Keeping Broker 'Uptick' Reports In Perspective
A: Everybody is hearing about the 'uptick' in foot traffic and deals since prices in Manhattan completed their first wave down from peak. The 4th quarter was dead, the 1st quarter started out dead and then got a bit busier, and the 2nd quarter saw continued increase in traffic/action. The drop off of sales volume in the 4th quarter really marked the beginning of the rollover in this market; even though we were trending down every so slightly for most of 2008. For brokers, who happen to be the source of these uptick reports, the months of MARCH & APRIL & now MAY brought with it a gradual increase in confidence and traffic. Funny, because the equity markets hit their lows in March and are now running on a 30%+ gain in less than two months. I wonder if there is a correlation there? Anyway, brokers are reporting on a month-to-month observation of increased action while I think it would be more prudent to put this market into perspective by observing year-over-year trends. So, how do we stand compared to this time last year, the year before, and the year before that? Warning, it may not be as rosy as the reports!
The NAR is famous for spinning data to the positive by noting month-to-month pickups in activity, even though the y-o-y comparison would show a continued deterioration in the marketplace. Data can be presented in so many ways!
The number of sales in Manhattan's 1st and 2nd quarters should reflect the action reported by brokers during the period of NOV through APRIL or so - removing the variable of lagging new dev closings. The reason for this is that it generally takes a deal 60-90 days to go from contract signing to closing (reasons include securing the loan, preparing the board package, mgmt review, board review, etc.); so if the broker reports on action and deals signed today, it will only be reported in 2-3 months when the deal closes. Front line reporting is very useful, but it could also cloud the bigger picture.
Here is a chart showing you the NUMBER OF SALES in Manhattan's 1st & 2nd quarters, dating back the last 10 years (the 2nd quarter of 2009 is not in the books yet):
*data courtesy of MillerSamuel
THE GOOD: When 2Q data comes in, I am confident it will show an uptick from the 1Q
THE BAD: Taking a step back, year-over-year, sales will likely come in at the lowest pace in 10 years
Both statements are accurate, yet one is misleading and the other is being ignored? As you can see, the 2nd quarter usually tracks well with the first quarter action. Each quarter likely reflects the previous 2-3 months activity, so its lagging in that sense. If only I had more contracts signed data directly from the internal system, we could learn a lot more. Moving on.
You can see the outlier in 2007 as the Manhattan market saw a surge in activity. That spike was the period leading up to the credit boom's peak and the subsequent fall reflecting the illiquid nature of Manhattan sales volume after the Lehman bankruptcy - classic overshoot and now undershoot of activity. Will prices follow the same pattern? This market is likely experiencing the most sluggish action in over the past 10 years! Yet we hear reports that sales are picking up. Picking up from what, dead silence? Nobody is denying that on a month to month basis activity is rising, but if you put it into context of where we just came from and how it compares to this time last year, and the year before, and the year before that, etc..clearly this is a market experiencing its slowest action for this time of year in the past 10 years. Puts it into perspective doesn't it.
There are over 9,000 agents doing business in NYC. Even in a market that sees sales volume year over year down some 47%, you will have agents reporting on a pickup in activity - and as I reported, I am hearing and seeing this pickup in foot traffic myself. But for every top producer benefiting from a pickup in action, trust me, there are many more brokers out there struggling to survive. Plus, what is this pickup being compared to - a period that saw barely any deals done? Even I reported on the pickup in activity, but I called it something different - 'a countertrend pickup in activity embedded in a longer term correction'. I still believe this as buyers seem to continue to price in downturn risk and every deal seems impossible to get executed.
But some will have you believe that this pickup in action, both in foot traffic and in deals signed, is a sure sign of the bottom. That is where you must be cautious as higher foot traffic does not necessarily mean that fundamentals have reversed course - that is where I differ from my peers. Putting things into perspective (even with the pickup in activity), this market is not nearly as active as it was this time last year so we must take the pickup in activity bit with a grain of salt! People want to know when the market will recover, and I worry that these headlines paint a misleading picture of this market and recovery argument on faulty logic. The drop off in 1Q action is sure to lead to a similar type drop off when 2Q numbers are released in July; on a year to year basis. Yet, there was improvement month to month as accurately reported by agents.
As long as this equity rally lasts, there will be a reflation argument out there that is enough to make even cautious buyers pull the trigger with prices down from their peak; that is, if the time and the property is right! And I think this is what we are seeing now. Remember there are deals at every price!
I don't buy into the sustainability of this countertrend pickup in activity because fundamentals continue to deteriorate, and to expect wage inflation in the near future is certainly way too optimistic for me. Let proctologists pick bottoms because as far as I am concerned, we wont know the bottom is in until we have already passed it. Arguing for a recovery based on a 2 month pickup in activity is quite silly, especially when sales volume is so much lower than it normally is for this time of year - again, the bigger picture.
Lets keep it real, because if sales volume all of a sudden gets sluggish again it will lead to another bout of illiquidity leaving brokers wondering why properties are not moving again even with prices down X%. What would be more interesting is if brokers can reveal WHERE the bids are coming in at for these signed deals being reported! That would be useful. Are we seeing an improvement in the strength of bids bringing deals back closer to 2006 levels? Or are properties still receiving bids closer to 2004-2005 levels, yet now we are seeing sellers willing to trade there? Don't forget the nature of this slowdown and that it is affecting the higher price points much more severely than the lower ones. One thing is for sure, WE NEED MORE DATA TO REALLY KNOW WHATS GOING ON OUT THERE!!
Posted by Hizzoner - 3rd Term
Mon May 4th, 2009 08:52 PM
Great article as usual....
What should be even more fun is watching the brokers "switch back" to YoY comparisons when they need to do the Q3 2009 reports....
Broker: "Well you can't compare Q3 2009 to Q2 2009 due to the seasonality factor"
Buyer: "Yes but you had no problem comparing Q2 2009 to Q1 2009"
Broker: "Yes because in that case it works out for us"
Posted by rally
Mon May 4th, 2009 08:56 PM
isn't it obvious by now? the market rallies, all is well again. Its that simple!
Posted by Buyer
Mon May 4th, 2009 11:30 PM
Thank you for being brutally honest. I know brokers have been claiming that it is busy like the market has returned but I don't buy it. Like you said, the fundamentals have not changed (i.e. job growth, flow of credit). I have been going to some open houses in the $2M to $3M range and there are still only a handful of buyers (not counting brokers). I have seen some price drops in this range but still think they are two high and am bidding 20 to 25 off ask. I would like to know how much buying activity do you think is in this range (especially for coops in the UES). I personally feel that 40% off peak represents value right now. Do you think that prices will reach that level in Manhattan?
Posted by Noah
Tue May 5th, 2009 06:28 AM
Buyer - personally, yes I think it will. But evryone has become so short sighted here. At first, they downplayed the crisis. Next, they said bids were coming in low and unrealistic levels. Now, the bottom is in as stocks suggest recovery.
Many do not think the bigger picture. All we need is another 2-3 quarters of sluggish volume and you will see another round of deleveraging from those that must sell. I just dont think we got the distress out here, and supply is still at high levels compared to previous years. By this time next year, yes I think we will be close to that level
Posted by brenda
Tue May 5th, 2009 06:40 AM
I'm seeing alot more signs of distressed buyers. Brokers hate to have these signs show, but there may no longer be the budgets for staging, and now you are seeing more empty apartments, an easy sign of need/desire to sell quickly.
Pricing patterns, for those who follow on StreetEasy, give many clues as well. But I agree with you, Noah, there's more distress to come, and that's what really changes the game, particularly in slow selling periods.
Posted by mh23
Tue May 5th, 2009 07:42 AM
Noah:
I believe we a currently in an environment where anyone who is listing their unit is a motivated seller...The days of "testing the market" are over. I agree with you that, as sales continue to lag for the next several quarters, prices will continue to decline. Come July, there will be renewed desperation on the part of developers and sellers, which will trigger the next leg down in pricing. The disconnect between owning and renting is still too pronounced, and that must come in before we see any real stability in the Manhattan market.
Posted by Douglas Heddings
Tue May 5th, 2009 09:59 AM
Noah,
You know I love you buddy but sometimes a duck is a duck. We had over 36 people at an open house this past weekend with 4 offers and selling 10% over the asking price (about 20% below peak values). An anomaly yes but just had a buyer lose a place at the Ansonia that had 3 bids and sold over ask. I know this is anecdotal but I am definitely hearing of more multiple bid situations on properties that are priced very aggressively. Perhaps a dead cat bounce and perhaps not. I would love to believe it may be an earlier indicator of buyers guessing at a bottom but I'm not convinced...yet :-)
Posted by Noah
Tue May 5th, 2009 10:27 AM
thats the info I want to hear! I have 3 contracts out right now Doug, but offer accepted for all are right in the realm of where this market seems to be trading.
I have bids in for 2 others, and I just lost a 2.5M deal to a higher bid that is now in contract in Tribeca. Im experiencing what you are, on a smaller scale.
However, almost every broker I talk to STILL fails to understand the macro environment, and the nature of this crisis and are putting all their focus on a this recent stock rally as a sign that the bottom is in and prices have floored. They say this. Its the same misunderstanding that occurred about 12-15 months ago. It is what it is and I love ya too!!!
I think this action is very much correlated with a bump in confidence, from VERY depressed levels, as a result of a 35% rally in stocks and signs of green shoots, as the media calls it. Ride it baby!! But fundamentally speaking, I will look at this market as one that is embedded in a longer term adjustment process.
Data doesnt lie and I bet that when Q2 comes in, it will prove that this will be the slowest first two quarters in terms of sales in the last 10 years. Brokers will never stop from spinning everything to positive (you aside of course, we need more trusted sources online). Im also on record for stating that I expect national real estate market to bottom at end of 2009, and for pace of deterioration to slow - Ill get more bullish on NYC when fundamentals or pricing gets more in line. First comfort zone was reached and Im way less bearish than I was 15 months ago now that process has started! Lets see what happens and how market trades summer/fall.
http://www.urbandigs.com/2008/12/noahs_2009_predictions.html
http://www.urbandigs.com/2009/02/inman_bull_vs_bear_video.html
Great to hear though, thanks!
Posted by In Debt We Trust
Tue May 5th, 2009 12:43 PM
What do you guys think of this weekend's Barron's article on commercial real estate? Accurate or just more mutual fund propaganda?
Posted by Noah
Tue May 5th, 2009 12:55 PM
link?
Posted by SRealist
Tue May 5th, 2009 04:22 PM
Noah:
As always, excellent article and very thorough analysis. If it isn't already obvious that you are one of the VERY few (actually, one of two, I respect Jeff Bernstein's analysis too) real estate professionals with both the intelligence and the integrity to analyze the market, this article should change that.
On a different note: it's obvious that the tone of reporting on the local real estate market has changed in the past few weeks as even the most resolute ostriches (NYTimes Real Estate Section) can not ignore that the market is noticeably weaker. I haven't, however, seen any articles that point out that often sellers are willing to rent out their homes at a price that is substantially lower than the cost to own the same place. I think that information has to play into a buyer's analysis. Deliberate obfuscation or lack of knowledge of fundamental analysis? Regards.
Posted by ted theodore logan
Tue May 5th, 2009 04:30 PM
Long time, first time... First off, I like this blog and the realism it portrays. If things are bad you'll say it, when things turn around you'll say it. With that said, I am in the market for a 1/conv2 UES place between $400K-$500K. I know the space won't be awesome, but there needs to be enough of it to make it livable (725+ sq ft). There are some compelling reasons to buy now; low interest rates, $8K tax credit, willingness to make it a 10 year investment rather then flip. However, the thing keeping us out right now is the potential low-end. For example, what will this type of apartment settle at (http://www.streeteasy.com/nyc/sale/391672-coop-435-east-77th-street-upper-east-side-new-york)? $450K, $400K, $350K, $300K, lower??? We aren't trying to time the bottom as much as we're fearful of buying, then watching our equity fly out the wonderfully lit living room. Hopefully your prediction of a 4Q2009-1Q2010 settling of prices come true. We shall see. Thanks again for the great blog!
Posted by khd
Tue May 5th, 2009 07:47 PM
TTL: I could not have said it better! We are in the same boat but looking to spend more for a similar sized place downtown. The great interest rates make us want to dive in, but there is a constant fear that if we buy now, our purchase will tank in price during the next year. I also believe that sellers are still not convinced they have to bring prices down significantly.
At the end of the day, no one, not even the wise Noah or Jeff, can predict where housing prices will go, just like no one can really predict the stock market. I hope that once we find the place of our dreams, it will be obvious, and affordable. Good luck!
Posted by Michael P New York City
Tue May 5th, 2009 08:47 PM
so, does this mean that a first time homebuyer like myself should jump in now or still wait it out ....ie is manhattan in for a much larger drop in the coming months/year.....i saw an apt this weekend and the broker told me in january of 09 you could bid whatever you wanted..ie lowball and more than likely get it but no longer....did i miss the boat here?
Posted by Noah
Tue May 5th, 2009 08:54 PM
Srealist - thanks! So true! Why? Because of the huge disconnect, and falling rents aint helping that analysis.
Posted by khd
Tue May 5th, 2009 08:55 PM
I don't think anyone can tell you when is a good time to buy. We have been looking for 2.5 years, have put in 1 low offer (over a year ago and was easily outbid--but NO regrets), we stopped looking for several months last year and now have really got back into aggressive searching. But, I still have reservations about buying. Having said that, there is a place out there I have my eye on that I maybe will bid on---but ~8-10% below the asking price.
Our goal is to live here for a long time (hopefully forever!), in which case buying now should be a great idea (i.e. even if whatever we buy dips in price in the next year, it will hopefully appreciate in the next 10-20).
If there is any chance you will be moving in the next 5 years I would definitely NOT buy.
Posted by hello
Tue May 5th, 2009 10:13 PM
Noah,
Please admit you were wrong. Just a few weeks ago, you mentioned that the uptick was a result of nothing more than foot traffic from curious but non serious buyers. Now you are acknowledging that in fact offers are being made and in certain cases, multiple offers.
It's ok to admit when you are wrong and not try to spin it.
Posted by Noah
Tue May 5th, 2009 10:30 PM
huh? there are deals at every price. A rise in foot traffic after a dead 4-5 months after Lehman, can FEEL a bit stronger than it is. Im submitting bids, yes, and I got a few contracts out. How does this make my statement from a few weeks ago wrong? Deals are happening right in line with where I stated the market seems to be trading. Im not allowed to submit bids as time goes on for clients or accept them for sales listings?
The point of the post is to downplay month to month observations and reports, and instead look at year over year trends. When you do that, this past few quarters are going to prove to be the most sluggish in past 10 years - paint the picture any way you like. That is the discussion here. I have no prob admitting Im wrong when I am. Im seeing a pickup in action yet this is my slowest start to a year in 4 years since I started sales. Lets keep it real
Posted by brenda
Wed May 6th, 2009 06:28 AM
Noah,
I am also noticing a number of apartments that are falling back out of contract. Not to be overly pessimistic, but I have to wonder how many of the thousand or so contract signings we've had over the last two months will actually close.
Most will be for less expensive apartments, is my guess. This will make the median sales price figure look mighty strange for this quarter.
Posted by Noah
Wed May 6th, 2009 07:27 AM
well one of my contracts out will be falling apart because the bldg has about a list of 10 things wrong with it, as found out by the atty for my buyer client - mainly that 25% of residents are in arrears. I wont name the bldg. The atty said that this is NOT a widespread thing but that the trend is rising across the city and worth watching.
The atty also said that she is seeing many contracts falling apart and many buyers having difficulty securing a loan commitment. her words, not mine. Ill get a more detailed update soon. But yes, you are right. Brokers will NOT ever want to discuss this trend and will likely accuse me of trying to 'bring down the market' or something. Its just reality
Posted by Former Seller
Wed May 6th, 2009 12:02 PM
I don't mean to toot my own horn here, but in regard to contracts not going through due to financing hurdles (rather than buyer/seller disconnect) I had been requesting discussion about this since September '09 because I predicted it would be a unique market dynamic this year.
Most recent time I did so- a part of a comment I made following the topic "The 'Disconnect' Continues - It's All Relative" back on Jan 27:
"I can give two more pieces of this picture that have yet to merit a blog topic or in depth discussion:
1. FINANCING: Last I checked we're still in the midst of a credit crisis, are we not? I had a buyer make a bid on my property in late December for what I thought was a reasonable price for the current market, and I agreed to it. The buyer had viewed the apartment several times during Nov-Dec. and despite my doubts assured me she had pre-approval for 80% financing from two different banks, had a perfect credit rating and solid income. Around the time we were going to contract, the banks had done some due diligence and said they would not guarantee financing after a closer examination of her income and the developing economic conditions. I consider this an example of a would be buyer, focused on buying a particular property for several weeks, but was kept out of the market by credit tightening- NOT an unrealistic price.
...."
Posted by Noah
Wed May 6th, 2009 12:30 PM
FormerSeller - I hear ya and I want more discussions on it too, but I dont get enough data or have enough sources to tell me whats going on with that! Wish I did. One can only imagine that its far more difficult to get that committment with tighter standards and lower appraisals today compared to years ago
Posted by Former Seller
Wed May 6th, 2009 12:46 PM
The type of discussion I was hoping to see is how the dynamic of how an ever increasing number of contracts not making it to closing (happens to be now due to tighter lending, but the reason really doesn't matter)- will affect market prices overall.
I'm sure that many, probably most readers here would be quick to say it will push prices down as the number of able buyers contract- and sellers would be more compelled to hit lower bids due to time on the market. If so, I think that reasoning would be flawed and lacks nuance. In any case, I think it would make interesting discussion, and I imagine informed predictions could probably be made even without concrete empirical data. Note: I'm not one who could make these predictions, but would want to hear from those that can.
Posted by brenda
Wed May 6th, 2009 01:58 PM
Former Seller, would you like to lead with a theory?
I think it affects confidence, both of the sellers and buyers. Many people, particularly at the higher-level market, have been looking for awhile. They see apartments go into contract and they feel things are relatively normal. When things then later start reappearing, it is a bit unnerving. The thought that you can sell in a falling market, but not really sell at all, means a buyer has even more room to sit on the sidelines waiting for deals to fall apart. And find the seller who eventually has to sell short.
Sellers are going to want to find the most qualified buyers, so as to avoid this process, and might lower prices so that their apartment is attractive enough to generate multiple bids, so that they can try and choose a "prime" buyer. But in Noah's case, where 25% of the owners are in arrears, they'd be screwed anyway unless someone is very stupid and has an all cash offer.
Posted by Ivan pintor
Wed May 6th, 2009 02:46 PM
As my friend Fern Hamberger would say " A deal is not closed and final till all checks have been received in the closing. "
I think what people want to do is get the traffic coming even greater by saying the uptick. Hey if it works great I am all for it. But I will still say we need to see a surge in job growth happen in NYC. So listen to Noah on what he states about the market in wall street.
Hopefully people that are buying and are going to buy place a larger down payment then 20%.
As for the Curbed site
http://curbed.com/archives/2009/05/05/broker_hold_your_horses_comrades.php
Well you are going to get some really annoying comments.
Posted by Former Seller
Wed May 6th, 2009 04:05 PM
brenda- My (novice, inexperienced) theory:
If sellers can be categorized this way:
A: Desperate sellers: Those that NEED to sell ASAP because they cannot service their debt much longer and will forfeit their property to the bank.
B: Motivated sellers: Those that can service their debt for the time being but are motivated due to a life change such as a new job or starting a family- or perhaps uncertainty about their future ability to service debt.
C: Investors / unmotivated sellers: Those that have no imminent debt service concerns but would like to sell either to reinvest or would prefer a change of place.
Of course, these are broad categories and there will be some shades of grey in between.
From previous discussions here about historical lending requirements in NYC I'd have to believe that those in A: make up a very small percentage of the overall pool of sellers in NYC, those in B: somewhat larger with C: being the majority.
Those in C: are probably the ones keeping the widest spreads in the market, and will put no pressure either way on prices, though one could argue that they'll hold out until "bottom" perception is accepted where they feel that good ole bidding wars are back- or instead that they're worried about becoming a B: at some point.
Those in A: will obviously put downward pressure on prices.
Those in B: are in danger of becoming an A: and the effect of seeing failed contracts will make them more aggressive in pricing as you mention, but I find it hard to believe that we're going to see a quick, punctuated effect on market prices; I think it would take a quarter or two before this dynamic really shows up in the data.
Given that the main barrier to liquidity is slowly moving from (lack of) buyer confidence to lending hurdles, price discovery is not completely clear after the '08 3Q and 4Q correction. All while this is happening, the fed and world economies are pushing and pulling levers in hopes of reversing economic trends and job loss. This adds another variable to price discovery as the year goes on, and could eclipse the issue of unreliable contracts.
Another thing I wonder about is a ratcheting down effect in property classes. Since a buyer can walk away from a contingency contract having lost maybe just an application fee, if they get right back int the market for a more modestly priced unit (one less than they thought they could afford), won't this have the net effect of bolstering the low and middle end markets- potentially pushing those prices up?
All just my thoughts for starters, and btw I'm just speculating that A: and B: are a minority of current sellers; does anyone have data to support or contradict this?
Posted by brenda
Wed May 6th, 2009 06:18 PM
Former Seller, it is extremely important to remember that during the slower months only a few hundred apartments go into contract monthly in a typical year.
It doesn't take that many people in category A to have a profound affect.
The ratcheting effect depends on why they didn't get a mortgage, and whether they are so determined to buy that they are willling to sacrifice what they were looking for. They may just as well be so unnerved by the process that they may wait until later, when the unit they didn't get may then be lower.