Manhattan Sales Trends: The Bigger Picture
A: I really don't get the fascination with month to month increases in activity as a foundation for making an argument that a bottom is in or that we are on the road to recovery. For housing sales numbers, especially Manhattan, there is a STRONG SEASONAL PATTERN! So, either you seasonally adjust the numbers OR you compare year-over-year to get the bigger picture! If you choose to ignore this, and instead focus on month to month trends or quarter to quarter trends, you are getting a very misleading picture! This is the exact type of spin that the NAR, and specifically David Lereah, used to argue against a falling housing market in 2006, 2007, and for most of 2008. And now, they lost all credibility. You want to see Manhattan sales trends, look at the bigger picture and understand that this is a seasonal market that must be analyzed year over year!
I can see the Bracha Blog did a whole piece how, 'Contract Out: There Is Something In The Air', focusing only on Manhattan sales trends from February, March and April 2009. This information should be interpreted as anecdotal and not used to establish any meaningful trend or to build an argument that we have turned the corner.
Nobody denies the pickup, but to cherry pick data and focus only on the near term bottom and where we came from since in order to build a bullish argument, is an exercise in futility. Let me show you why.
Here is the past 10 years of Manhattan sales activity for co-ops and condos, courtesy of MillerSamuel:
Looking at month to month pickups, without rationalizing why this pickup may be happening, gives you a very narrow window into what is happening. Doing so means you ignore the seasonality of this market and usually leads to a false interpretation of a trend. Ask yourself:
1. Why ignore the seasonal nature of this market, and where we just came from after the Lehman collapse?
2. Why ignore a 38% stock market rally and that short term effect on buyer confidence after a sharp move down in prices?
3. Why ignore macro economics and simply interpret the pickup as evidence things are on the road to recovery from now on?
4. Why ignore year over year trends which clearly show Q1 as being the most sluggish in the past 10 years!
Why ignore all of these things? It was like ignoring alt-a when subprime collapsed and everyone stated that it was 'contained'. Remember that? They chose to ignore the bigger picture of this crisis. That didn't work out too well. Well, looking at a quarter to quarter pickup in activity and ignoring all of the above is outright silly! Either you do so and drink the kool-aid, or you analyze the right way and understand where this market is in the grand scheme of things.
Why not tell it like it is? What's the problem here? Why can't I say, yes, there is a pickup in activity but I strongly believe it is simply a counter trend pickup in activity embedded in a longer term correction - comparing y-o-y will show a slowing market. When you look at the graph above, its clear that is what this is!
When Q2 sales data comes in, it will show a tick up from the Q1 data and be interpreted by media, brokers, and brokerage executives as a sure sign this market has finally turned the corner! YAYYYYYY - champagne for everyone!
As I noted above and stated many times here, YES, there is a pickup in activity and YES, it will show up in the Q2 data when comparing it to Q1 - the trend that hope is being built on. I learned long ago to ignore such trends and focus instead on the seasonal nature of markets, trending macro fundamentals, the state of the consumer, the state of the credit/banking system, and the state of buy side confidence for the asset class.
I am estimating that Q2 sales, released July 1st or so and reflecting April-June, comes in around 1,700-1,800 or so - a significant pickup from Q1 but well below Q2 from 2007 and 2008 and either at or below trend for the past 10 years. Putting both together, it will seem that the first two quarters of 2009 will prove to be the most sluggish in the past 10 years. That's the bigger picture. Comparing month to month or quarter to quarter non seasonally adjusted data is quite misleading; so interpret at your own risk.
Posted by patientbuyer
Thu May 14th, 2009 12:01 PM
what fool would listen to a broker that focuses on feb-apr only? why omit jan, last quarter, last year? if my broker shoved this in my face to support me bidding higher for a place, i would laugh in their face and fire them! keep fighting the good fight noah
Posted by kmc
Thu May 14th, 2009 12:25 PM
Going forward, all potential buyers will have less access to capital through lenders. The rental market will continue to become stronger.
Posted by stats-man
Thu May 14th, 2009 12:46 PM
In statistics - anytime you look for sequential trends in a data series where the timeframes are relatively close together you are generally introduced to a higher degree of noise. If one month is down a lot, the next month maybe up slightly. Also, as you mentioned, if there's evidence of seasonality in historical data, you maybe missing other factors to help explain the pickup or slowdown in activity. That's why statisticians typically like to look at smoothing data through moving averages (average 90 day trend, for example) and throw in a seasonality variable to see whether the change they see is real or can be explained by simple seasonality.
For example:
Unexplained change (month-over-month) = Observed change (month-over-month) - Seasonality change
So if you see a +3% month-over-month change between March and April, but people tell you that historically there's generally a +2.9% difference between March and April for various reasons, then can you really be sure that what you're seeing is a true change?
Year-over-Year change is a *crude* but simple and effective way to figure out whether, accounting for seasonality, there's a real difference in this month versus last month. Even if you see that +3% month-over-month change between March and April, but both months are down 20% from last year, it shouldn't tell you much about pickup or slowdown in activity.
Posted by lars
Thu May 14th, 2009 01:07 PM
Chart looks pretty ugly to me and not surprisingly. But it does point out how little time this correction has been underway (i.e.- 2008 was a banner year relatively speaking).
It begs credulity to think that Manhattan pricing/volume has reached any kind of stability in a short six or seven months since the correction began in earnest (post LEH). Unprecedented forces on the way up and equally unprecedented on the way down.
Any activity on the upside is simply noise/outliers (markets never come to a full stop, or, as Noah points out, correct in a straight line). To think anything else is to not understand the magnitude of changes/problems facing the real estate market.
Posted by cfranch
Thu May 14th, 2009 05:33 PM
Noah:
When I read your posts I sometimes wonder what Halstead must think about you spilling the beans. Would understand if you didn't want to share but.....
Posted by Noah
Thu May 14th, 2009 05:54 PM
well if they do say anything, I dont hear about it..I would prob share.
They dont like me talking about actual %s, because they feel nobody knows and you cant generalize for the whole market..true, but I feel fairly confident in how I write on this site and what I say.
Posted by WestSideMan
Thu May 14th, 2009 07:19 PM
kmc - I agree that in normal times, a softer / weaker sales market translates into a stronger rental market. however, with unemployment rising rapidly, financial industry still atrophying, people leaving NYC - rents are still coming down.
Posted by In Debt We Trust
Thu May 14th, 2009 08:29 PM
Green shoots? Not according to this man:
http://www.reuters.com/article/
ousiv/idUSTRE54D4IL20090514
*Note - I do not follow EW theory so if others have any insight please feel free to say something.
Posted by Noah
Thu May 14th, 2009 08:42 PM
I think EW believes in a primary wave 2 UP now, that tops around 8517 on Dow, 914 on S&P, and then a new wave down that comes close to, or retests low.
They certainly believe we are in a grand supercycle down. But then again, they also call fro gold to hit 680, hasnt yet
Posted by joedavis
Thu May 14th, 2009 09:00 PM
Noah -- very good points. However, given how dismal the market is I am impressed that your 2nd quarter estimates are much closer to the previous years (not counting 2007-8 and 2002) relative to the departure for the 1st quarter from comparable numbers.
I have actually been surprised by how many properties have recently gone into contract. A few have actually come back on the market. So, I dont think things are stable, and many of these situations may be tenuous. From a buyer's perspective, volume is interesting but price is the critical point. If the market does not move down appreciably then we are still waiting. Is there any way to put up a comparable chart that gives psf or a comparable measure -- would be a great help
Thx
Posted by malcolm carter
Thu May 14th, 2009 09:08 PM
The conclusion that stands out for me is the percentage change in price drops from February to March (15%) versus March to April (5%). That said, your point is well taken, Noah.
Posted by Jonathan J. Miller
Fri May 15th, 2009 09:20 AM
Noah - 2 things.
Firstly you are dead on about seasonality and how it explains the recent uptick.
Second, I think that the fact we are seeing seasonality is a good thing albeit at half the levels of last year. I'd be a lot more dire in my outlook (not that I optimistic short term) if we didn't see any seasonality because that would suggest something catastrophic. Still we are looking at several years of settling, not simply a few quarters.
In other words - we need to get over it - we are not returning to where we were anytime soon. Thats not good or bad, it just "is"
Jonathan
Posted by guest
Fri May 15th, 2009 09:35 AM
Noah, Great post as always. I would love to hear your thoughts (if you attended) on the Observing Living event on May 14. Some of the panelists told it pretty much like it is, but the CEOs of the major brokerage firms think that we are all drinking the kool-aid!
Posted by MauraZW
Fri May 15th, 2009 09:55 AM
Noah,
Thanks for your great insights, forecast and thoughts.
It would seem that the record low mortgage rates and first time buyers tax credit are playing a big part this quarter. Both of these are limited factors and when rates rise and the credit is gone, the downward pressure will be strengthened.
Noah, what are your thoughts on how these factors are impacting this quarter?
Posted by jason
Fri May 15th, 2009 10:23 AM
how can you even mention the bracha blog? it's not a blog it's a idiotic advertisement
Posted by Noah
Fri May 15th, 2009 10:24 AM
Jonathan - totally agree! And we should be able to discuss this market openly, honestly, even if it does have a few more bumps ahead.
We are adjusting to a new world, a new normal, and a less sexy one.
thanks for commenting JM!
Posted by Noah
Fri May 15th, 2009 10:31 AM
MauraZW - "It would seem that the record low mortgage rates and first time buyers tax credit are playing a big part this quarter"
Yes, that plus:
1) a 35% stock market rally
2) a price adjustment of 20-35% or so depending on price point
3) a boost in general confidence that we are turning corner and see growth ahead
I think this is all in the natural order of markets. There will be deals at every price. This may be the best time to buy in terms of LOWEST RATES + ABILITY TO LIMIT FURTHER DOWNSIDE RISK. However, that is not a bottom call for housing. Just that the environment of low rates and what kind of deal you can grab now, maybe nearing an end. I see higher rates and lower prices in year or two ahead; and these will be interrelated and the fed will do everything to stop it and that wont help either. what if mortgage rates rise to 7% from 5.5%. How does that affect affordability? So your rate goes up but the price likely will fall.
personally, Id rather let the price fall and save up to be able to put as much down as possible and limit exposure to the interest rate risk. Thats a nice position to be, in my book.
Posted by In Debt We Trust
Fri May 15th, 2009 02:29 PM
The Treasury Department and the Department of Housing and Urban Development announced further changes to their foreclosure prevention plan Thursday, but instead of focusing on lowering existing payments, the administration pushed for ways to help borrowers exit their home.
The centerpiece of a plan the Treasury announced in February has been a program to reduce borrowers' monthly mortgage payments to 31% of the borrower's income.
But on Thursday, Treasury Secretary Timothy Geithner announced a plan to provide incentives to borrowers and servicers to pursue a short sale or deed in lieu of foreclosure if a borrower is eligible for the modification program but does not qualify under criteria tied to the loan's net present value.
http://www.financial-planning.com/news/
administratoin-offers-plans-spur-short-
sales-2661934-1.html
Posted by In Debt We Trust
Fri May 15th, 2009 02:29 PM
The Treasury Department and the Department of Housing and Urban Development announced further changes to their foreclosure prevention plan Thursday, but instead of focusing on lowering existing payments, the administration pushed for ways to help borrowers exit their home.
The centerpiece of a plan the Treasury announced in February has been a program to reduce borrowers' monthly mortgage payments to 31% of the borrower's income.
But on Thursday, Treasury Secretary Timothy Geithner announced a plan to provide incentives to borrowers and servicers to pursue a short sale or deed in lieu of foreclosure if a borrower is eligible for the modification program but does not qualify under criteria tied to the loan's net present value.
http://www.financial-planning.com/news/
administratoin-offers-plans-spur-short-
sales-2661934-1.html
Posted by joedavis
Sat May 16th, 2009 08:47 AM
inventory seems stable for a while, suggesting that the % of flippers or speculators in the market has nearly evaporated and the transactions are primarily of those who need to sell and those who need to buy, i.e. the baseline of the market is exposed.
seasonality ought to apply to the inventory coming on the market as well as inventory moving, so as miller observes, in a sense the market is being surprisingly robust all things considered.
The latest Deutsche bank report projects an additional 35% decline in NYC prices to get back to affordability levels.
This seems an entirely reasonable prognosis as the seasonality factors move towards a decline in sales volume, and the distressed /distressing situations take hold.