Keeping It Real - Less Bearish
A: People seem to forget that about 8 months ago I started to change my tone a bit now that the adjustment process started. It was back in November that I made my first statement about being "less bearish", and wrote..."This might surprise many, but I am a bit less bearish than I was 12 months ago when we were near peak levels...Today, a noticeable adjustment has occurred and the pendulum has clearly swung in favor of buyers". Recall that when I made that statement, this market was still frozen from the shock of the Lehman bankruptcy and government rescue of AIG. What took us so long to roll over still confuses me, but markets have a tendency of surprising us sometimes. Longtime UD readers know how bearish I was in late 2007 when equities were near record levels and trades in Manhattan were at peak levels. So to hear me start to talk about being "less bearish", should tell you something. I will always strive to keep it real, even if the market behaves in a way that is inconsistent with my general feelings about macro fundamentals and the new, less sexy world we are in. Ultimately, the markets are bigger than any of us!
That wasn't the only time I talked about being less bearish OR that a pickup in activity has occurred in our local marketplace. Here, take a look:
FEB 3rd - "I'm less bearish today because the process is happening, as a year and half ago I was way more more bearish than I am today. And as time goes on, I will probably become even less bearish."
April 2nd - "I'm way less bearish today than I was 12 months ago now that the process has started and equities have adjusted. 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."
April 16th - "Its hard to argue these forces although I am way less bearish today than I was only a year ago on Manhattan real estate because the process is happening. It must happen. It will happen. And we will get through it! This leads me to believe that at some point in the next few quarters you will see a bunch of quality Classic 6s, 7s, and 8s, looking mighty attractive!"
May 19th - "I was quite bearish for very real reasons 18 months ago, and now I am way less bearish than I was because the process started; but we still have a ways to go before a solid foundation can be built to sustain a recovery. Right now, I would update my 'muddled L' recovery to look more like a muted 'W' recovery with the final growth spurt a big question mark and more of a muddled stabilization for a while. It seems Keynesian stimulus will have its moment, although it will be temporary."
Enough of that, as you should get the point. But I took it further. I started to discuss the pickup in action from the frozen 4th quarter as early as late January, but was too unsure to call it anything other than a relative anecdotal pickup from a very frozen 4th quarter. Real estate is seasonal, and when we compare the first half of 2009 to previous first halves you will likely see the number of sales on the sluggish side. Month to month pickups can be misleading.
Moving on. As buyer interest gathered steam, I decided to call it a 'countertrend pickup in activity embedded in a longer term correction process', and I will stand by that call even today. I even went as far to devote a post to the surge in contracts being signed about two weeks ago, asking people whether they are noticing their Streeteasy saved searches going into contract.
But there is a big difference between a countertrend pickup in activity embedded in a longer term correction and a new, sustainable recovery for Manhattan home prices. This is where you will see me differ from others. Deals still seem to be happening in the comfort zone reached after the first wave down - a move down almost all brokers and executives either didnt see coming or thought impossible (my E 87th property went into contract over ask after being priced about 30% below peak levels - proof that markets dictate price, not brokers)! If anything, accuse me of being extremely bearish on Manhattan real estate in late 2007 and being less bearish starting in late 2008 when the adjustment occurred.
Fact is, there are many bids coming in and there are plenty of deals being signed. The pace of deals happening seems to be accelerating with the ongoing rally in equities - in other words, most of the action has occurred in the last 6-8 weeks or so. Inventory is coming in as a result right as we enter a time when new listings tend to decline with sales volume for the slower summer months - except sales volume isn't declining, its accelerating. Take a look at a chart comparing new listings to a weekly average of contracts signed and you can see what I mean (courtesy of UD charts):
In my opinion, the boost in buy side confidence is due to a few factors that I will list in order of what I feel is priority:
1) first wave down to comfort zone - definitely the most important. Tiered structure of correction due to nature of this recession with sharpest adjustment in high end and slightest adjustment in studio market
2) equity rally - the S&P is up about 40% in the past 12 weeks and that is boosting confidence; remember, the stock market is the stars and the most widely used gauge as to the overall health of our economy. The banks raised a ton of money, and the fed engineered the system to make banks profits soar. But a) will it last and b) what about higher quality debt classes still on and off balance sheets?
3) reflation trade - rates, stocks, commodities are all rising at the same time as a reflation trade is in place from massive fiscal/monetary stimulus. Many like to be in real estate to protect them from massive inflation and a devaluation of our currency. Time will tell if wage inflation and job growth occurs as onset of inflation hits.
4) rates - the combination of lower prices, confidence boost from equity rally, reflation trade, and possibility of higher rates is making many feel more comfortable to pull trigger to lock in price and low borrowing costs. Its very possible the next wave down is a result of another round of severe illiquidity because lending rates are significantly higher than what we got used to over the past 5-6 years.
Know that markets do not move in a straight line and there will be deals at every price. Real estate in general is very illiquid and even with the big uptick in action, some units are having trouble selling. And the most important thing people need to realize, is that deals are happening in the range that I discussed previously! It's not like you are seeing a sudden surge in the aggressiveness of bids with deals happening closer to peak levels. So don't mis-interpret this piece. We reached a comfort zone, prices came down, and because of the 4 forces I just discussed, confidence is up and bids are coming in! Its as if the wall street bonus season that is supposed to be active (we forget that this time of year is the busiest time of year for us), is on a 2 month delay. Rather than being JAN - MAY, its like the action really was from MARCH - present, and ongoing. I would not be surprised to see this action last a bit longer than normal, and continue until the end of June.
But make no mistake about it, this economy is still hurting big time, macro fundamentals are still pressured, and if the stock market decides to sell off again you will see the recent boost in buyer confidence slip away for a while until equilibrium is once again achieved by natural market forces. No one can predict exact bottoms and real estate is a very individual decision. There will be a time to talk about a sustainable recovery based on positive fundamentals, but for now, the best I can get myself to do is be less bearish than I was at peak. Whether or not another wave down comes is something I cant conclusively answer, but my gut is telling me we will have one. Plus, we are about to get some price discovery about where high end deals are happening at, and I think that will surprise many! Given the surge in activity from the dead 4th quarter, perhaps some deals are happening at the lower end of the pyramid range I discussed here before for each price point. Time will tell. For now, I still worry about higher rates, higher taxes, rising unemployment and other unintended consequences that come from a major earthquake like the crisis we just went through. Its hard not to expect a few aftershocks!
Comments (24)
I don't know why you are less bearish. NYC's entire economy has been propped up by TARP. Plus, there haven't been any big condo foreclosure sales. As the dust settles, the real estate market will take another strong leg down.
Posted by Poster | June 4, 2009 10:55 AM
Im less bearish because the market had its first wave down. Thats why. Here are where I see deals happening at.
HIGH END ($5M+) - down aprox 25% - 40% from peak
HIGH/MIDDLE ($2M - $5M) - down aprox 25% - 35% from peak
MID END ($1M - $2M) - down aprox 20% to 30% from peak
LOWER END (Under $1M) - down aprox 15% - 25% from peak
Posted by Noah | June 4, 2009 11:01 AM
There had to be a first wave; I just think there will be a lot more to come.
Even though some people have bought now, the buy vs. rent equation is still way out of whack and median Manhattan incomes will continue to decline.
Posted by Poster | June 4, 2009 11:56 AM
and I agree, I expect at least another wave down. What sparks it, when it occurs, or if we have a period of action before then is anybodys guess
Posted by Noah | June 4, 2009 12:15 PM
Noah (or maybe Jeff),
I'm writing from the perspective of a potential buyer of a $600-800K 1BR apartment in Manhattan.
-What is the premium (or rather discount) for making a cash deal?
-Where is this discount likely to be more significant - new developments or existing buildings?
Thanks!
-ab
Posted by ab | June 4, 2009 12:23 PM
in that price point, the discount is not as much as it would be if it were high end or mid/high end. Still, there is a premium, and perhaps 2-4% off where it may otherwise trade. How you figure out that level is another story. And depending on motivation of seller, that can change a bit in either direction.
Posted by Noah | June 4, 2009 12:31 PM
Whether the RE world is less sexy or not depends on one's perspective. As a would-be buyer and current renter, it never gets sexier than this. I've just renewed my rent and the owner quickly gave me a 30% discount on the merest hint that I am looking around for options!!! And as a buyer, I am taking my time while enjoying the respect and the most amiable treatment of brokers and owners, which I never get to enjoy much in the past.
Posted by Robert | June 4, 2009 1:42 PM
I think you mis-interpret the 'less sexy' statement. I discussed that many times before, as crisis was in its infancy. What I mean is, we will not see CREDIT and SECURITIZATION APPETITE go anywhere near what it went to during boom for quite a while. Sure lower ownership/rental prices are sexy, but that is not what I meant.
Posted by Noah | June 4, 2009 2:26 PM
Buyer,
I think being an all cash buyer might net you as much 10% to 15% advantage over someone else in price (FYI I am pulling that number out of the air - Noah is the residential expert) it is just a gut feeling. My gut feeling....surprisingly... is that you will get your best/easiest deal in an existing apartment. For a new condo development to offer big discounts they need to get permission from the bank. As I go through my zombie condo analysis, I don't see a big change in the average price per sq foot for units sold in late 2008 vs. 2009, which leads me to believe that many have not started cutting back hard on prices. Until a project really gets in trouble (the construction loan comes due and they are way behind on sales) and the bank realizes they may have to take some pain they don't start offering big discounts. Also for the most part it is difficult to get mortgages in these buildings and so most deals are cash deals already(my estimate is 60 - 70%).
Posted by jeff | June 4, 2009 2:43 PM
Those buying today will be underwater for the next 15 years while those who bought at the peak will be underwater for 20 years. There's your difference. So I guess I am less bearish now too!!
John
Posted by JKD | June 4, 2009 2:56 PM
Relative to the EUR or CHF...yea, they will be underwater for 15yrs....relative to the USD, i think buying anything in the middle range will be a winner....
that said, i have been long SDS and SKF for the past 2 months...whatever i say do the opposite and you will make money
Posted by wall street | June 4, 2009 3:02 PM
Anecdotally, since moving back in to my 1BR 2 buyers had seen it back in February but made no bid. They had contacted my broker and made lowballs last week, each of which I probably would have worked with back in Feb to sell and avoid having to make a major change to near term living plans. I explained that we were now settled back in, not motivated to sell now. Both improved their bids each about 15% this week. Again, anecdotal (as all of my posts here are) but if they hadn't tried to time the "bottom" of the market they probably would have gotten in at it. BTW- I'm referring to the near term "relative" bottom; I'm not yet convinced the recent rally will stop a long term decline.
Curiously, I'm wondering if others here are less bearish now...
Fred 1/13/09
"If buyers dropped to 2002 prices, there would be a sharp increase in volume transactions, easy. $500 psf is where it's going to end up because thats the long term relationship between home prices in Manhattan to median income."
condo_shmondo 2/27/09
"ye old truthteller. You are too bullish. I really think will see NYC turn in a post-nuclear wasteland within the next 24 months. Penthouse co-ops on 5th Avenue will be left bare and be housed by homeless crack-addicts"
HT 3/2/09
"If I would be a motivated seller I would try to get ahead of that freight train called DOW and APRIL."
Allentown 2/26
"I'm in the money, hello my honey. I've got $100,000 tucked away under my matress and that new build condo that was listed for $1million in 2008 ... its finally mine !!!!!!!!!!!!!!!!!!"
Thisson 2/2/09
"Brokers need to see that nobody is hitting the overly optimistic asking prices and feel enough confidence to break the news that to move properties, sellers are going to have to take losses."
Truthteller
1/13/09
"Another word to sellers, price your crappy apartments to sell, that means price then at 2000 prices and you'll get a few buyers to come out."
1/20/09
"Prices will bottom at a 1995 price point and not a dollar more."
1/27/09
"seller, very simple. Sell today at a price someone will pay or sell in six months at a much lower price."
Posted by Former Seller | June 4, 2009 4:07 PM
FormerSeller - I always enjoy your comments. Hmm, I wrote about a month ago or so how the tick up in traffic is being passed on to sellers and that here is a good chance they get less motivated to hit a low ball bid that was common in the months of OCT-JAN, after Lehman, when no bids at all came in - well not unless they were uber low.
Add in stock rally, and sellers are even less motivated to hit low bids unless their financial situation is pressured. Its so individual and hard to generalize. Even with this pickup, I know a few colleagues with properties that they still cant sell, sellers desperate, and price cut drastically to represent significant move down from peak. Still no movement. Dark, unrenovated, poor light/view, poor layout properties in this market are still very hard to move.
Posted by Noah | June 4, 2009 5:02 PM
As you pointed out in a recent topic, this uptick has every appearance of being seasonal rather than a bottom reversal, so I wouldn't be the slightest bit surprised if we start seeing some seller competition and bid-hitting again in mid summer... but I wouldn't be shocked if we didn't either; the RE market hasn't been obeying the underlying macros.
I posted mainly for entertainment value, because it's just as funny to see flawed or irrational sentiments overshooting the bearish side during a burst as it is see the exact opposite during a bubble. I must say though- I've been using the 'anecdotal' disclaimer with all my posts in regard to my personal experiences throughout the past year but all these experiences closely reflected the trends, so perhaps they're not so anecdotal :)
Posted by Former Seller | June 4, 2009 6:24 PM
Iven - I have no problem w Rogers, in fact I'm pretty much on his side of the trade. It just amuses me because he's saying exactly what he's been saying for the past 2 years. Can't fault him for a lack of consistency, that's for sure. My point is simply that his proclamations aren't news, since he's been saying it all along. What makes this newsworthy is that the market is finally going his way.
Posted by yournamehere | June 5, 2009 9:48 AM
Iven - try this again (having trouble posting). I have no problem with Rogers' logic. In fact I'm largely on his side of the trade. It just amuses me because what he's saying now is exactly what he's been saying for the past 2 years. No difference except he's closed his shorts and the market is on his side finally. He's very entertaining.
Posted by yournamehere | June 5, 2009 9:56 AM
Prices will no doubt reach levels of 2002. It's obvious to anyone who lives and works in Manhattan.
Posted by Big Perm | June 5, 2009 11:33 AM
Prices will no doubt reach levels of 2002. It's obvious to anyone who lives and works in Manhattan.
Posted by Big Perm | June 5, 2009 11:33 AM
Noah or Jeff: I started the process of selling my apartment in February because I was worried that the real estate market might get worse, not because I was financially forced to sell. Recently, traffic has picked up (it has a good layout, good light, and is renovated) and I received an offer that is 75-78% down from the peak; I had priced it 85% down from the peak. My apartment is selling in the 900s, so it's in the "lower end" market. I'm worried that if I sell now, I might not be able to afford a similar apartment in a couple of years. Here's why: if we experience mild inflation, the Fed would keep rates reasonable, and asset prices (including residential real estate) will rise. The low interest rates would make it affordable for buyers. Banks that are overly-cautious now will need to redeploy their capital, possibly into residential mortgages.
Also the California market has bottomed and is experiencing increased transaction prices, according to the WSJ. Will we see increased transaction prices in New York soon? People didn't think California was going to come back so soon, and yet prices are starting to rise.
Can you tell me why all this wouldn't happen? Maybe I should take my apartment off the market before I sell it at the bottom?
Posted by sellerinmanhattan | June 5, 2009 12:00 PM
Formerseller: I am not less bearish, because I still see that the people I'd expect to live here are getting clobbered financially. Big firm lawyers are still being fired, and the ones who keep their jobs are having their salaries slashed.
A fresh example from yesterday:
http://abovethelaw.com/2009/06/kilpatrick_stockton_pay_cut.php
Also, for Noah, a new article posted on the continual decline in hotel occupancy rates:
http://www.calculatedriskblog.com/2009/06/hotel-occupancy-rate-falls-to-516.html
Posted by Thisson | June 5, 2009 12:23 PM
Big Perm, I've lived and worked in Manhattan for 15 years. I confess nothing is very obvious to me right now- but maybe it's just me who doesn't have a clue. Any particular reason the market will go to 2002 levels and not 1998 or 2004 levels?
Posted by Former Seller | June 5, 2009 12:25 PM
Sellerinmanhattan: it may be premature to call a bottom in California. What will RE prices do if property taxes skyrocket to fill CA's $40+ billion budget deficit?
Posted by Thisson | June 5, 2009 12:25 PM
Former Seller,
June 8:
Robert Shiller: "U.S. housing prices are in the midst of a decline that may last for years."
Whitney Tilson and Glenn Tongue, co-founders of T2: "Indications that the housing market has stabilized look like the mother of all head fakes."
Posted by Big Perm | June 8, 2009 4:43 PM
First time home buyers face many challenges in understanding the process of purchasing a home, obtaining a mortgage, and knowing which type of loan will best suit their needs. Advice from well meaning loved ones can be helpful, but buying a home is a major financial commitment and you would be wise to educate yourself on the home buying process before taking the first step.
Posted by Lake travis houses | June 12, 2009 1:29 AM