Breaking Down The Manhattan Tiered Price Adjustment
A: This market really is the fastest, and most enjoyable market to work in; so lets have some fun with today's look back on what we just went through. Over the past 10 years, Manhattan has been averaging about 7,500 - 8,500 transactions a year or so; excluding the 13,000+ transactions in 2007 which marked the peak of the credit bubble. But over the past 3 quarters, this market has seen some extraordinary moves that is worth reflecting on for a moment. In short, the market went from sustaining near-peak trades all the way up to the Fall of 2008 --> to, freezing up completely with a huge plunge in sales activity --> to, a fear based market with sellers hitting low bids --> to a market that saw increased activity and priced out fear and Armageddon. All of this happened in the past 9 months or so and it was crazy, frustrating, and exhausting all at the same time. Lets break down how it happened.
It's all about buy side confidence and sell side motivation/desperation. Combine the two and you have a market, or lack thereof with a disconnect between the two parties needed to do a transaction. The buyer-seller disconnect was in full force in 4th quarter of 2008 after Lehman failed, and continued until about the end of March - then something happened. As the equity rally continued from the March lows, contracts started to be signed and activity accelerated as the rally continued - boosting confidence amongst buyers who were more than comfortable to put money to work at significant discounts from only 18 months earlier. This is an observation of our marketplace since April or so.
But the nature of this recession hit our market's varying price points much differently! The best way for me to give you real time range approximations on where product was trading at the height of the fear, was by price point (stated March 9th, 2009, so put yourself back into time & place when the DOW closed at 6,547 and S&P closed at 676):
HIGH END ($5M+) - down aprox 25% - 40% from peakIt might be best to reflect on what happened by price point, starting from the fall of Lehman. To do so, I created a made up index using approximate discounts from peak that I thought each price point was trading at during each month after Lehman. The data for Q2 that was released July 2nd, pretty much confirmed these trading ranges discussed first in early March; so I feel comfortable talking about this and playing around with a play chart to help visualize what happened.
HIGH/MIDDLE ($2M - $5M) - down aprox 25% - 30% from peak
MID END ($1M - $2M) - down aprox 20% to 30% from peak
LOWER END (Under $1M) - down aprox 15% - 25% from peak
Lets create a chart that looks at discounts from peak kind of like how we discuss where a mortgage backed security is trading at from par - "i.e., 60 cents on the dollar". So we will use '100' to denote the peak to see where each price point seemed to trade DOWN FROM PEAK as this market adjusted to the reality of the credit crisis (so if you see a drop from 100 to 70 on the vertical axis, that would represent the price point was trading down approximately 30% from peak levels - best I can do on such short notice to get point across):
*unofficial, rough mock up of what I saw happening to each price point since Lehman's failure - simply for sake of this discussion! You must use a general range due to the many variables that affect an individual product's market value here in Manhattan
It's as if you can summarize this wave down by three periods:
Period 1: THE FREEZE UP - the sharpest of the adjustment occurred in this period, as the world changed after Lehman failed and AIG had to be rescued. This is the period from mid-SEPT to about late JAN that basically defined the initial snap down from peak levels. Although the market seemed to be trending slightly lower by the time Lehman failed, this was really when bids disappeared and brokers/sellers were scratching their heads on how difficult it was to get a deal done - the markets work in mysterious ways even though the writing was on the wall for many many months before the fall of 2008. As the freeze up continued into January, fear levels started to rise as equities adjusted downward in response to what turned out to be quite a failure in the financial system. A negative feedback loop hit buy side confidence, causing many to just sit back and wait. Sales volume was low.
Period 2: THE FEAR TRADES - ahhh, the very small period that I would argue lasted between mid-FEB and mid-MARCH or so, as equity indexes approached lows. This was when the DOW JONES index hit 6,576 and blood was on the streets. Sales volume here was still very light and those that did occur, were sellers hitting low ball bids out of fear; hence the phrase, 'fear trades'. This period marked the final move down in the first wave, defined by the low ball bids demanded by buyers that were asking for 'additional downside risk' due to the uncertainty of the near term at the time. Since traffic was so light and bids nowhere to be found for 5-6 months straight, sellers feared that time may cost them more money and hit bids. We are seeing the last of these trades clear now due to the lag from contract signing to closing.
Period 3: THE PRICING OUT FEAR: you can't deny that this market saw an acceleration of contracts signed and a decline of inventory as the first wave down finished itself off. I discussed reasons for this confidence boost a few times, so now I will just point out that this market did indeed PRICE OUT ARMAGEDDON in regards to the 'additional downside risk' demanded by buyers during the prior period just discussed. As activity accelerated with the equity rally, confidence rose, buyers were out shopping for discounts and felt more comfortable submitting bids - the natural market forces at work as perceived clarity increased! Many buyers missed out on a few places, saw saved listings go into contract, and noticed sellers not as pressured to entertain or hit low ball bids as they were only a few months earlier when fear levels' were much higher. The market has a way of equalizing itself and this is exactly what happened for each price point. The first comfort zone was reached and deals started to happen again!
Now the interesting thing is we will have to wait to see where the deals that occurred in PERIOD 3 happened at, as lagging reports will catch the beginning of this period first - the real action was from mid-APRIL to end of JUNE which will be registered in Q3's or Q4's data depending on the time lag to closing. So, when we look back at the end of this year, we may see some quarter-over-quarter increases in prices that no doubt many will build bottom calls out of! Lets check back here in JAN 2010 or so to see if this turns out to be the case! Real time market conditions likely will continue to be different than the picture painted by these quarterly reports - so stay ahead of the curve!
And there you have it, my unofficial, official interpretation of the past 9 months! Will discuss some exciting news and thoughts on where we may go from here over the next few weeks. Enjoy the weekend all!
Comments (10)
Noah - great work! the visual drives home the speculative nature of the high end price point which we now know was the riskiest tranche of all. i imagine the next wave will see the fiercest selling in the middle with floor in the 400k range range since that's kind of where gov't financing really drives the market. my bet is the high end has taken it's hit in large part because while that equity was dumb to stay in the game, when you have the choice of taking $15mm today and buying dividend yield versus waiting for $20mm to come back around, you probably drool over the sales contracts. the middle market has yet to be price discovered i think which is the scary segment for all that lovely class A sitting there. i keep going back to what dual incomes with 200k in dwm pmt can afford in today's financing environment and it's definitely not $1.5mm. option ARM resets here we come......
Posted by Fred | July 11, 2009 5:57 PM
Well what more can we expect Because of continuous economic downturn, many realtors and business establishment were engaged in financial issues, they tend to get big loans in order for their business to survive in this time of depression.
Posted by Real estate marketing | July 11, 2009 9:29 PM
I know the chart is meant to be rough but... a 20% bounce since March in the high end? That seems out of sync with reality.
The recovery in volume was driven by mid to low end, right? Was the under the impression this volume was first time buyers with a burning edge to get in the market and they finally saw an opening.
Looking forward to the coming post(s) with your take on what may happen over the next 6 months across the segments.
Posted by High End Bounce? | July 11, 2009 9:31 PM
High End Bounce - more like a 10% one. The high end during fear months at max seemed to be trading down around 35%-38%, I put the fear months around 62-63 for high end, and then put it around 70 for pricing out of fear period. So, maybe a 10% move back up as it balanced itself from early MARCH to say late JUNE.
I wouldnt say a 20% move.
YES, the mid to low end saw most action. Not all first time buyers, but yes, they prob made up most of the action. I am certainly not seeing many move UP buyers lately.
Posted by Noah | July 12, 2009 9:12 AM
Noah, I noticed something about how you describe the crisis. You like to say you are "less bearish". But most would take that to mean that your view of how bad things will get is now less than you thought at the beginning, so if you thought something was going down some 40% now you would think it was only going down 30% (or something less than 40%.
But I think I understand that what you seem to mean is, using the previous example, the decline would still be 40% but that things are not so bad because if we have seen 20% of the decline, we only have 20% to go.
Posted by Anonymous | July 12, 2009 10:41 AM
I think that graph would be more informative if you overlaid the volume of contracts signed (similiar to how volume is overlaid on equity index graphs).
Posted by msn | July 12, 2009 11:02 AM
anonymous - "But I think I understand that what you seem to mean is, using the previous example, the decline would still be 40% but that things are not so bad because if we have seen 20% of the decline, we only have 20% to go."
basically you nailed it. Lets go back in time for a moment to mid/late 2007. Stocks were at their highs (dow 14000, s&p 1500) and the manhattan market was trading at its peak as the euphoria stage saw huge sales volume. At this time I was very bearish, and turned most content on this site to macro, credit markets, and warning signs. The process did NOT happen yet.
fast forward to when I first said that statement, I believe FEB 3rd, 2009, and stocks were down 50% and Manhattan real estate had a sharp correction downward with each price point affected differently. The world changed, and asset values came way down reflecting the uncertainty and problems associated with this credit crisis and debt deflation. so, your bearish view must change too or you risk being a perma-bear blinded by your prior bias.
I knew the adjustment had to happen, but I did not know when, what would spark it, or how much it would go down. Nobody knows that. But I knew markets were wrong in late 2007, both stocks and manhattan trades, as their was a disconnect between actual market trades and what credit markets were telling us.
Today, the process occurred and stocks saw a few waves down so far and manhattan had one sharp wave down. I dont think its totally over, but with the first wave down complete, and price adjustment occurring, I cant be as bearish as I was before the process started.
I dont like to put exact % numbers on where this market may go from peak to trough, but roughly speaking, yes, if I expected a 40% adjustment, and we just saw a 20-25% adjustment, I am less bearish because we are likely more than halfway through. As the process continues, and time goes on, I will likely get even less bearish but I need to see more adjustments and pain occur first - especially with macro data and earnings and bank acknowledgments that balance sheets are not out of the woods. Its all cleansing and in the end, we will be able to start a new sustainable yet non sexy growth period. But I think we have a few more waves to go through first, consumer needs to delever and repair balance sheets, and future waves likely not as severe as what we already went through though. And expect the unexpected with consequences to policy to stem this crisis down the road. I think we are trained now after the shocks we went through and we all expect more pain, so when it comes, we could handle it better than the original shock of a lehman failing.
great question. thanks
Posted by Noah | July 12, 2009 11:05 AM
msn - hmm, good point. I will try to do that next week! I would also like to extend it backward so people can kind of see where this market came from, roughly speaking. reports are so flawed with lagging sales and new dev deals that they often dont tell the whole story of whats going on right now
Posted by Noah | July 12, 2009 11:06 AM
Hello,
Thank you for posting this information. It is quite informative and nevertheless an interesting read. This definitely helps me with my business!
Webmster,
I Buy Houses
Posted by Your House Into Cash | July 1, 2010 2:31 AM
Hello,
Thanks for posting, it is informative and an
interesting read nonetheless. It has definitely helped me with my business!
Webmaster
I Buy Houses
Posted by Gordon | July 1, 2010 2:35 AM