Quick Manhattan Snapshot: Market Pricing OUT Fear

Posted by urbandigs

Tue Jun 30th, 2009 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:

manhattan-inventory-nyc-totals.jpg


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:

contracts-signed-nyc.jpg


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.

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