Looking At Todays Manhattan Marketplace
A: I always enjoy reading my friend and fellow colleague Doug Heddings stuff over at TrueGotham.com, especially when its strictly about what he sees in the marketplace at any given time. His latest discussion delves into the realistic pricing adjustment that he says sellers have made either in listing price or in negotiated price for a deal. This varies depending on price point and right now the lower end (studios, 1BRs), especially under 1M, is very active. This is mostly a function of lower prices, higher buy side confidence and more liquidity in the mortgage markets. I see similar things that Doug reports on out there, but I also see a good amount of listings that are still ridiculously overpriced with no relation to past comparable sales. What buyers need to understand is that there will always be a subset of sellers that will test the market and have no financial or time pressure to sell. After all, its not your apartment to sell.
Doug discusses his feelings that "Sellers More Realistic Than Buyers in Today's Manhattan Real Estate Market":
Before you get all crazy on me, here me out. I'm not AT ALL suggesting that it is a seller's market...because it's not. That said, it also is NOT the buyer's market that many believe it to be.I largely agree with this. Just yesterday Christine Toes writes to me..."I'm seeing bidding wars left and right in the under 600K range."
Anecdotal evidence is showing that aggressively well priced properties are receiving multiple bids which may indicate that we are nearing the "bottom." Most sellers and their agents have already adjusted asking prices to reflect recent depreciation. Of course some are still delusional but it seems to me that asking prices are down almost the same 10-40% from peak levels. Buyers bidding another 20% below these already adjusted prices are experiencing overwhelming frustration at the inability to negotiate with sellers.
So despite the fact that we have witnessed one of the most rapid price declines in housing market history, buyers must take into consideration that many sellers have finally accepted this fact and adjusted prices accordingly.
I have certainly seen this market as quite active for about 4-5 months now. The market will always do what it wants to regardless of what you, me, or any one individual thinks or says. The fact is this market is reacting with the same reflation trade mentality that is encompassing the credit markets and the equity markets. It seems assets across the board have got a bid under them - even in the CMBS world where AAA Series 1 bids are in the low-mid 90s where it doesn't seem it could rally much further. Any talk about commercial real estate being the next shoe to drop certainly is not being reflected in dropped bids for commercial mortgage backed securities. Back to the market.
Looking at today's Manhattan marketplace it seems to be a classic case of a natural market rebound after an overshoot to the downside. In a few months you will have the analytics to see this in the data as it happens - so stay tuned as Im working hard on this now for you guys!
What buyers need to know is where this market seems to be trading right now. That is why Doug says, "It has never been more important than it is today to analyze an apartment's price and how it compares to peak pricing levels as well as recent sales and contract signings.". Well, where are contracts being signed? Where are the bids coming in? This is what brokers need to educate their clients on and in my opinion is where the true meat of the buy side consulting kicks in. If you are going to spend hundreds of thousands or millions of dollars on a property, its kind of important to have a credible guide advising you where this market seems to be trading today. Otherwise you will be navigating a very fast moving marketplace blind and bidding at a level conducive to 'getting a deal done'. If I had a dollar for every time I was told by a listing broker that the 'bid must come in near ask' with no comparables to support that price leve, I would be a rich man.
It seems to me that each price point is now trading at the lower end of the % discount from peak range noted here in earlier posts. So it would look something like this:
HIGH END ($5M+) - down aprox 28% - 38% from peak
HIGH/MIDDLE ($2M - $5M) - down aprox 23% - 28% from peak
MID END ($1M - $2M) - down aprox 18% to 23% from peak
LOWER END (Under $1M) - down aprox 15% - 20% from peak
*NOTE: approximations of where price points seem to be trading must always take into account any one unit's unique identifying features (light, view, raw space, renovations, layout, outdoor space, monthly expenses, bldg amenities, etc.)
If I were a serious buyer today, this is the range I would use to figure out where any one product likely will trade in the marketplace today. Fine tuning the analysis based on the unique features of a property then comes into play. If you compare this to my previous estimates on where price points seem to be getting bids, you will notice that it has been updated closer to the lower end of the range down from peak. The biggest fear I have now is that sellers will get too optimistic and refuse to move property where bids seem to be coming in - that leads to a buyer-seller disconnect and much lower volumes. For now that doesn't seem to be happening as serious sellers acknowledge where the market is today.
You just can't deny that buyers are out there and bids are coming in around the levels I described above. If you are a seller and you got a bid higher than the range I suggested, I say great for you and strongly advise you to take advantage of the confidence boost that comes with a surging equity market and recovery headlines. Always know that confidence can turn on a dime and be shattered at any time due to some unforeseen event or trend reversal. Nobody can predict the timing so we are left to analyze where we are today, where we came from, and where we might be going. I'll leave the future up to you guys and stick to monitoring whats happening out there now. If bids change further, Ill report on it here.
The biggest mistake a seller can make right now is to price their property way ahead of where this market is right now, simply on the belief that the perfect buyer will come in and include a premium in their bid for anticipated future profit potential. I still see many listings out there today that are pricing this way. That strategy is counter productive. Only you and your broker know how traffic has been and where bids are coming in - and this is not a perfect science and I am only one agent out of more than 8,000 doing business in the NYC area. Ask yourself, is the pricing right or are the bids right? If you think your priced right and we are telling you this market is quite active, then why haven't you sold?
The best description I can give regarding my buyer clients mentality right now is that they are more than willing to pay market value for property, but not at all willing to chase for fear of being priced out forever or be swayed into pricing in a future profit potential that has not occurred yet. This leaves sellers and their brokers to figure out where market value is for the property. Price right - get the traffic in - create a sense of urgency - and hopefully get multiple strong bids.
Buyer's seem to be well aware that bids have improved over the course of the last six to seven months, and to get a property today they need to come in around those improved levels. Similar to what Doug said, I find that buyers bidding as if fear of future downside risk should be baked into the purchase price are getting disappointed in the response.
Posted by Fred
Wed Sep 23rd, 2009 09:43 AM
as always a good post Noah. i do think it's important to be very careful about what we term "peak" as it relates to manhattan RE. depending on which metric one uses (and there are many), some peak values were just grossly distorted by some really dumb sales prices (15 CPW, Plaza, etc.). i think it's really important to recognize that RE is a very slow moving asset class. what is very clear today is that we will not have the frothy upper middle (1+ million) driving higher highs on the lower price ranges. folks who can spend say $1.5mm today used to be able to afford $2.5mm but those same prices are probably on average down to $2mm. so why would someone who can afford to buy settle for less space, lower quality or a less desirable location? the fact remains that there is no compelling value proposition in Manhattan; folks are still acting like Manhattan RE is some kind of exotic financial asset, when it's not. the near term may be stable but the medium/long term is down.
Posted by Former Seller
Wed Sep 23rd, 2009 11:18 AM
On this topic I would only make the observation that there had been a lot of talk during the most illiquid period of the past 12 months about the majority of buyers expecting anywhere from 5% to 20% 'downside potential' to be discounted from where deals were happening then, or they would not participate and keep the market illiquid.
We are seeing the folly of that logic now, and saw it in the inverse during the bubble when it wasn't uncommon for sellers to balk at buyers who offered ask price- often at their own peril, as is easy for anyone to see looking back at the end of the bubble.
It's good to see that the majority of buyers have been more realistic lately- participating *at* market levels, which only makes sense. Pricing in market speculation as a negotiating strategy doesn't work.
Posted by Noah
Wed Sep 23rd, 2009 11:32 AM
"Pricing in market speculation as a negotiating strategy doesn't work."
Its a very good point former seller! It seems that phenomenon only plays a critical role in the marketplace at times of extreme distress or extreme euphoria - neither of which we see today.
the only other thing I can think of is the unique nature of any housing market, where the distress or lack thereof lies solely with the homeowner and that is the one who makes the decision to accept or reject whatever bid may come in.
Posted by anonymous
Wed Sep 23rd, 2009 01:10 PM
There clearly are buyers willing to participate at market levels. What happens if most sellers decide to participate there as well (which they will need to do if they truly want to sell)? Are there enough holdout sellers out there that will need to face reality such that the market could be pushed lower again?
Posted by Former Seller
Wed Sep 23rd, 2009 02:26 PM
Anon- what is the 'reality' that needs to be faced? The only one that exists is the CURRENT reality, so it's the only one that matters.
"What happens if most sellers decide to participate there as well (which they will need to do if they truly want to sell)?" ?? by definition, if transactions are occurring it means that both sides are participating and coming to agreements on price. Prices could be pushed lower (again) when more agreed upon deals happen below the market than above or at the market at any given point in time. I'll bet ya that if you observe any supply and demand market, it will work that way. Future reality has nothing to do with it since nobody truly knows what it will be (except of course for those with time travel machines).
Posted by anonymous
Wed Sep 23rd, 2009 02:46 PM
Former Seller
- You completely missed the point. There are a number of sellers that maintain high asking prices well above current market levels because they either don't want to sell or they can't face the reality of where the market is trading today. Therefore, they do not compete in the active market. If lower their prices to market, it would add to the supply that is in-play. I was curious what the magnitude of this could be.
Posted by Former Seller
Wed Sep 23rd, 2009 03:46 PM
Anon, your question would seem to suggest that those who have made transactions with buyers over the past few months may only represent a minority in a much larger pool of active sellers, the majority of which refuses to set prices at market levels- or not enter the market at all (wouldn't that mean they're not really sellers to begin with?)
If so, it's is a fair question. Perhaps mistakenly, I thought you were suggesting that most sellers in general haven't faced reality about where the market is, which would be a highly subjective point of view. It's possible to get a good idea of how many listings are highly overpriced just by spending some time going through them the internet. I would just point out that there's a flip side to the same coin that you cannot see: how many qualified sideline buyers are out there that would currently only make a deal way below market prices. One could use the same logic to argue that that once they 'face reality' prices would go up again. That's why I think these types of rationalizations about market dynamics are misleading and not very useful.
-but I only speak for myself, Noah may have a different take on this.
Posted by billshiers
Thu Sep 24th, 2009 06:11 PM
"Pricing in market speculation as a negotiating strategy doesn't work."
This is missing the point. Market speculation is never priced out. The prevailing price of any asset reflects the expectations of the market as to the future value of the asset. The failure of buyers and sellers to come to agreement on price is not about the legitimacy of pricing in market speculating as much as it is about different expectations as to future valuation. As Noah alludes, market speculation may only lead to a disconnect in pricing in times of extreme euphoria or duress because these are the only times when there are going to be wide discrepancies in market expectations among a material portion of the population. To the extent one can use expectations about the market that are more extreme than the prevailing wisdom as a negotiating strategy is really just a function of the idiosyncrasies of a particular buyer or seller in a given transaction.
Posted by Former Seller
Mon Sep 28th, 2009 11:01 AM
billshiers- I don't disagree with your point that market speculation is never priced out. As you say, it is often built into the offer a buyer makes, or a seller's decision to accept or refuse the offer. My point was that when one side explicitly tries to rationalize their price to the other by bringing up market speculation, it won't help to influence the other. On the contrary, it can only lead to a further disconnect, since both sides have a vested interest in market momentum swinging their way.
When I had been trying to sell my condo in Q1 this year, a potential buyer literally said "we think a fair price right now is x, but given current market projections for the remainder of the year we will only offer x - 15%". Negotiating ended there. Had she instead just offered x - 15% for some other reason, ex. renovation needed- without the rationale, negotiations might have gone on further, maybe reaching a point somewhere in between. Why? because if I'd gone to contract with her I'd have to worry about things not going smoothly if the wind wasn't blowing the right way between signing and closing. (anecdotally, her stated speculation turned out to be completely wrong so the strategy worked against her anyway).