Reuters Talks Hit To Manhattan RE

A: Manhattan's bullet proof armor is starting to show some weaknesses as the main stream media starts to pick up on the lagging nature of our adjustment! That's one big thing with real estate, its very lagging! So, stay tuned to sites like UD for real time reports, but be prepared that what you read here may not show up in reports for a good one to two quarters! Plus, the media may pounce on lagging data and Armageddon discovery giving a misleading picture of the current health of our markets. As I noted before, we need to get through the Armageddon price discovery first before we see just how much of a stabilization occurred with the 40% equity rally and the media induced 'green shoots' reflation mentality for buyers. Just as the media enhanced the move up, it may have the same effect during the correction process.

Reuters discusses, "Is the housing bust about to take Manhattan?":

New York City real estate prices are looking increasingly shaky as instability in two of the city's sexier submarkets -- second homes in the Hamptons, and new condos in Manhattan -- register the latest signs of a housing downturn.

Back in town, the number of sales in new developments dropped a whopping 71 percent in April from a year earlier as condo developers enmeshed in complicated financing arrangements have been slow to slash prices even as the market corrected all around them, Kim said.

When the rest of the country was watching new neighborhoods begin to disintegrate into foreclosure ghost towns in 2007-2008, Manhattan landlords would still publicize new buildings by hosting parties featuring pop stars, sushi and girls twirling hula hoops in a bid to convert still-airborne Wall Street bonuses into down payments.

Today, that bonus pool has dried up amid job and compensation cuts in the financial services sector that drives the city's economy. The elite in the real estate industry had once hoped Manhattan could escape relatively unhurt as other housing markets suffered. But the collapses of financial powerhouses such as Lehman and Bear Stearns destroyed such thinking.

Oh, it was much more than just the elite that argued why Manhattan was immune to any slowdown, how the foreigners would always save us, how the weak dollar would always make us attractive to outsiders, and how supply could never grow for this market limited to a measly island! Amazing how things change when people realize that markets will do what markets want to do, and they usually follow the macro fundamentals. It gets tricky and ugly when you start dealing with unsustainable gains due to temporary credit bubbles that are blown up by the lovely engineers at the federal reserve! Of course, this crisis went much deeper than just the fed and every bank wanted in on the credit bubble that earned billions in fees from an originate-package-sell securitization model - giving a loan to anybody with a pulse. Well the party was fun until everyone was drunk and the music stopped! It always does.

Back to Manhattan. Whether you believe it or not, this market started to trend down in Spring 2008 or so as the first signs of how bad this credit crisis finally sunk in - even though at the time, many still believed the fed rescue of Bear Stearns avoided all systemic risk and that the worst was over. Boy were they wrong. I wrote about the change in psychology on the buy side in detail in my July 7th piece, "Low Ball Bids & Cold Feet". I couldn't get more specific than that folks! Putting yourself back into time & place, most brokers assumed that if it didn't happen in Manhattan by that time, well, it just wouldn't happen! Hopefully many learned a lesson that nobody is bigger than the markets and that nothing goes up in straight line forever!

So what has happened? Well, the first wave down occurred after Lehman failed and sales volume plummeted for about 5-6 months - say from mid SEPT to early MARCH. That was when bids were hit and people began to realize something has changed in this local marketplace. Inventory rose, sales volume dove, and to move property you had to offer quite a discount from peak trades to entice a buyer to put their hard earned money to work at a time that was far from certain! Its all about the buyers and buyer confidence, always has, and always will be. If you focus on the sell side or supply only, you may be missing something. For example, if you looked at inventory levels 7 weeks ago you would have noticed that we were near our highs and assumed that the market was dead. But that was not the case at all and in fact buyers started to sign deals in droves as the equity rally, reflation trade, and first wave down complete combined forces to add certainty to buy side psychology in the asset. In short, buyers got way more confident putting their money to work. Today, you see the net result of this action as the lagging nature of contracts signed finally made their way into inventory numbers - giving us a drop of about 6-7% or so in the past 30 days. This is a combination of sellers removing unsold inventory for the summer + the accelerated pace of activity following the first wave down to a comfort zone.

Before we get excited, know that we have to go through the discovery period of those difficult months + we need to go through the 'taking out' of the new dev effect on Manhattan price data. The latter is something I will discuss in more detail later - but dont forget, what comes in will ultimately come out and we already went through the positive effects of all those new dev closings, now we will get to see pure existing resale reports without the uumph that defined most of 2007 and 2008 data. That is why I wrote, "Why Manhattan Price DATA Will Stay Strong in 2008", last April:

How could prices rise as sales volume slows and inventory rises? The reason is because the prices component is NOT registered until after the deal closes; some 1-3 months generally from contract signing! For new development deals, a contract can be signed over a year in advance of the closing. Which leads me to tell everyone that 2008 will see the closings of thousands of new development units that were signed into contract in 2007!

QUESTION: How will the prices paid, especially the price per square foot paid, ultimately affect future quarterly price reports for Manhattan?

ANSWER: Positively! As new dev deals close, it will help to offset any weakness that may be occurring in the current existing resale marketplace causing a misleading and mysterious report that probably will not be in line with the sales volume & inventory trends at the time!

Soon we will get Q2 data and I expect a solid uptick from Q1, which the brokers, streeteasy commenters, and media will of course base new bullish arguments around that the bottom is in and that all is well moving forward. But the real juicy analysis will be to compare Q2 of 2009 to past Q2's, on a year-over-year basis. Real estate is seasonal, and as such the data must be seasonally adjusted OR compared y-o-y to cancel out month to month noise that may be misleading. But, people will no doubt take advantage, which is fine and part of the natural order of markets. In the end, the markets will still do what they want regardless of anybody's banter.

There will be a time to discuss a sustainable recovery both for our local economy and our local real estate marketplace; for now, I am less bearish now that the process has started but I think we still have some issues we must face and I discussed them plenty on UD - including unintended consequences from actions taken to stem this nasty crisis. When things do improve, we will see a big time exit strategy from the fed and regulation both on wall street and on the banking system to make sure a parabolic credit boom never happens again; at least for a decade or two until we forget and need a way to make more money. For now, there will be deals at every price during the adjustment and nothing goes in a straight line. Real estate tends to be like a tanker, taking time to stabilize and turn around. So, focus on the things that make for good decision making and don't buy just because you think prices will surge 20% in a year! A home is becoming just that again, a place to live and not a ATM machine that can be speculated on for 100% appreciation in 3 years time - although you will ultimately see nice returns for vulture investors that are gobbling up foreclosed properties in very hard hit markets for 30 cents on the dollar. Markets working as they should.

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