Calling the shots from the sidelines: why you need to be in the market to understand it
I had the opportunity to speak at length with an Apple, Peeled contributor, Mitch Askinas of Warburg Realty, about his observations of the market today. Pointing to two case studies, his current take on the market is that: 1) the higher end ($3MM+) is definitely picking up, and 2) the lower end is showing a material preference for fresh renovations. In our discussion, Mitch pointed to the correlation he sees between those high-end buyers/sellers and their respective confidence in their market understanding.
This reminded me of a conversation that Noah and I had about Gary Malin’s recent interview with TAP, in which he cited that, based on the data transparency that sites like PropertyShark and StreetEasy provide, clients now often think they know better than the “professionals”, even though they’re not actually in the market.
So what’s going on? The theory goes that a client making $1+ million a year, particularly in the finance industry, can be rather difficult to advise. The wealthier the clients, the bigger the “poker players” they are, as Mitch likes to say. This often translates into a greater satisfaction they tend to get from treating the negotiations process as sport, rather than the means to an end of selling or purchasing a property.
I don’t think this can be reiterated enough: you have to be in the market to know the market. Analyzing statistics and reading headlines will only take you so far. This was a point also vehemently made both by Gary Malin and Mellisa Cohn; data is only data … interpreting it requires an on-the-ground presence. Further, most data points out there are lagging indicators. We know that, by the time the NYT does an article about low inventory, the on-the-ground reality will have shifted. By the time the media says you must buy (or sell) now, that is often a contrarian indicator.
The market is more dynamic than ever; the best way to understand it is to be in it, be engaged, see properties, talk to buyers, place bids … it’s quite easy, and often enjoyable, to be on the sidelines analyzing it all. There’s even merit to doing so in order to maintain a more macro or objective perspective on what’s happening.
But the market is not clean. It doesn’t lend itself well to sterile analyses and logical predictions. There are egos involved, with real human beings on each end of the transaction. As such, the market does not have to be rational. It does not have to be efficient. Buyers don’t have to purchase, and sellers don’t always have to sell. Being attached to what should be versus what is will likely not get either party what it wants. Much like a marriage, there’s no such thing as an exact 50/50 in terms of who has the power in the relationship. In Q1 of 2009, sellers yielded, many out of fear and others out of necessity. In Q1 of this year, it seems more buyers have yielded, motivated by lower inventory and a solidified sense that the market may be turning.
The point is that neither a CFA, a large salary nor some website statistics does a real estate expert make. Get in the game, stay on the ground and test the market. If you’re going to work with a real estate professional, find one you trust and whose expertise you respect. The job of a true professional (in any field, frankly) is to partner with you and tell you what you need to hear, versus what you want to hear. Keep in mind that wherever transactions are happening, at whatever price-points, however under or overvalued they might be from an analytical standpoint, that IS the market, pure and simple.
To end on an old Buddhist quote: “To deny the reality of things is to miss their reality.”
Posted by Prague-Noah
Thu Jun 10th, 2010 02:49 PM
im so glad you wrote about this Ana. So many times I had clients tell me how 'their bid was right, the seller was wrong' simply because the unit was still on the market. Hard for me to argue without insulting my clients intelligence, but in pretty much every instance, the listing eventually sold (usually within 4 weeks of the low bid being rejected) at a higher price.
Psychologuy is everywhere in this market. Every buyer likes to think they are right and every seller likes to think their place is worth more than the comp. I find new young buyers in the financial industry, especially those at the top of their class who only knew book smarts and straight A's, to come into this market and think they know how to master it before their first purchase. I get spreadsheet after spreadsheet rationalizing why their bid is right, and the seller is wrong. Only for them to realize later on that the market is a bit more complex than any model. Negotiating is an art, dealing with situations is an art, and knowing when to pull out the right moves during an active bidding sessions is an art. There are no scientific formulas. Rather there is a FEEL, and that feel comes from experience and being involved. I average 10-15 deals a year, but usually get involved in 30-35 negotiations a year. Sometimes more. Over time, you get a feel. But many buyers or sellers simply cannot be taught and simply will not take any brokers advice, likely because of a pre conceived notion of the reputation that brokers in general have out there. Others do listen and use the broker because of exactly what we are discussing, because we know whats going on out there.
Which brings us to the big problem. Not every broker has the right intentions when servicing their clients and not every broker has a pulse on the market; although they may think they do because of their own personal biz at the time. I recall during the peak, many colleagues being bummed and upset because they saw no uptick in their sales volume...so naturally, to them the market was not doing anything nutty, and seemed slow. That was the advice they passed on to their clients as data proved quite the opposite, with voluming surging across all segments
great topic to discuss but not one I would expect many comments on like the buy/rent one earlier
Posted by AvUWS
Thu Jun 10th, 2010 04:33 PM
Ever notice that it was an over reliance on models by the smart-people-in-the-room that got us into the whole over-leveraged financial mess in the first place?
A product, any product, will trade when the interests of both the buyer and seller meet. And those interests will be based on subjective realities, most especially in the case of something as emotional as a home purchase.
One can disagree with a price, but one still needs to respect that it was the one offered.
Posted by anonymous
Thu Jun 10th, 2010 04:49 PM
I tend to look at these things financially, but I still agree that it doesn't necessarily matter, especially short-term. Even if the models are near perfect, the average buyer thinks in terms of what he is willing to pay and getting the most for that money. I would think very few of them think about the long-term financial implications systematically, but rather rely on partially true assumptions that you are thowing money away by renting or asset appreciation will make you whole or owning property is inherently better. On the other hand, the seller isn't wrong if he knows he can sell for more, no matter what he thinks about the value. What do they care if the buyer is misvaluing the property?
As a buyer thinking in terms of financials, it is probably better to do your modeling, or whatever calcs you feel are correct, and look for properties that fit rather than telling other people that they are wrong. If they aren't available, just continue renting and wait. In the long run, however, the financial concepts should at lease serve as some sort of anchor that prevents prices from deviating too far in any direction.
Posted by Ana Maria
Fri Jun 11th, 2010 11:38 AM
Everyone is making such great points, here. For as much as we're dealing with hard numbers, volume data, comps, etc., there is so much of this process that just isn't that scientific at the end of the day.
Anonymous, to your point, I think it's very useful for people to do their research as a relative anchor around which to determine one's pricing. And AvUWS, couldn't agree more that just because the market speaks, doesn't mean you need to agree with it. You just can't argue that, at that time, that's the market.
Noah, your soon-to-be-released data/research model should help buyers and sellers in establishing better anchors for themselves in terms of having a better understanding of what the market is actually telling us.
Posted by Mitch Askinas- Warburg Realty
Fri Jun 11th, 2010 02:36 PM
I concur totally with Ana Maria's points of "Having to be in the market to know the market", as well as, having the ability to "interpret the raw data", which can only come from our daily interaction in the residential real estate market. Mellisa Cohen is a consummate professional at driving this home with her mortgage brokers. When I meet with her brokers, they really know their facts and it helps educate me on what is currently going on in the mortgage world.
Many of my out of town clients read the newspapers, etc. and think they "KNOW" know how to navigate the N.Y. residential market. Many strike out initially because they "Know It All" and their egos get in the way of listening to professional guidance and marketing knowledge. Once buyers or sellers can understand the data they make successful decisions.
Posted by bill
Fri Jun 11th, 2010 03:15 PM
Most people who are "in" the market are going to be way, way too influenced by their own personal experience in the market to have a true objective sense of the market. Some people in the market may have an experience that is representative of the market as a whole, which allows them to have an accurate view of the market. Others in the market may have an experience which is not representative of the market as a whole, which will cause them to have an inaccurate view of the market. But how do we know who has had a representative experience and who has had an unrepresentative experience unless we look at the data? A person in the market who has had an unrepresentative experience will understand the market less well than someone familiar with the data who has had no experience in the market at all. Buyers and sellers may be irrational and often don't act as they "should" given the data, but that doesn't invalidate the data - it's just a function of the fact that the data describes a vast number of transactions, some of which are "rational" given the state of the market and some of which are not.
Posted by henry
Fri Jun 11th, 2010 05:22 PM
I hate the broker babble epitomized Mitch Askinas' post above. I think that buyers and sellers usually understand the data; unfortunately, they just do not always make the decisions their broker(s) wants. "Striking out" and not getting to "successful decisions", while a missed paycheck for the brokers involved, may be the right end result for one or both of the principals. Similarly, an above market ask or a below market bid may be rational even if there is only a small chance of success.
In general, most serious buyers are "in" the market seeing properties, evaluating comps and talking to people (including brokers) on a regular basis. Given their focus, many buyers end up knowing their area of interest (small submarket) better than most brokers by the time they purchase (even if they are not in the market daily).
Posted by AvUWS
Fri Jun 11th, 2010 08:13 PM
Henry - More to the point, the buyer (not all, but certainly some) not only know their submarket well, but they probably know their own interests, tastes and desires FAR better than many brokers.
I knew many brokers who would show me something because they had the listing. That it included some sort of "no-go" item of which I had already informed them never stopped them. (FYI, I hate Decorative fireplaces. I love real ones but deco fireplace is a waste of a wall.)
Posted by s.d.
Sat Jun 12th, 2010 07:20 AM
What is there to know about the market?:
Sellers - lower your price and it will sell.
Buyers - increase your bid, and the apartment is yours.
"I" KNOW myself because I know what I want and have a price range in mind based on what I can afford. I am willing to negotiate, but if it's not within my range, I'm not interested; it just means it's not time for me to be in the CURRENT market you brokers know so well...
Posted by Eric
Sat Jun 12th, 2010 03:42 PM
While this thread has some valid points, it also sounds pretty condescending. The brokers might "know" the market in that they understand where the last transaction occured, but they have no more a clue than anyone (I would argue less possibly) about where things are going to be in 3, 6, 12, or 24 months. In any market there is a clearing price where a buyer and a seller meet, and then there are a string of buyers at lower prices, and a string a sellers at higher prices. Writing a blog about how buyers who are lower (for whatever their reasons) "just don't get it" is pretty presumptuous. If I think the market is going to be lower in 12-24 months and therefore refuse to pay the current rate, you might think I'm wrong. But if you are so in touch with knowing where a market is going, why don't you become a real estate investor instead of a real estate broker? I realize as an agent you should (hopefully) know where things are trading today. If you have a client that you think is off their rocker in their expectations, don't work with them. But writing about how people with spreadsheets and models don't get it because they believe something different than the current clearing price shows your own misunderstanding about what a market is. I do believe in the long run, money is money, and markets will reach an equilibrium. In the history of finance, there is no example where something stayed out of equilibrium forever.
My whole point in this is we live in unbelievably exceptional times. Interest rates are near 0, the rent to property "value" in NYC (cap rates) are way off where they have ever been, the Euro may very well settle at 1-1.10 per dollar (remember all those foreign buyers), the marginal income tax rate in NYC is probably going to be well north of 60% in 2 years, and the finance industry is about to have more regulation put on it than in any time since after the depression.
There will come a time when rates are 6%-10% again, it might actually make sense to buy instead of rent for monetary value not just emotional value, and we are going to be paying Carter like taxes. If that is 10 years away, tell me what likely impact on housing prices that may have? 2 decades ago we started a straight line march of declining rates. And stocks and housing prices have been in essentially a 1 directional march as well. Rates are no longer going lower. We'll see where asset prices go over the next 10 years.
So for any broker or agent to tell anyone else that they don't "get it" and that they somehow do because they saw 10 transactions last month on their little block is mypoic. That information is good for about 10 minutes and clearly misses the forest for the trees, imo.
Posted by homes for sale in ny
Sat Jun 12th, 2010 03:58 PM
Psychology has a lot to do with it, but it doesn't help when so many people are underwater with their homes, it really brings people down so they don't spend more.
Posted by pablo
Sun Jun 13th, 2010 12:37 AM
I think Ana Maria , is saying it can be frustrating dealing with "experts" people like my myself who come in the market all knowing , where prices etc are and should be . She is on the ground every day , and I am sure she is right .
That being said it does get tuff dealing with brokers , who think prices are going up , and will continue to firm up and continue higher. Basically anyone who has an interest in prices rising , RE Brokers, investors ,home owners , RE economists etc says things will go higher and continue to strengthen . This is troubling ,to myself , When every economic metric that can be used to gauge and value future assets prices indicate troubles ahead .
Posted by Ana Maria
Sun Jun 13th, 2010 09:11 AM
Eric - just a clarification: I definitely did not intend to (nor do I believe) that people who do their homework don't get it, nor that spreadsheets and calculations are pointless.
All I wanted to point out, as Noah's, Mitch's and others' experience concurs, is that number-crunching has its limits. It is, of course, highly important in terms of determining one's own position or stance in the market. And no, no one knows where the market will go. But to look at that data and be frustrated as a buyer that the seller doesn't get it, only to then have that apartment go into contract a week later is just denying the market. (Clearly I'm not saying you do this or said this.) Frankly, that may well represent a situation where the buyer has it "right" and the seller doesn't get it; 'could go either way.
What the post is meant to highlight is the frustration that we (agents) are seeing on behalf of some clients who are fighting the market every step of the way, and wonder why they're not able to transact. Missed is the point that the party on the other side of the transaction doesn't have to be hyper-rational, and neither does the market. Meaning, as a buyer or a seller, you either play in this market, listen to what it's telling you and take it for what it is, or you sit it out until the market behaves in a way that's more aligned with your calculations and assumptions.
Posted by Keith Burkhardt
Sun Jun 13th, 2010 10:48 AM
IMHO prices will continue to fall, the current uptick and multiple bids is (was) pent up demand, falling prices,low interest rates mixed in with some irrational exuberance. What on earth can drive up prices in the 1-2 year term? If you are buying now, I think you need to be able to deal with the very real possibility that your purchase may lose money in the near term.
If you are a long term holder of RE you don't have to time the bottom perfectly. I'm no quant but I knew enough to put the brakes on at the beginning of 2007 and get out of the selling game (and buying, some offers we made on houses in NJ that were laughed at...were gifts. Luckily none were accepted.)Spotting a giant bubble is a lot easier than timing the bottom to within say 5-15%...
I do think that in some cases prices have fallen enough to get back in the game. So if you want to balance quality of life with fiscal responsibility, bring the spread sheets and fine tune your pre-frontal cortex and buy a home you LOVE to raise your family in or just have a life in. Of course you can do that in a rental as well, I currently am.
There was a time where the mathematical side of my brain said very loudly DO NOT BUY! And there was plenty of data, history and information to back that up. For me and many of my customers we are of the opinion that it is safe to be buyers again with a careful mixture of financial prowess and the joy that comes along with buying a home to create a life in.
The math alone will not provide much of an incentive to own a home. Hey, I'm building a house in Costa Rica, does it make rational fiscal sense, can I just rent there at a fraction of the cost of home ownership? Yes. But as far as I know all I have is this life, I can afford to build my little dream casita and I know me, my family and friends will enjoy it. Pura Vida.
Posted by Sam
Sun Jun 13th, 2010 02:51 PM
Eric,
"remember all those foreign buyers?"
ask any broker, when the euro is high, foreign buyers flock to nyc real estate because it's so cheap.
ask any broker, when the dollar is high, foreign buyers flock to nyc real estate as a hedge against the falling euro.
Posted by Thisson
Tue Jun 15th, 2010 03:18 PM
The bidder isn't making an error: it's comparable to putting in a limit order to buy stock below it's current price.
It is correct to say that Seller's don't get it and are overcharging. Some will get their offer hit and make extra returns. Other's will not get their offer hit and will lose a sale.
The fact that an overpriced home goes to contract a week after a rational bid is declined doesn't mean the property was priced correctly - it means the market hasn't run out of "Greater Fools" yet or irrational/uninformed buyers are being allowed to bid up the market when they shouldn't (e.g. through FHA or 1st time homebuyer subsidies).
I think Eric's analysis is spot on. Prices are irrational and will correct when government intervention in real estate prices is forced to end due to austerity/cutbacks.
Posted by nycjoe
Tue Jun 15th, 2010 06:19 PM
'It is correct to say that Seller's don't get it and are overcharging.'
'The fact that an overpriced home goes to contract a week after a rational bid is declined doesn't mean the property was priced correctly'
These statements are kind of funny. I'd say the seller got it pretty well it if they declined a bid and went to contract for a better one.
"Overcharging"? Seriously? As if a buyer walks in to the 'home' store, checks his invoice and sees that what he bought was higher than the price tag.
You can argue that people don't use fundamental macro analysis when deciding what to bid, you can predict that prices will decrease in the near future, and you could be right, could be wrong. -but just like all the doom-sayers (sideline buyers) in 2008 preached, a property is worth what someone will pay for it, remember?
Posted by Gotta Be In The Game
Tue Jun 15th, 2010 08:48 PM
Yes, no more sideline quarterbacks.
You gotta be in the game - to get the game.
True that!
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Fri Aug 13th, 2010 04:50 AM
So what’s going on? The theory goes that a client making $1+ million a year, particularly in the finance industry, can be rather difficult to advise. The wealthier the clients, the bigger the “poker players” they are, as Mitch likes to say. This often translates into a greater satisfaction they tend to get from treating the negotiations process as sport, rather than the means to an end of selling or purchasing a property.
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