Manhattan's Slowdown Defined By Sluggish First Half Sales
A: There was a reason I used the statement...'the first two quarters of 2009 will prove to be the most sluggish in the past 10 years' in Mid May. It takes 2-3 months, sometimes more if there are bottlenecks with underwriting of the loan or processing of the board package by the management company or board, to close on a co-op or condo; this is more the case with co-op sales as condo transactions can usually go from contract signing to closing within 2 months. So, there is a lag between what we brokers see out there in the field, in real time, and the quarterly reports that are released to the public. This lag usually paints a misleading picture of a market that reflects what the report states; this go around is a great example as the headlines certainly didn't exemplify the activity going on for the past few months. Take a look at the graph I composed comparing Manhattan Co-op + Condo Sales by quarter, over the past 10 years - clearly showing the parabolic boom in 2007 which marked the euphoria stage of the credit/housing bubble for Manhattan! In doing so, the wave down in prices for Manhattan is visualized by the first half total number of sales - which really reflects the marketplace 2-3 months prior!
Here is the chart showing you the parabolic boom in 2007 sales volume and the sluggish aftermath of a market that saw bids disappear starting in the 4th quarter of 2008 after Lehman's collapse! The real time market took 2-3 months to show up in this closed sales data - reflecting the lagging nature of our marketplace from contract signing (which brokers use to gauge activity) and closings (which these reports reflect)!
*data courtesy of MillerSamuel
Quite telling isn't it. It basically defines the wave down in prices to the latest comfort zone that we all experienced since late 2008. This is what happens when bids disappear, proving once and for all, that its all about the buyers!
What this chart does NOT reflect is the month by month acceleration in action that took place starting around mid April, and lasting until end of June or so! Time will tell if the action continues! The reasons for the pickup in activity were discussed in my less bearish piece on June 4th:
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.
The question is, what happens next. I'll delve into thoughts on this when I have time. For now, I have to r-u-n-n-o-f-t on appointments!
Posted by Brian23
Mon Jul 6th, 2009 12:55 PM
http://abcnews.go.com/print?id=7988874&ref=patrick.net
I would agree witht he lag in lead out. This story just affirms this.
Posted by Brian23
Mon Jul 6th, 2009 12:58 PM
The Case/Schiller index confirms this and so does the traditional metrix for affordability such as Income to price and rent to price. Manhattan is still well above its norm. Plus, how much longer can teh govt prop up the markets, especially the Jumbo market. How much longer can trading desks ignore core fundamentals of the mortgage market. Severities are increasing and delinq in the pipeline are getting worse.
Posted by lars
Mon Jul 6th, 2009 01:13 PM
From David Rosenberg: "New York City is now being particularly hard hit — the vacancy rate in Manhattan just hit a 15-year high of 15.0%, versus 13.5% in 1Q and 7.2% a year ago (for class A space). Asking rents plunged 11% QoQ and for those clinging to the inflation view, many sectors are actually deflating; median apartment prices in the city dropped between 13% and 19% as well last quarter."
With commercial vacancy rates at 15 year highs and rents plummeting, it is very hard to see how residential real estate can be on the mend. For my money, recent activity is just a blip on the upside in a on-going declining trend. As is over quoted, nothing moves in a straight line.
Posted by Noah
Mon Jul 6th, 2009 01:40 PM
This is nothing more than a countertrend pickup in activity embedded in a longer term adjustment. Commercial may be next negative surprise shock in general, as yes, NYC is getting hard hit and understandly so given the nature of this crisis. I wonder when that wave will really hit banks BS, or if the latest round of capital raising will get them through a while longer.
Consumers are still indebted, and I think we have another wave of this crisis to go through, the question is when and how bad it is. I think this is a fiscal/monetary stimulus move here, and hard not to be on look out for a double dip recession in 2010 or 2011. This re adjustment will last years here, and have dips and blips throughout the whole process!
Posted by mh23
Mon Jul 6th, 2009 08:31 PM
I think that those investments that did well during the last run-up...commodities, emerging markets, financials, low quality stocks (e.g. gaming stocks), and junk bonds are going to get hammered in the next wave down. Next up-cycle look for high quality dividend paying big caps such as WMT (near a 52 week low) MCD, TUP and utilities as well as high quality corporate debt and high quality munis to do well.
Posted by Noah
Mon Jul 6th, 2009 08:43 PM
i agree, but timing is everything. Ive been looking for wave down for past 3 months, and have been dead wrong. im thinking it comes, but much later than many originally thought. Not many a)discussed the severity of this downturn in detail, and then b) got this so far 4-month sustainable rally right.
double dip?
but when? 2010? 2011?
if this was the closest to debt deflation we have seen in 70 years, then why couldnt this adjustment or process last a good 6-7 years - not more because the stimulus efforts will have an effect throughout and on the whole process duration
Posted by bje
Mon Jul 6th, 2009 11:18 PM
Noah, be patient. Go short with CDX. Less downside, more upside. And remember, it's always lightest before the dusk.
Posted by Noah
Tue Jul 7th, 2009 10:43 PM
bje - well I got some ultrashort etfs on...took big hits on past gains during this episode though, hitting stops a few times and reloading.
when you say go short CDX, I assume you mean go short corporate bond spreads after the rally?
Posted by bje
Wed Jul 8th, 2009 11:58 AM
Essentially, yes. Specifically holding cdx gives you more downside protection with a whopping upside in the event of defaults.