Following The Bids - Mental Math

Posted by urbandigs

Mon Mar 8th, 2010 11:32 AM

A: When I was in elementary school I knew that math was my strongest subject. I recall one teacher that would challenge our class in an exercise she called 'Mental Math', a contest me and a few of my close friends at the time loved and looked forward to. The idea of 'Mental Math' was to shout out a long math problem and see what student can come up with the correct answer the fastest, without writing out the solution on paper. An example would be, 'Okay kids, now tell me the answer to 7 times 6 plus 8 divided by 5 minus 2 times 9 plus 3 divided by 3 plus 9 divided by 2....'. The winner would get one extra credit on the next test; not that it really meant much but to us kids it became more of a contest to be the winner of! I would always be one of the fastest and I loved the next challenge.."17 - is the answer" as I eventually learned to do the calculations in my head on the fly as the numbers came out - always learning to remember where the numbers first came in so I can get the right answer later.

That fascination with numbers and the rush of the fast paced challenge is what I think attracted me to Equities Momentum trading right out of college. I genuinely loved the rush of trading in and out of positions in a matter of seconds. I started young as my first investment was in SGI, Silicon Graphics to the home gamers, as they made a few of the computer games I always played as a kid. I bought a few hundred shares of SGI at the age of 13 and since then, I was hooked on the markets.

Now I have a new challenge ---> Manhattan residential real estate. Following where the bids seem to be coming in is a constant challenge, and I love it! If it were easy to follow, I wouldn't be interested in it. I always must admit that the market is bigger than all of us and that what I see out there may not be the actual general trend. The fact that this market is mired in mystery and lacking transparency makes me want to gather more data, parse it, and see what we can come out with! When I tell you real time reports on where I see bids coming in, people yell for REAL CLOSED DATA; and rightfully so. But we all know the lag it takes to close from contract signing.

Being out there in this real estate marketplace daily eventually gives you a 'feel' as to how strong or weak the market may be at any given time. One example is simply following all the responses of the brokers I talk to everyday and keeping tabs on what the 'individual listings' that my clients become dis-interested in end up doing. Just because a client dismisses a property after a 2nd viewing or a poor response from what is perceived as an offer too low, doesn't mean I stop watching it! I want to know how quickly it goes to contract and ultimately where it sells - so I can gauge how a buyer valued the unique features the property had. Over time, assuming you keep a mental history of what has happened in this market and when, your 'feel' for the market becomes more natural; it takes less effort to focus on multiple variables and understand what it all means.

Is following the bids an exercise in futility? I don't think so. While I only know where my client's are bidding and how the outcomes are, I still can learn a heck of a lot about the marketplace even if we do not get the apartment. Which is why I can confidently say that today's marketplace is one where bids exist, and sometimes competing with each other. That is much more to say than this marketplace from October 2008 until March of 2009; when bids did NOT exist and sellers had to 'hit a bid' to move property. Today it feels more like buyers are 'paying the offer' or very close to it, to use an old trading term. That is the difference in this same marketplace when comparing two very different time periods: MARCH of 2010 vs MARCH of 2009.

Here are just a few examples of closed sales where the buyers paid either full ask or more than ask:

155 W 70 - 15E sold at Full Ask at 1.699m
850 Park Ave - 8B sold Over Ask at 4.3m
10 WEA - 25A sold Over Ask at 1.557m after a price increase in NOV
333 E 69 - 10CD sold at Full Ask at 3.495m
210 W 78 - 8A sold for Full Ask at 1.65m
146 W 57 - 74C, price reduced when it didn't sell in June 09, then sold for Over Original Ask at 3.7m (great example of the progressive improvement in this market over time from early 09 lows)
15 W 81 - 8G sold for Over Ask at 2.5m
90 Riverside Drive - 12B sold for Over Ask at 6.125m
61 Jane Street - 19G sold for Full Ask
150 WEA - 27M sold at a discounted Full Ask of $1,050,000 and 5% higher than prior sale of $999k in April 2009 (another example of the improvement from early 2009)
509 Hudson St - #3S sold for Full Ask

Now you can't cover an entire marketplace with just some examples, I'm aware of this, but these are the things I have been noticing for months now that signal the changes this market experienced over time from exactly one year prior! I mean, what else am I supposed to show if its not actual sales? Even higher end stuff is starting to move again, like the Townhouse over at 178 E 73rd St that sold for $13m after having trouble getting bids in that range for much of 2009 - the contract was signed in late January 2010. A year ago, even 9 months ago, getting an offer of $13m for this proved very difficult.

There are many more apartments that sold within 5% of the last ask and 10% of the original ask (i.e. 180 E 79th, PHE @ $4.2m or 470 WEA, 14FG @ $2.4m or 1 EEA, 10C @ $3.125m) - a dynamic that depends mostly on how the apartment was originally priced. This is why I say very clearly, 'quality apartments that are priced right are selling fast in today's market'. Not everything is priced right and not all apartments have features that buyers would deem 'quality' worth bidding up for.

A year ago the bids came in at much lower levels pricing in future downside risk that had not happened yet - fearful or desperate sellers had to 'hit' one of those bids to get a deal done. Take a look at the listing discount of the deals done for 15C at 1165 Park Avenue (20% off Last Ask & 41% off Original Ask) or 9B at 490 WEA (24% off Last Ask & 39% off Original Ask); both contracts that were signed a year ago. Both Listing Discount & Absorption Rates blew out in 2009 reflecting the extreme move this market experienced. I would expect both to come down noticeably based on the data/deals I'm seeing in past few quarters.

Today offers are not pricing in downside risk anymore and instead, seem to be reflecting emotions of 'missing out on the bottom' or 'losing another quality apartment' more than anything else. For serious buyers faced with frustration over the lack of supply of quality/well priced apartments, a gap up offer all of a sudden becomes something you will strongly consider - feeding the herd-like mentality of this fast paced market. If you are out there everyday, you see this. I simply question how long this will last!

Then there are those units that didn't close, but I know will close over ask because of information gathered when my clients bid for them: 35 Bethune Street, 205 W 89th Street and 15 W 72nd Street just to name a few. And I'm not including all the broker responses of 'we have multiple offers over ask, doing a best & final soon' to properties I have attempted to setup appointments for in the past months. Follow the bids and keep a mental history of what happened! By doing this you will know not only where this market seems to be trading, but where it recently came from. I consider this to be one of the most important services a broker can offer their client's when devising a buy side strategy and doing a property valuation - where is this market trading right now????

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