Get Ready! Here It Comes...

Posted by urbandigs

Tue Sep 29th, 2009 09:00 AM

A: Its starting early and I suspect it will only get louder as we get to week end. With Manhattan's Q3 Residential Real Estate report slated to come out in a few days, expect a surge in activity to be reported. Quarterly reports are a peak into the rear view mirror for the past few months; so lets do a little backward looking. As usual, due to the lagging nature of these reports headlines may mis-represent what seems to be going on out there now. If you want to see whats in front of you, don't look in the rear view mirror.

Expect both contracts signed activity and actual sales to surge on a quarter-to-quarter basis. The preferred analysis will be y-o-y and that will probably show a level sales comparison with lower prices from the year ago quarter.

In Q3 2008 we had 2,654 sales. Its quite possible that we get close to that level in this upcoming report (closed sales) and actually beat next quarters level of around 2,300 when Q4 is ultimately reported. After all, many contracts were signed over the past 3-5 months and now we are just waiting for them to close; a 2-3 month process. In terms of sales volume, the quarters that defined the downturn for the Manhattan residential market were Q4-2008 through Q2-2009 - so we got some favorable comparable reports in our future for y-o-y analysis. Take a look...

manhattan-sales-coop-condo.jpg
*data courtesy of MillerSamuel.com

The one area we won't see improvements is in price levels. The NY Times discusses in "At Long Last, a Leveling Out? ":

A review of closing data shows that median and average prices on co-ops and condos have continued to drift lower in the third quarter. Sales volume has picked up from the moribund levels earlier in the year, but remains about 29 percent below the levels of a year ago.

Because of the long lag time between contract signings and closings in New York, many brokers are hoping to see stepped-up activity reported in the fourth quarter, normally a sluggish period. They are also looking forward to a surge in sales based on a forecast of significant bonuses, at least among the Wall Street firms that survived the downturn.
I guess we can hope for a surge in sales on headline news too. So, the headlines will likely remain focused on the sales volume rebound as proof this market has not only bottomed, but is now recovering. Buy now or be priced out forever right? Umm, no.

Its true that you can't deny the pricing out of fear this market experienced via the improvement in bids for Manhattan property. But to cherry pick price action and ignore the entire correction by looking at the improvement in bids recently is to miss out on the adjustment this market has made. Stabilization is quite different than a new sustainable rise in prices built on improving fundamentals. What we had is a stabilization of prices after an enormous shock that saw bids for Manhattan property adjust to a new, lower level. It took a few bumps to find that new, lower level, but then again that is usually how markets work. This is where we are now and this is where I think we will stay for a while.

The Q3 report will probably show this muddling around of prices on a quarter to quarter basis. No market was immune from the deflationary forces of the greatest round of debt deflation since the 30s. Anyone expecting a prediction from me going forward, I'm sorry to disappoint. The correction I was expecting happened, and other than muddling around for a while I don't see any big moves in either direction until some outside force acts upon us. This could be a number of things:

a) another shock to the credit markets - so far, the exact opposite has happened and credit has improved significantly
b) a sharp rise in rates - who knows how mortgage markets may react to the winding down of fed quantitative easing policies, continued supply of treasury auctions or perceived inflationary pressures in the years to come
c) another fierce equity selloff - tied to 'a' above, who knows when stocks will decide to fall given all known information being fully priced in - right now the path of least resistance is clearly up.

In the meantime, individual distress will be where the best values are and I'm sure consumer deleveraging will continue for years as homeowners in trouble will do everything they can before being forced to sell their primary residence. The banking system continues its recapitalization with plenty of outside help and bad debts need to ultimately be written down. At the same time consumers are repairing their own balance sheets via higher savings, less spending, and paying down of excess debts. When we reach the end of this cycle we can start to talk about sustainable credit expansion without emergency fed facilities for an economy that sees job creation and consumers with rising credit quality - that is when loans will start to accelerate and the money multiplier effect kick in again. For now, the patient is still receiving a steady IV drip to nurse itself back to health.


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