8 percent to $1.23 million, Miller Samuel said.
Any broker hanging on to the median rise of prices, fueled by closings of high end new developments signed into contracts way way closer to the peak of the market, simply doesn't get it. If you want to know how strong or weak a market is, take a look at sales volume, inventory trends, and where contracts are being signed. I can care less about what the market was like 12-18 months ago when deals were signed for pre-construction properties that are only closing today. We are at now now, and the past is meaningless. If Im going to consult for a buyer or seller, they need to know what is happening NOW! Denial doesn't help anyone.

As Jonathan Miller accurately states, "Sales activity is the barometer for the health of the market -- not price". So how is sales activity in this great city? Slow. As Miller continues to state: Transactions dropped to 1,195, the fewest since the fourth quarter of 1994, according to Miller Samuel. That's about 48% lower than the 1st Quarter of 2008.

Folks, when the bid disappears this is what happens. For years brokers, buyers and sellers were used to a market with very tight inventory, tons of buyer demand, bidding wars, easy financings and closings, and quick deals. But where most go wrong is understanding how this world has changed, from that previous world that powered our markets from say 2003-2007 or so. It's all about the buyers, always has been and always will be. The seller can set the price wherever they want, but the property is only worth what a buyer is both willing & able to pay for it at any given point in time. So to really understand the markets and where its trending, we must do our best to go into the minds of those that make this market work, the buyers!

Today starts the negative media effect that I discussed a while ago. In both boom markets and bear markets, the media plays a role by enhancing the effect of the trend in the mind of the buyer. In boom times, there were articles discussing all those ever-lasting forces that were working together to make Manhattan prices go up forever with no chance of stopping. That helped to increase confidence in those buying real estate here, and even worked to bring in foreign demand and speculators to buy buy buy with no chance of a reversal in the trend. The result was tight inventory, high sales volume, bidding wars, and rising prices with each new sale. When the music stopped, the buyers went away and trend reversed. Now the headlines are working to further dampen confidence, and no doubt we will hear from sellers & brokers that the mass media is causing this downturn to go where it otherwise shouldn't. So, we will hear stories of how its a great time to buy, which happens to be the same sales pitch doled out when the market was at its peak. Ain't that something? I mean, is it ever not a good time to buy in the eyes of a broker or a brokerage firm executive?

The market will do what the market wants to do, and in the end you must understand that we overshot to the upside as a result of a parabolic credit boom that has now gone bust. Its very possible this market overshoots to the downside as well. Savvy buyers will be called 'vultures' and 'bottom fishers' for expecting a deal, and many will fail to see that this is simply a market where buyer and seller are simply not on the same page. Its tough on everyone involved in the transaction - the buyer that wants the deal, the seller that wants their price, and the broker that wants their commission.

Deals ARE happening and will continue to happen at every price as the adjustment plays out. Right now I would generalize that this market is trading around:

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

This is where I see trades occurring today but unfortunately Manhattan properties vary so greatly in regards to the following features:

- Views / Exposures
- Natural Sunlight
- Monthly Carry Charges
- Layout
- Building Amenities
- Building Policies
- Raw Space
- Location
- Renovations

etc., that it is virtually impossible to apply a single number to any single property and say that the apartment should trade there. That is the art of the buy side consulting process, taking into account where this market is right now and where this market might be trending.

If this is the active season in Manhattan and the sales volume is down 48% from this period last year, what do we expect to happen as we enter the slower months? Where will the bid be if you don't sell after May? What forces may affect buy side confidence as our local economy deals with the side effects of this crisis. What will happen with city tax collections from a very slow residential sales market? How will the income/bonus tax thing play out? How will an equity rally or re-test of the lows affect confidence/bids? How will condo auctions fare and how will buyers react to the fact that auctions are taking place in our backyard? How deep will job losses ultimately go as the wall street dismantling spreads to other local retail businesses? These are the questions we must focus on if we are to continue keeping it real!

All I know is that the process is taking place at great speeds, and I would not be surprised to see the bulk of the adjustment complete by this time next year. After that, a muddled L shaped market is highly likely for years as we as a nation deal with the unintended consequences of policy actions and over-regulation taken to both stem this crisis and ensure that it never happens again. I'm way less bearish today than I was 12 months ago now that the process has started and equities have adjusted. Manhattan prices will rise again but only after this correction plays its course, household balance sheets are repaired, excess is removed, and job security is no longer a concern. The future world may be a less sexy one, but that is to be expected after what we just went through.