A 'Seasonally' Slow Manhattan Summer So Far

Posted by urbandigs

Mon Aug 2nd, 2010 09:06 AM

A: Its very clear that this summer has seen a noticeable slowdown in 'sales pace'; especially compared to the activity in the first four months of 2010. But I would like to dig a bit into why the drop in sales pace should be somewhat muted by a drop in inventory levels as well. Like the after-effects of a stimulus plan, the surge in activity from Feb-April is being followed by an overshoot to the 'dull' side later on. Well that 'later on' seems to be here and while the summer is hot, it seems sales pace is not. However, we should use caution before interpreting a slower sales pace to mean a new move down in prices is upon us. I'll discuss why below. Unless there are sellers out there with serious pressures to liquidate, I say what we got here is 'a very seasonally slow summer'. We should wait it out before making bold predictions on price action - although I'm sure we can give back a bit of the reflation. If this sales pace continues apace after Labor Day and macro forces deteriorate with it (equities take a sharp move down), then we have something to discuss.

First, let me show you some sneak peaks so you can see why I am thinking this way. The Broker Year-over-Year Contracts Signed Charts will show us the realtime movement of Manhattan property from ACTIVE to CONTRACT SIGNED, as the brokers update the status of their sales listings:

pending-1.jpg

Looking at this form of 'sales pace' chart, the downward trajectory looks ugly and may lead some to believe a noticeable drop in prices is inevitable - similar to how a drop in sales volume after Lehman failed in Sept '08 led to a big price adjustment across all price points. Outside of seasonality which always should factor into our thinking, I would be wary of making bold price predictions for three main reasons:

1) First, before Lehman's failure in late 2008, Manhattan property was still trading right near peak levels - not so today. We always should keep in mind where we are coming from. In other words, today we are coming from a market that adjusted and then reflated a bit - not from a market trading at peak levels. Therefore its likely we will see less downward pressure should any new adjustment process be in the making.

2) Second, the level of fear floating around the environment two years ago versus today is quite different; today we do not fear systemic collapse or risk of a true depression. Rather today, a reflation mentality still seems in tact. The question is whether or not you believe in it.

3) Finally, the pressure to liquidate combined with a negative wealth effect of a plunging equity market is highly unlikely to mimic what happened from late 2008 to early 2009. Recall in that period, stocks were on their way towards a 45% nose dive - so ask yourself, do you see equities doing a similar move over the next 6-9 months causing the same level of panic?

In every market there will be sellers that must sell, sellers that want to sell, and sellers that are testing for a certain price. The confluence of factors that allowed an extreme move post-Lehman to occur, just doesn't seem to be in place right now. With that said, I think the mini-frenzy that produced some stronger than normal bids during Feb-April is clearly over. Its likely we see continued upward pressure in quarterly reports into late 2010 or early 2011, whenever the lagging deals eventually close and get caught by public record.

Now, the market is also seeing a move down in measured Active Inventory levels. Nothing major, but a decline in inventory nonetheless. I will not disclose the rules we put in to measure active inventory right here (you will have to wait for launch of the new site), but people should know that rules MUST be in place to properly measure what should be counted as active in this market - for example, a listing that is set to ACTIVE internally yet not updated by the listing broker in 90 days or 180 days, should NOT be counted as active! Those are stale, old listings more likely off the market yet never updated by the listing agent. Bear with me here.

Movement in sales pace should be analyzed with respect to relative movements in active inventory. What I mean is, imagine if sales pace stays constant but active inventory increases by 15%. Although sales pace did not change, one should interpret that as a slightly weaker market because demand is not meeting up with supply the way it did when inventory was 15% lower. On the flip side, if sales pace rises 10% and inventory falls 10%, that should be interpreted as a quickly strengthening market because supply is not keeping up with the pace of demand. These relationships could be due to seasonal factors or they could also signal a shift in the markets.

With me so far? One of the cooler charts we designed was what we call the Active-to-Pending Sales Ratio. It could be thought of as a reverse Absorption Rate chart with an equilibrium right in the middle. It will signal a weakening market when the ratio rises above equilibrium and signal a strengthening market as it falls below equilibrium. But it should factor in how different market forces may be enhancing one another or canceling each other out. Not a bad measure of volatility as well I guess.

So here you go, the Active-to-Pending Sales Ratio Chart since January, 2008:

active-pending.jpg

First you notice the huge bulge that shows the severity of the adjustment Manhattan real estate experienced post-Lehman - pending sales fell about 70% while inventory rose about 30% during that phase, causing this ratio to surge with that weakness. The reflation that occurred in mid 2009 is also there. Finally, in the last month or so we see only a slight move up as sales pace noticeably fell. The main reason why this trend did not move up further, is because active inventory fell about 7% in the last few months; somewhat muting the effect of the drop in newly signed deals. It seems more of a seasonal thing than a 'market is about to see an adjustment' thing. When viewing the data trends as a whole, rather than piece by piece, I can confidently say that the pace of brand new listings hitting the marketplace in the last few months has slowed big time - and with it, deal volume.

Let's wait a bit longer before changing views or declaring inevitable price adjustments in our near future. For those that must sell soon, enjoy the fact that inventory is declining but get aggressive on price because the pace of signed deals is telling me that buyers are being very patient right now or taking a break for the summer. It may be quite difficult to procure that strong bid for any property mis-priced and with no special features to offer.


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