It Takes Two To Tango: Are Buyers On Board?

Noah,

The direction of the stock market is irrelevant. Until the jumbo mortgage market rebounds, Manhattan real estate will be in the dog house.

In this weekend's news: "Geithner Says Unemployment May Peak in Second Half of 2010." In my job, all I see is a parade of laid-off workers. Sorry, but this sideline sitter is in no hurry to act on what folks are thinking is the bottom. In the boutique condo where we sold in 2007, prices have not budged (and neither have the listings). In this case I believe patience will pay off in the long run when it comes to finding a good deal.

Anon - couldnt agree more and the point of the post! The 2M and above market is clearly a good example of this. real estate is not correlated to stocks yet people out there believe it is. they believe that stocks are predicting future recovery and that real estate should follow suit directly. not true. the point was that the stock rally affects both buyers and sellers, and in my opinion buyers are NOT budging and rightfully so. But, sellers may be and that could make for difficulty in getting the two minds to meet

thanks for comment

Noah, there's an interesting article on bloomberg today about how lowering input costs for wholesale prices may lead to higher profit margins, and a surge in the s&p. of course there's no discusssion of which input costs are being reduced, and given that transportation went so low already, and there's been little to no decline recently in commodities (there may be some holdover effects from declining oil, but it seems to me like that would have hit wholesale prices already), so one has to wonder if the deflation is being caused by declining labor costs, just maybe.

the article is entitled the "silver lining" to deflation or some such rot. that silver lining will most likely prove to be nothing more than cheap polyester.

Noah, Are buyers recognizing and focusing on the current economy improving or only the equity rally?

steveF - nice to see you here! From my own little business I can tell you this:

1) YES, buyers recognize the rally but are NOT buying into it. A few of my buyers already bought being very comfortable with the wave down and discounts that brought. Others bid and didnt get their apt. Others did and we found out via diligence there were issues and backed out. IN terms of the stock rally, I find my buyers motivation level to JUMP IN, is very little changed. They are proceeding as they did before with same goals in mind and are not altering those or getting more aggressive just because stocks have rallied

2) YES, buyers do acknowledge that economic data is less worse and that in likely will continue for a few more quarters. However, they dont believe in a sustainable recovery and because of that, most of my buyers remain cautious.

The point, and to answer your question, is that my buyers are focusing more on, and in priority:

a) finding the right home
b) paying market price for that home and not more and not expecting less, anymore
c) prefer to see more clarity on economy, NOT stocks

In short, my buyers simply are not affected and are not focusing on this stock rally. They just dont believe in it, and if they are wrong, they dont care. They certainly are not scared that real estate will run away from them because stocks rallied so much.

Best answer I can give as each client has different goals.

Brenda - yea I briefly skimmed that. Well, Im still in the camp that sees deflation now, inflation later ONLY that inflation later will first take form of higher rates, taxes, food, energy, metals, commodities, health care, etc.. the stuff that shrinks margins...

maybe Im completely wrong. Who knows. Bottom lines are doing good, so companies are doing their cuts big time but top line is coming in below estimates. Hard to imagine deflationary forces only last for a year or so. Then again, hard to imagine how all this stimulus actually effects our economy - both for good and bad. Its unprecedented, so nobody really knows. I still worry about unintended consequences and I still think banks have another wave to go through, but that may not be until later 2010 or even 2011. By then everyone will not expect it

The point, and to answer your question, is that my buyers are focusing more on, and in priority:

a) finding the right home
b) paying market price for that home and not more and not expecting less, anymore
c) prefer to see more clarity on economy, NOT stocks

glad to be here....okay Noah, thx for your buyers thoughts. Sounds like a reasonable group.

Quite simply, I don't think this is anything but an artificial bottom. The true bottom of the market will hit once interest rates inevitably start to creep upward again. In lock-step fashion affordability will decrease, mortgage applications will decrease, liquidity will decrease and prices will have to decrease accordingly. Combine this with the persisting weakness in macroeconomic fundamentals- there is just nothing that points to price reflation in the near- or middle-term.

Noah, slightly off topic, but do you have any predictions about what Madoff's pad will fetch? .....

http://money.cnn.com/2009/08/03/real_estate/Marketing_the_Madoff_Mansions/index.htm?postversion=2009080311

Noah, I do expect Condos to fall more than coops

Condos were more leveraged. The buyers could put down less equity, They tended to be younger buyers who had less savings and more activity during the housing boom was focused on condos(which incidentally allow investment property as a purpose)

Noah, condos will go down more than coops
condo market is more speculative. Greater number of investor properties and less ltv was required. They also over-represented in the bull market accounting being resold after ever small increase in market levels.

Noah, looks like you are predicting another buyer - seller stalemate like the one earlier this year. Tough news for brokers if transaction volumes drop.

formerseller - hmmm, good question. 133 E 64th street. I wonder if it has any 'status symbol' value for some rich guy - 'hey I got bernie madoff's pad'!

I think this is it right:

http://www.brownharrisstevens.com/detail.aspx?id=1019969

Doubtful. But a 4BR duplex when 5A sold for 5.5M in mid 2005, and 3 floors higher, I would say this sells anywhere between 5.8 - 6.2M or so. I cant tell the condition of either of those units, but this is what my gut would tell me.

Lets see how close I get.

sechel - yep, did a whole piece on that the other day, I guess you are commenting about that and not the above discussion. It will be interesting to see the full unwind as the years go on for those high end peak new dev buyers.

hsw9001 - been a while hsw!! good to hear from you again.

if this rally continues and sellers get more optimistic on their property value, yes, I think buyers will be less hesitant to jump up and start paying premiums or closer to peak valuations just on moves in the stock market. The effect of this rally is a psychological one, nothing more. It changes the way both buyers and sellers think. If a seller was ready to hit acknowledge their pad may trade for -25% from peak, as the rally gains steam, they may only be willing to accept a bid that is closer to say 15-18% below peak on the recovery hopes. Well, a buyer needs to willingly accept that too!

i think we see a bit of a disconnect though if it continues.

On the topic of condos vs coops, I don't at all agree with Sechel's generalization that condos will go down more than coops. Some the reasons given for this assertion in the past two topics- like higher leveraging and speculation during the boom do not mean that condos will always be valued lower. The only thing it really indicates is that condos experience wider price swings than coops: they will drop more sharply in a bear market, but will spike more sharply in a bull market. This is not inconsistent with Noah's previous article. I believe his point was that there was an EXCESS of condos vs coops at the time of the bust due to new development. This created seller competition which forced condo prices down quicker.

Noah also made the points that condos have a far less invasive form of ownership, and don't have the major hurdle of board approval to buy and sell. This alone makes condos more attractive in a market where liquidity is a primary concern among buyers and investors just after the market was completely illiquid.

Let's not be mislead by the average sale price statistics. Condos may have corrected by 21% at the median compared to 2% for coops, but one of Noah's points was that coop boards can "make the market"- and they can make the market illiquid, as they did in Q1 this year. Setting an artificial price floor on a coop is not a hell of a lot different than the government setting artificial prices for the CDO junk that was bought with bailout money: it doesn't reflect the true market.

Will pigs fly?

AIG reporting this Friday

The heavy lifting by the FED may be successful in keeping a floor under prices in the near term (though I think this is all a head fake myself). Still, the any real "reflation" will not be seen in housing. The housing bubble has sailed into the history books alongside the Nasdaq bubble.

All the liquidity will land somewhere else, but not into housing in a meaningful way. You can take that to the bank.

Why isn't the worst over? Because apartments are still massively overpriced. How do we know? Because you can rent identical places for a fraction of the ownership costs. In many cases LITERALLY THE SAME PLACE will be listed for rent at $8500 per month and for sale at $2.5 million. Assume even a 30% downpayment and tell me how one could conceivably justify buying rather than renting such a place (even if you assume you bargain the price down to $2.1 million or less)? If the answer is "cause if you buy it you'll participate in the appreciation" my response is WHY WOULD IT APPRECIATE WHEN IT'S ALREADY OVERPRICED?

mph - well, Im certainly not one to argue that its smooth sailing from here on out, but we did have a sharp and fast wave down from Q42008-Q12009 that did some damage here. This market is unique, not immune, but unique. Hard to compare to other markets.

Now, yes one can argue that prices are still high and that rent ratios still show prices to be at premium levels, but this city never ceases to amaze me in terms of resiliency and wealth. Tons of money here. Thats all. With one wave complete, I say we muddle for a while and if there is another hiccup, sure we can experience another wave down but I dont think it will be as fast/severe as the one we just experienced. It might be a slow market for a while, deals here and there, but not an outright collapse that many were calling for that sees prices down 60%+ from peak levels. I dont see that happening.

Why wouldn't condos fall more than co-ops? LTV's were more toa buyer's advantage and co-op boards would be even more scritinizing then the actual lenders. In the Hoboken area, we have nearly the same results in housing that NYC has. Most of our units are condos and many homeowners are Wall St or execs. That said, I am seeing a lot of clients with the same type of mentality with buyers not buying into the bull rush of the stock market and sellers still not wanting to let go of their homes for a discount.

If I were on the sideline, I wouldn't be in a rush to chase the bottom today. Lets face it, the homeowner tax credit really doesn't help those in our area so there is really no incentive there. It is going to take a meeting of the minds as Noah said, one that we haven't seen yet.

when there is little to no movement on the high end, which means the prices are too high.. meanwhile the low end has been propped up by the new buyer tax credit and ridiculous interest rates but neither can last forever

when neither the low end nor the high end is at a reasonable price, how can you not expect further significant price decreases, especially with the bad side of seasonality coming up in a few months?

house prices will be really sticky on the way down because few in nyc have to sell and not many are convinced the market won't go back to 2007 levels. you can expect some fits and spurts on the way down, but prices are nowhere near their market clearing prices.. just compare contracts signed to new listings (in the middle of summer for christs sake)

I will add the observation that in the waiting game between buyers and sellers, the buyers have a big advantage.

Unemployment keeps increasing (albeit at a slower pace), and this means some # of people will be FORCED to sell and hit whatever bid is presented. This # of forced sellers will slowly increase as layoffs mount.

In contrast, it's hard to imagine anyone feeling "forced" to buy.

Also, I feel that, at least for apartments under $2million, prices are at a very high multiple compared to salaries of the Yuppies you would expect to buy them. Particularly since lawyer salaries (if not bankers) are still being reduced wholesale at many of the big NYC law firms.

noah...if the govt didnt meddle in corporate recovery...nyc real estate would have plummetted by 50 to 60%....unfortunately...the govt saves these big banks, etc so that they have NO RISK...ie in good times they make money and in bad times they get bailed out...while the little people sit on the sidelines and no one helps them......the little people might have been finally been able to buy a slice of the big apple but the govt bailed out corporate and the left the little people to rot.

"the little people might have been finally been able to buy a slice of the big apple but the govt bailed out corporate and the left the little people to rot."

No they wouldn't. If all the banks failed, we would be in a second great depression. So even if Manhattan RE fell 50%+, it would still be unaffordable to most people since nobody would have a job!

i guess im being selfish....i have savings enough to purchase a cheap $300k apt and still live off my savings until the economy rebounded...if i lost my job which i dont think would happen....

The Great Depression lasted for over 10 years, so waiting "until the economy rebounds" can be a LONG wait.

Hey Noah,

Great post as always. Check this out...one of my seller's currently in contract called me last week to ask if he should ask the Board to reject his buyer because he doesn't want to sell at the bottom.

thanx for sharing dis blog.It really helped me.Keep on writting.........

thanx for sharing dis blog.It really helped me.Keep on writting.........

no way! That is insane. I just got a board turndown because price is too low, and right now we have a new deal on table with contracts out at a price about 13% higher.

Crazy risky to do though, especially with full summer ahead. This market is nutty!

what did you say in response to them?

Well, the economy is slowly improving, so I hope buyers would get back on board to sail with the bulls.