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Quick Manhattan Snapshot: Market Pricing OUT Fear

Posted by Noah Rosenblatt on June 30, 2009 at 10.26 AM

A: I have been too busy to blog lately, which is nice of course, but wanted to give a quick snapshot of what I see out there - take it as such, a quick snapshot of what I see out there. Basically what has happened over the course of the past 2-3 months is an acceleration of activity from the March lows, as this market priced OUT Armageddon. Strange to hear it that way, but basically that is what I see happening. I see deals happening at slightly higher levels today than only 3-4 months ago because of the shift in both buy and sell side confidence - leaving out whether this shift is warranted or not. Does that mean a new sustainable bull market, of course not. It means we went through some extreme times, and the market is adjusting and equalizing. While every price point has been affected by this crisis and trading in their own unique ranges down from peak, it seems transactions taking place over the past 7-9 weeks are not as pressured, or 'fear based', as those that took place in February and early March when fear was highest. The shift in psychology from fear to reflation/confidence is responsible; and a 40% equity rally from the lows + a wave down in prices helped that shift to occur. Looking at inventory trends, you can see this shift rather clearly. Don't forget though, the fear months will close first - so we will have to wait 2-3 months to see the 'less pressured' deals I am referring to here.

Contracts continued to be signed and you may have noticed some listings on your radar exit the active marketplace. Combine this activity with listings taken off the market for seasonal reasons, and you see a notable reduction of active inventory over the past 2 months. Take a look at Manhattan Active Inventory trends both before and after the March lows and know that there was a bit of a lag for the confidence and action to get going - mid April to mid June were noticeably active and the trend started to reflect this in early May:

Now, you must keep in mind where we came from and understand that very few trends go in straight lines forever. There are blips, bumps, corrections, retracements, and countertrend surges - all in the way natural markets behave. To ignore the increase in inventory and only concentrate on the last 2-3 months to build a sustainable bullish argument, is flawed. Always look at where you came from. Nevertheless, this market seems to me to continue to be active and I can see this trend continuing for a bit longer before we head into the normally slower summer months! Time will tell how this summer compares to previous ones, considering how different this year has become - I am referring to a wave down in prices that most thought impossible only a year ago.

Here is the trend in contracts signed, at a lag of course, that is displayed as a weekly average so to avoid the spikiness that comes from little to no data updates over the weekend. You could clearly see the pickup in activity that was discussed here months ago:

I would expect confidence to continue to mirror the equity market and major headlines moving forward, on top of seasonal changes in activity for the 2nd half of the year. Should you see a deep correction in stock prices, expect to see activity dry up again for our local marketplace. On the flip side, should stocks continue the rally and surge, sellers will be less motivated to hit a low ball bid (unique financial circumstances aside) and I'm sure brokers will continue to benefit from a ready, willing and able buyer pool - lets see how sellers, appraisers, underwriters, and co-op boards react. Predicting a shocking event or a systemic risk at this point in time, seems dangerous given the path taken by the fed and government. This is evident in the fall of the VIX to its lowest levels since Lehman's collapse - a lower VIX means fear is subsiding and traders view this as a contrary indicator (a low vix may mean complaceny sets in, while a high vix may mean fear is peaking). How long it lasts is another story as the markets seem to be pricing in a V-recovery and not a deep, prolonged, or W-double dip recession possibility - will the market be disappointed if data doesn't come in to support this?

For those trying to Price In Downturn Risk right now, you are probably finding it harder than you previously thought; especially if you were seriously bidding in the fear months of February and early March! When fear was high then, pricing in future downturn risk was easier to get away with as sellers desperately hit bids after 4 months of severe illiquidity / stocks falling to lows / and systemic risk high. But today, with the market pricing out Armageddon and total collapse, I'm sure you will see deals happen at higher levels than what units in contract 2-3 months already are closing at now from the fear months - the lag of property transactions at work. Strange and interesting to see how Armageddon discovery comes first and whether buyers will consider those deals outliers or the new baseline for future bids. Don't forget, that while the buyer dictates the value of any property at any given point in time, it is the seller that must sign off on it. Therefore, you can't discount the psychology changes that came on the sell side as well as the buy side, as traffic heated up and bids started to come in at stronger levels. For me, I still focus on the buy side as a gauge to current marketplace health. With that said, let me be perfectly clear that this market is not a frenzy like it was in early 2007 and deals continue to be had at the noted range discounts discussed here previously for each price point - albeit closer to the lower end of that range now that Armageddon seems to be priced out of transactions.

Interesting times indeed and remember, don't look in the rear view mirror if you want to look ahead. And don't analyze a seasonal market by focusing on month to month changes! When Q2 data comes out in the next few days, expect a significant tick UP in contracts signed from Q1 to Q2 but a drop in closed number of sales on a year over year basis! Because of the lagging nature of our markets from contract signing to closing, we could see a rather bullish Q3 sales number down the road - reflecting the active market from mid April to present! Its the sustainability of this activity that I call into question and as we get deeper into the summer, I would expect things to quite down a bit again in line with the seasonal nature of our marketplace.

Comments (32)

Time for a lot of people who frequent this board to eat some serious crow. I am eager to see the Q2 numbers. 50% down... Ha!

Posted by OT | June 30, 2009 11:02 AM

Re: the vix comment. When I see headlines like that , it is a serious contrarian indicator as it indicates that traders are getting complacent.

Posted by In Debt We Trust | June 30, 2009 11:40 AM

Most of the shit on the Banks' balance sheets hasn't hit the fan yet.

What is going to happen when Fannie and Freddie's loan portfolio's crater and they beg for bailout cash?

What happens is AIG's $200 billion in interest rate swaps go bad?

What happens once California cuts spending to finally balance its budget?

What happens when all of the laid-off people start raiding their 401ks to pay their living expenses?

I am still predicting deflation and a continuing decline in RE prices.

Posted by Thisson | June 30, 2009 11:45 AM

Thisson - im still with you and you know my thoughts on Wave 2. With that said, we can easily have a spurt for a while longer before that all comes out. A W-shaped recession, a double dip, seems very likely although I wonder if 2nd dip will be anywhere near as severe as the first. Interesting times indeed.

Also, see the headline on prime delinquencies?

http://www.bloomberg.com/apps/news?pid=20601087&sid=amq8v.M.ak60

Posted by Noah | June 30, 2009 11:47 AM

INWT - yep, I start to think same thing. But I still feel like market can rise, even though I have shorts on that have been painful for months now, hitting stop losses, reloading, hitting stop losses, reloading lower, ugh..bottomless pit for some of these. Decay factor sucks with these etfs

Posted by Noah | June 30, 2009 11:56 AM

Off topic a bit but does anyone know how the auction went at The Beacon this weekend?

Posted by Don | June 30, 2009 1:24 PM

Noah,

This stage of price discovery is called "Dead Cat Bounce" by many seasoned traders, basically fools rushing in.

Posted by mgnyc | June 30, 2009 3:26 PM

An uptick in activity in the active season(with a bear market rally underway in equities to add some fuel to the fire)hardly a surprise. The best of the best is trading but far more is sitting idle. I have a studio for sale on 12th street between 5th & 6th ave, approx. $700F2, doorman, solid building-still available. Sure many attend the open house a few bids that have not been acceptable. Your widget is still showing over 10,500 units, although surely less than perfect data-it does offer perspective.

It's good to see you a bit "positive" Noah (lol), but this "good news" is really reaching IMHO.

Posted by Keith Burkhardt | June 30, 2009 6:46 PM

ha Keith!

Well, ALL OF you guys know that my feelings are this is nothing more than a COUNTERTREND SURGE IN ACTIVITY EMBEDDED IN A LONGER TERM ADJUSTMENT PROCESS!

But for those that like real time feedback here on what I see, sometimes I must admit there is action and things are moving, to continue to keep it real.

I even say this to clarify so people dont get confused by these front line reports every now and then:

"Its the sustainability of this activity that I call into question and as we get deeper into the summer, I would expect things to quiet down a bit again in line with the seasonal nature of our marketplace."

For now, it is what it is.

Posted by Noah | June 30, 2009 7:07 PM

Noah - While I agree with you in general, I will have to ask if these current buyers look at any meaning ful data before purchasing. Obviously not. C/S came out today and the NYC Metro area is falling at a 1.67% MoM clip which is over a 20% clip yearly rate. While the rest of the country slows, NY Metro area is accelerating. This is essentially following RE boom bust cylce in the past that shows NY lags in and Leads out. I also have to agree with you in how sustainable is this. Probably not very since the govt has countless programs to artificially inflate the market. I mean, how much longer can they print $$. At the end of the day, the long term avg of rent to price and income to price have to come in line and we are still not there, evevn for this region. Even the DB NYC metro area Real Estate report, which I believe came out last week, says this. Although they are far more bearish in saying 40% more decline from March of 2009.

Posted by Brian23 | June 30, 2009 8:58 PM

Clearly the recent activity by buyers is misguided if you look at "non-broker" reports, i.e. Deutsche Bank and Goldman report.

Here's the link to DB report.
http://matrix.millersamuel.com/wp-content/6-2009/US%20Home%20Px%20Outlook%2015%20Jun%2009.pdf

They call for another 40% downside in NYC prices. Goldman had a similar number. Difficult to reconcile why buyers would be buying right now with this kind of overhang. Personally on the sideline as well and don't see it a risk. It's difficult to conveive that NYC would have a V shaped recovery.

Posted by Cons | June 30, 2009 9:36 PM

I love it - bears coming out saying "really no surprise that we're seeing an uptick this Spring". BS - many of you called for armageddon this quarter. Many of you continue to call for armageddon based on esoteric financial analysis that doesn't necessarily have any influence on NYC real estate.

Frankly, I see prime Manhattan remaining quite stable over the next few years as people who are intent on buying stay away from shaky new dev situations, and away from the "hip" neighborhoods. I have said this for over a year now and my anecdotal experience bears this out.

As for the geniuses at DB, GS, etc., are you guys seriously pointing to that as proof positive of a decline!? Aren't these the same bozos that invested billions of their own cash in subprime and other toxic debt?? Come on people, WTF!

Posted by OT | June 30, 2009 11:36 PM

OT - If you dont like the DB and GS report, then you can refer to the Case/Schiller Index Numbers. We are still over 26% elevated in terms of price in the NYC Metro area from the avg for the last 19 years. The Actual index number came in at 170 and the avg through the 90's and 00's combined is only a 122 while rent to price and income to price ratio's are still out of whack. The bottom line is, which ever metrix or report we use, prices still point to further decline in the NYC region, which follows NY as laggin in and leading out of housing recessions. This one is no different.

Posted by Brian23 | July 1, 2009 7:34 AM

Also, the avg for the C/S Index for the 200's is a 167. We are still above that and to think that we will stay at the bloated levels of this decade and not go below these index levels might be a little naive.

Posted by Brian23 | July 1, 2009 7:37 AM

OT, you can wish whatever your heart desires, but (Noah's correctly reported uptick in activity notwithstanding) if you go to streeteasy or any other listing's database you'll see that there are 20 or 30 price decreases per increase and that many are substantial. So you'll have to predict when do you expect the NYC RE market to start stabilizing, 'cause that's not what's going on right now.

Posted by Trompiloco | July 1, 2009 10:15 AM

C/S index is useless in evaluating prime Manhattan properties - is includes counties from 4 states as the Metro area (NY, NJ, CT, PA). Prime Manhattan is still a tight market, just not as tight as it once was. Not saying average prices in the area or even Manhattan haven't or won't go down - I just think people paint the area with too broad a brush. Just because the Dow is down, or the S&P, doesn't mean there aren't stocks that are stable or even up.

Posted by OT | July 1, 2009 10:40 AM

mgnyc - you recall my audiocast on TRD a few months ago right?

Posted by Noah | July 1, 2009 10:43 AM

There are people who can afford to buy and still need a place to live and are buying because why should they throw it away on rent in the meantime. Even if I buy and lose money, I still get a tax break versus renting and no tax break. So buying is still the way to go right now in my opinion if you can afford to. There are too many variables, none of you are right and none are wrong, but it's not going to get worse. I think everyone on the sidelines missed the DIP. That's what always happens anyway, you'll realize you stayed on the sidelines too long.

Posted by jackson5 | July 1, 2009 3:18 PM

People want to own Prime Manhattan, I agree with OT - while brokers in the past have been ridiculous and worked the uptick to milk the life out and last dime out of people, manhattan real estate will be back, it always comes back from the deepest depths to the highest heights. At the next peak we'll be reacting the same way we are to this bottom. I'm holding my real estate because really, we don't know if it's next year or 5 years from now, but it will be back unless the world ends. Because NYC is a financial epicenter, so I won't bank on anywhere around this country other than this teeny tiny island - because even when sXXt hits the fan, this is where business gets done - period. NYC IS A BUY and I'm with Madonna - I bet on the upper east side definitely - not past Carnegie Hill though. :)
I think you're going to see it back up in mid 2010 and not know what to do with yourselves, get off the sidelines and jump in - if you blink, you missed it!

Posted by ClaireBarnes | July 1, 2009 7:17 PM

Speculation is so boring and um, often so wrong. Look, in early 2006 NYC had a mediocre real estate market, who would have predicted what happened towards the end of that year and the insanity of 2007. You can't say oh, it's 1 year, 5 years or 10 years because none of you know. It has to do with employment, and population. Demand may be down because of unemployment but the reality is as my 8 year old has said, Dad, Everyone wants to live here, Everyone. And the desire for NYC isnt' going to go away, people want to live here so badly they'll stretch finances and buy into the dream. Also, alot of people here make alot of money, to be middle class here you have to make a lot of money. No one knows and the banter is boring, because you just don't know, it is what it is and you'll be reacting like can you believe this to the uptick just like you're reacting to this downtick. New York has never gotten CHEAP so I don't know what planet you all are living on, but nothing has dipped so low as to make it so darn affordable. This is the dream you try to achieve, this is the pinnacle, it's what people aspire to own and it's never going away. My bet is on the upper east side not past carnegie hill, I'm betting on Madonna - watch 70th-80th near 1st, 2nd and 3rd boom for those 10 blocks cause she's there now.

Posted by NYC33 | July 1, 2009 7:23 PM

There are some seriously delusional people on this thread - wow. I guess the insiders believe talking a good game will turn this market around? Are we still in the denial phase? Thought we got past that.

Like most people in this city I would love to see demand outstrip supply and NYC recapture the glory of years past on all levels. That having been said, I tend to believe in asset cycles, bubble timing, and basic economic theory -- those trends tell a very different story.

Most of the folks further up the food chain in this city got killed the past 12 months -- set aside the folks smart enough to predict the crisis beforehand and double down -- and a lot of people are doing the math with continued income tax increases that make this lovely island less attractive with each passing year. Oh yeah - anyone else read the letter explaining your deductions don't really count in the world of Albany math? Guess what? That's just the start for the $1m+ income segment (and all the way down to $250k feeling much more pain in the future). Each percent the state takes (and in the near future the feds) means less disposable pocket money for the HENRY (high earner not rich yet) demo that used to make this city hum when society believed we could all "support" a negative savings rate. That HENRY segment takes home less with each passing year and from what I see the majority of the truly liquid are not jumping at the opportunity to own new depreciating assets in the early part of a correction that should take years (not months). Then again, if you see something nice and emotion takes over then pull the trigger - life is short and most individual units are never your best performing assets over the long term anyway (or you did something terribly wrong in other classes).

Am I missing something as an amateur observer viewing this as a somewhat boring asset cycle? It almost seems like the recent activity is clearing out the folks who froze in Q1 but needed to close at some point - job, kids, 10 yr time horizon, two mortgages. Of course I don't sweat the contract data like people on this blog so I'm watching just like everyone else as this plays out in 2009/2010.

My gut reaction is that an unbiased third party studying the Manhattan "prime" market would find 15 reasons why we continue to trend down, 5 reasons why we could stabilize at this level, and 2 reasons why the market could trend up near term ... perhaps a $150k tax credit with no income caps as the driver on this front?

Welcome to the new normal - boring as hell as we all wait for the next macro cycle. Back to work.

Posted by Amatuer Observer | July 1, 2009 8:41 PM

Mortgages are cheaper again - b/c FNM and FRE said so:

125% LTV

http://www.nakedcapitalism.com/2009/07/
freddie-fannie-to-provide-125-ltv.html

Looks like the feds love printing money

Posted by In Debt We Trust | July 1, 2009 10:38 PM

My favorite here over the past few months has been that "reversion to the mean" argument. So much for that theory- the bubble burst and yet the market hasn't beelined to the point where everyone who works in Manhattan can afford a spacious home on the island, with a cushy commute in a tony neighborhood.

Also amusing is the fools rush in argument. Who is the bigger fool- the one "rushing in" to buy a home they want to live in for a while- or the one remaining on the sideline calling him or her a fool, while the market doesn't armageddon with desperate sellers kissing scarce buyers' butts at every turn.

I don't understand how all the macros work- but apparently neither do most buyers. My take is that we had a huge party for a few years, went through a nasty hangover we don't want to experience again, and are cautiously moving forward in a culture that now loathes excess, something that seems healthy to me.

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