'Armageddon' Price Discovery To Come First
A: Folks, I'm still not 100% here and off for next few days but wanted to discuss an important topic. The first two quarters have been nothing short of intense as we seemed to experience a shift in psychology from 'Armageddon' to 'Green Shoots / Reflation' over the course of just a few months. Isn't it amazing how quickly confidence can change? The nature of our markets is that there is a 2-3 month time lag between contract signing and closing, sometimes longer if financing is hard to line up. Which puts us in a very interesting spot right now. For the most part, the closings that we will see now will reflect contracts that have been signed in February and March - that period of time when Armageddon was on the table and stocks were on their way down to the Haines' bottom. If you go back into time & place, and then compare it today, there has been quite a shift in general psychology that has affected both buyers, sellers, and brokers. Lets discuss briefly.
You may have noticed many of your listings on Streeteasy go into contract the past 5-7 weeks, as this fierce rally continues and green shoots are discussed everywhere. I have reported on this pickup a number of times and the reasons I think for it. Many seem to think there is a reflation trade going on right now with the massive stimulus (both fiscal and monetary) taken to stem this crisis - clearly the worst bout of debt deflation since the great depression. Combine the first wave down, with low rates that many feel are going higher, and a 40% surge in equity prices and you have the makings of a nice tick up in action. Sustainability is another equation that is not for this discussion.
Now, for a moment, put yourself back into time & place to February and March - what do you see? Here is what you see...
a) first wave of illiquidity hits Manhattan real estate after Lehman, seeing real estate activity stop for 5 months
b) first wave down in price adjustment
c) banks are still in serious trouble and failure isn't off the table of a major bank - bank stocks are trading at depressed levels
d) stocks in general are in a plunge on their way to the most recent lows, hit March 9th, 2009
e) fear level was HIGH
Combine those forces and put yourself back into time & place and this market was still quite sluggish, after 5 months of being frozen. There were signs of deals starting to happen and the high end was getting hurt the most. Sellers that had to sell, for whatever reason, had few bids to hit. Those that did get bids, strongly considered hitting them - and in fact, many did. Lets call the months of OCT - FEB, the fear factor months that defined the first wave down - an adjustment that almost every broker previously denied as even possible. Lets take a look at how the equity market selloff to the lows, the fear factor, the bank recapitalization, and then the equity surge looked over the first two quarters of 2009:
Now, what you need to understand is that the deals that were signed into contract at the tail end of the fear factor months will close first! So, the second wave of price discovery that trickles in AFTER the first wave down in prices will reflect the deals that occurred in the fear months! So don't be surprised to see some crazy prints get recorded, because they will reflect a much different period of time than when the numbers are discovered at today.
Case in point. Take a look at 490 West End Avenue, 9B. This is a classic 7 (3BR/3BTH + DR + MAIDS) that needed some work and whose price was reduced from 2.45M to 1.975M over the course of a 9 month listing history. The listing entered contract on March 12th, 2009, 3 days from the stock market lows and right at the end of the fear factor months! Then we get price discovery as the sale gets recorded for $1.5M! This is a prime example of how the Armageddon price discovery will occur first.
Now, what remains to be seen is whether these types of sales are considered outliers from a temporary blip in the market when fear was at an extreme. Or, will buyers use this as a new baseline to submit bids too? I'm thinking somewhere in the middle for at least as long as this equity rally sustains itself. Certainly, the world today is not facing Armageddon and a systemic bank failure seems all but off the table. That is quite a change from 3-4 months ago when nobody could say for sure what may happen next - so, it must properly be priced out of deals, for now. Not only that, but today's world is witnessing a stimulus induced equity rally around the globe that is boosting confidence in a reflation trade and perhaps a V-shaped economic recovery. Time will tell whether this is sustainable or not. For me, you never know what might issue in another wave or two of illiquidity similar to the months after Lehman's failure - and I don't buy into a V-shaped recovery.
The shift in psychology was not only dramatic, it was amazing to be honest with you. It is affecting buyers, sellers and brokers alike. Buyer activity has picked up big time from the fear factor months, as buyers get more willing to submit a bit in the lower end of the pyramid range of where deals seem to be happening at based on price point - certainly, prices aren't rising nor are deals happening at peak levels. Traffic is picking up, brokers are reporting on it, and sellers are learning of it. As a result, sellers may not be as motivated to hit a bid that otherwise might have been hit during the fear factor months. It's so individual and by no means are things flying off the shelves! Deals still seem to be occurring in the range I provided months ago, yet at the lower end of that range due to the shift in psychology.
This means that in a few months from now, we will likely see deals closing at levels above the fear factor months - but we will have to go through the Armageddon discovery phase first! Interesting times indeed! Expect to see the biggest surprises in the Classic 6, 7, and 8 market as deals start to close from contracts that were signed when the fear level was much higher than it is today! This is due to the higher end nature of this crisis.
Thoughts? Examples of others? Would love some reader insight here!!
Comments (24)
Noah -- nice article. We have discussed the problem with the charts earlier. However, if you look at the charts there has been a remarkable decline in listings and contracts in the last week or two. INventory is still going down.
Are these two real or an artifact of the charts?
Posted by joedavis | June 9, 2009 5:56 PM
well many sellers take listings off market as we enter summer and I think many listings went into contracts over the past few weeks, which will remove it from the inventory data.
inventory surged big time, so a tick down is not so suprising considering what is going on now, the pickup in activity the last few months, and that some seller dont want to sell for uber low prices if they dont get any other bids. That is, if they dont have to sell
Posted by Noah | June 9, 2009 6:00 PM
Noah - good past as usual. I think you may be right that we will see closings above the Armageddon trade in a few months time. That said, mortgage financing conditions (both the cost and availability of credit) are still very tight and getting tighter. In addition, most people are still underwater in their portfolios versus Q307 levels. With such an obvious reminder of the ephemeral nature of paper wealth, I am betting many people will be very reluctant to part with large slugs of cold, hard cash in the form of 20-25% down payments (if they even have it). That is, of course, until prices reflect fundamentals (still rising unemployment, contracting GDP) and allow for still high downside risks (cratering commercial real estate values, further hits to consumer confidence). On an aside, I am short a few of the consumer discretionary businesses that have run up 100-200% since last fall...
Posted by WestSideMan | June 9, 2009 6:51 PM
I signed a contract to purchase a 3 bedroom / 1.5 bath coop in the Lower East Side back in the middle of March. Unfortunately, "green shoots" have led the coop board to exercise their right of first refusal and purchase the shares directly from the seller at our contracted price. My wife and I are left heartbroken with no apartment and the last 3 months of our lives wasted on preparing the board package, lining up financing, etc. We even went through the board interview, spending days preparing for it. They decided the day after our interview to purchase the shares directly.
Posted by veeman5 | June 9, 2009 7:47 PM
veeman5 - WOW! I didnt think a coop board would do that, let alone out of their reserve fund. I know a condo had the right of first refusal. I thought the coop could simply reject if they thought the price was way too low and adversely impacted other shareholders, leaving the seller out of luck and the unit back on the market.
I didnt think they would buy the shares directly. Seller got lucky if you ask me. So the deal closed then, and the board purchased? care to disclose the bldg or the % from peak that the deal occured at?
Really fits in to the FEAR MONTHS that I described above and I am sorry you had to experience that. Thanks for sharing your story and I wish you the very best moving forward!
Just crazy
Posted by Noah | June 9, 2009 7:51 PM
If you take runaway inflation off the table, is there any conceivable justification for an end to the slide in housing prices in NYC? True, sellers might wishfully continue to refuse to hit bids they deem lowballs for as long as they can, but look at all the ghost towers and new condos coming on line that soon will either be rentals or sharply discounted sales (soon meaning next 6 to 18 months). Smart buyers will turn into smart renters and will be able to win the standoff with condo owners in the sale market. I mean, the purchase/rental cost ratio is ALREADY enormous. I have been looking to rent in the $8500 range for a couple of months in Soho/Tribeca/Chelsa area. Many of the places in that range also are listed for sale, with prices that would imply (assuming 30% down) monthly carrying costs in the $12,000 to $15,000 FOR THE SAME APARTMENT (and require downpayments north of $600K). Honestly, other than as a play against inflation I don't see it, and inflation seems to me like a longer term concern anyway (like after jobs start coming back in 2010 or 2011).
Thanks for your work, I really enjoy reading the blog.
Posted by Mitch | June 9, 2009 8:52 PM
Noah - on several other threads, I have stated that when viewed in aggregate, the quarterly numbers will look less spectacular than what people expect based on the prevailing mood as reported by the media and expressed on the RE blogs. Q1 09 bore this out, as average PPSF went down around 3%. The reason for this as you obviously know is that in any given quarter, closings are recorded for properties that went into contract anywhere between 18 and 2 months earlier. This wide range of price points mutes the quarterly numbers.
I suspect that the average PPSF number as reported by Miller in Q2 will probably see another 3 - 5% decline as there will be more properties closing that went into contract Q4 08 and Q1 09 which were the Armageddon periods. There will, however, be properties that close in Q2 that went into contract pre-Lehman and these will help buoy the average and median numbers.
I suspect that we will see mid-single digit drops in average PPSF in the quarterly reports through the end of the year, with an uptick in Q1 2010.
I will be the first to concede that the average PPSF is a trailing indicator, and not particularly reflect of the market at any point in time, but I haven't seen a better metric that is regularly reported out there. Median PPSF would compete, but I don't know anyone that reports that number.
Posted by OT | June 9, 2009 8:55 PM
Mitch - I think the case of the new dev condos is somewhat unique and not necessarily indicative of the broader market conditions. As you point out, the condos with greater than 80% unsold units are in for a tough ride, and many will convert to rentals with lower price points than we have seen. However, I think the phenomenon of people moving back in from the boroughs will help stabilize this market somewhat.
When we ran the numbers for rent vs. buy in prime UWS (not CPW, but close), with 30% down, we are actually paying less for our place when factoring taxes than the rental for a unit in the same line - and we bought in 2007! So the 2 markets exist separately and are driven by very different fundamentals. If you can rent the same unit for less than it would cost you to purchase, then you should rent.
Posted by OT | June 9, 2009 9:02 PM
veeman5,
Was the apt. in co-op village? I've owned there for a long time and it is not uncommon for the board to purchase the shares direclty when the sales price is too low. One reason they do this is because they assume that the price is artifically low since the seller is taking money under the table in order to avoid paying the flip tax. In the past, several sellers have done this to avoid the tax, but the board eventually caught on. So my guess is that the sales price in your situation was far enough below the comps to raise eyebrows.
Posted by Donald | June 9, 2009 10:55 PM
Noah - the apartment was in Coop Village (East River Housing Corporation - 570 Grand St.). The contracted price was 30% below original listing price (not sure if that's peak or not).
Donald - the point that leaves a bitter taste in my mouth is that the board knew what the contracted price was for several months. Why go through the board package, interview, etc. before pulling the rug out from underneath us? Also, the apartment was listed since September with no bids; similar apartments also have been sitting around for over a year. It's too bad for us that the board wants to determine what "too low" a price is. Feels like the board is doing the same thing the Fed, US Treasury, etc. are trying to do by artificially propping up prices. I can't imagine that's what shareholders would want their reserve funds used for. And, eventually, there has to be consequences for these types of actions. In any case, there isn't much I can do about it. We have no choice but to wait for another opportunity.
Posted by veeman5 | June 10, 2009 7:53 AM
Noah -
According to the "Manhattan Real Estate Data" from Streeteasy that you have on the top right of your site, the daily number of new listings is always larger than contracts signed. This has been the case for a few months (with the exception of one or two days). Doesn't this imply that inventory is quickly growing?
Posted by Clive | June 10, 2009 10:23 AM
I know of one 6+ room Park Avenue apartment where the seller is close to accepting an offer 50% below their original asking price.
Posted by Poster | June 10, 2009 10:28 AM
Noah, I agree with you in general with regards to fear and overshoot. My feeling is that there are buyers coming out of the wood work, and these buyers feel like they missed the boat on the mega rally in RE prices over the last 7 years. A 30% decline in RE prices seems like a reasonable entry point, but I think it is still very expensive because of the following reasons:
- Unemployment remains high and will still increase in the near future.
- Shadow inventory – A Big Issue
- There may be more defaults coming after the unemployment benefits, severance and reserves have been depleted. My guess is that the inflow of cash will disappear soon.
- Equity market will not rally forever.
- Compensations are way down from 2006 and 2007. The top guys will be well compensated, but that is it.
- Currently, it is the high season for RE, and if the sellers didn't exit at this point, they will be holding on to their property for another year.
- Madoff and other scams have cost the rich a lot of money where did it all go. With 50B gone, the rich is getting poorer. This is just from the Madoff scandal there are a few more other, which I did not mention. So it is probably 60-70B + gone.
- The key factor – low demand due to less income and less saving and large supply of apts – It is a recipe for RE prices to continue to feel the downward pressure.
Noah and others, please feel free to comment. I wish I was wrong and that the economy will grow since lower RE prices, high unemployment and lower income are not good for anyone.
What is your opinion on the below article?
http://www.smartmoney.com/investing/stocks/true-or-false-u-s-economic-stats-lie/
Posted by Jabba Walkie | June 10, 2009 12:13 PM
The top issues facing NYC residential real estate at the moment are:
1) Unemployment, continuing to rise
2) Deflation and declining salaries/bonuses
3) Rising Yield on the 10-year bond
In my opinion, these three factors all point to continued price declines. Armageddon may be off the table *for now*, but may be back on the table again in the near future.
Posted by Thisson | June 10, 2009 12:41 PM
"I know of one 6+ room Park Avenue apartment where the seller is close to accepting an offer 50% below their original asking price."
No you don't. That BS myth was recently dispelled by NY Magazine. Many people made the same claim about a buyer in the Hamptons snapping up multiple properties for 50% under asking, but a search of the tax records found no evidence. Now that they've been caught, the same people are chaning their story to incldue Manhattan. Please let this silly rumor die.
Posted by Donald | June 10, 2009 1:26 PM
Donald, Where do you find the tax record for the Hamptons? Acris?
Posted by Jabba Walkie | June 10, 2009 3:23 PM
Donald,
This is not a silly rumor. It's a real-time report from the field.
Posted by Poster | June 10, 2009 8:26 PM
@ Jabba
I do not know where to find Hamptons data. However, the NY Mag article I referenced is below
@ Poster
If it is not a silly rumor, then post the address of the apt that is selling for 50% below ask.
http://nymag.com/realestate/realestatecolumn/56593/
Posted by Donald | June 10, 2009 11:23 PM
I am not sure I accept that the RE market psychology moves that much in sync, but a thought-provoking analysis, Noah. Indeed, I considered the question of how to treat your Armageddon pricing for comp purposes going forward in a post today about 2 loft sales at 144 West 18 St.
Long story, short: identical lofts on market at same time; one drops quickly and often, closes in December at $1.675mm; the other drops slowly, finds contract in April and closes last week at $1.425mm. They got *hammered* for being slow to change. How deal with these as comps??
@Donald: how's 46% off for you? I will blog about this at some point, but #6A at 43 West 64 St was offered first in November 2007 at $7.995mm; closed May 12, 2009 at $4.36mm.
Posted by Sandy Mattingly | June 11, 2009 10:19 AM
Is it June 20th already?
Posted by sechel | June 12, 2009 6:46 AM
Donald - wait until you see some closings at 1165 Park...15C...i bet it will be around 40-45% off peak levels
Posted by Noah | June 12, 2009 8:51 AM
45% off peak isn't cheap enough.
It's got to go lower. Much lower.
Posted by Thisson | June 12, 2009 3:02 PM
whoever had the board pull the rug out from them was done a favor. i bought in July 2008 and have buyers remorse to the point where i may need to sit down on somebody's couch soon :-)
Posted by Anthony | June 24, 2009 7:27 PM
whoever had the board pull the rug out from them was done a favor. i bought in July 2008 and have buyers remorse to the point where i may need to sit down on somebody's couch soon :-)
Posted by Anthony | June 24, 2009 7:31 PM