It Takes Two To Tango: Are Buyers On Board?

Posted by urbandigs

Mon Aug 3rd, 2009 09:08 AM

A: It takes two to tango and to make a deal happen both buyer & seller must have a meeting of the minds. So we went from a frozen market in late 2008, to a fear based market in early 2009, to a reflation trade market over the past 4 months. Is it right? Who knows, its the market and the best I can do is tell you what I see out there now and where we may be in the cycle. I don't see a sustainable uptrend in bids just because stocks say so, as buyers don't seem to be fully on board the gravy train. But this fierce equity rally may just be enough to alter the psychology of sellers and slow this market down a bit. Unless buyers change too we will see a disconnect again leaving brokers and those same buyers wondering what the heck is going on.

We had a nice down move with prices more accurately reflecting the macro pressures than they did at this time last year; even though the warning signs were everywhere in AUG 2008. So, the process started and that is healthy. But as equities rallied, and rallied hard I might add, we saw a surge in deals recently and a subsequent 15% drop in active inventory - below is a 6-month chart of Manhattan Active Inventory:

nyc-real-estate-inv.jpg


Is the bottom in? Well no doubt there are real arguments to be made about that with Jeff's 'less worse bull market' seemingly in play - a great call almost 3 months ago by Jeff. Given the amount of fiscal/monetary stimulus in the system we no doubt will see improving economic data outside of the unemployment rate - which will lead most, including me, to think that the worst is behind us. I actually can see this spurt lasting a good 3-4 quarters and who knows how confidence will be affected. But why doesn't it feel over? Well, because unemployment is rising, people are cutting back spending, jobs are not so easy to find, some developments are stopping work, retail is showing signs of the distress, etc.. So for many, there is no reflation. But for stocks, reflate away!

Combine reflation hopes and less worse data with an unstoppable equity market and it could easily affect both buy side and sell side confidence in the following ways:

1) Buyers - buyers could be convinced to throw in a stronger bid or be motivated to pull the trigger on reflation and recovery hopes; the old 'buy now or be priced out forever' is likely to be replaced with the broker tagline 'buy now or miss the bottom'.

2) Sellers - sellers may not be as willing or motivated to hit a bid that is deemed too low and otherwise depicts where our market currently is trading. As stocks fly and reflation hopes dig in deeper, this mental change may be exaggerated. Crazy, but true. Pricing in downturn risk gets increasingly difficult when stocks surge as sellers don't bite if they feel their property was improperly valued with the first wave down. Sellers will look to anything to rationalize that their property is worth more than it was only 3-4 months ago.

Combine the two and you have confused buyers and more hopeful sellers. Which will be the stronger force? Its all fine & dandy if the effects on both sides of the deal are equal, but in my humble opinion they are not. I am finding buyers to be very confused right now and choosing to be cautious rather than aggressive in dishing out a strong bid to entice the seller to accept. While buyers seem fine paying market value for properties today, they do not seem fine paying a premium over that just because stocks are flying - yet some sellers are demanding that. This has happened a few times to me in the past couple of weeks - as sellers seemed to change their tone and expect a bid significantly higher than only a few months ago to move property. Has the market really bounced that much OR is this market simply pricing out fear and equalizing itself? My bet is the latter. Stocks and real estate are two different animals and just because one is rallying doesn't mean the other has to. Real estate is more closely tied to the jobs market, incomes, lending rates/affordability, credit, rental rates, supply trends, and confidence in the asset class. Stocks can move for a variety of different reasons.

Keep in mind one thing: this equity rally may have an unintended consequence for Manhattan sales volume IF buyers refuse to get on board with the reflation gravy train! This is what may surprise some out there. Its easy for a homeowner to argue for higher housing prices but if your a potential buyer, you need to have strong beliefs to put your hard earned money where your mouth is. And in the end, it's all about the buyers willingness and capacity to pay higher prices and close that deal.

You need two to tango so if sellers get more optimistic, buyers must too or we will have a stalemate/disconnect! For now, the 'less worse' rally continues and this spurt will feed on itself and likely produce better numbers in the near future that can ingrain the recovery mentality. Those expecting a double dip, including myself, must push back any predictions for a 2nd wave down by at least multiple quarters as it is easier to dip down from much better levels than it is from uber-distressed levels - now is the process that sees data get better or less worse, what I question is the sustainability of it over the longer term.

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