S&P 500 vs Manhattan Pending Sales

Posted by urbandigs

Wed Dec 14th, 2011 02:47 PM

A: I was working on another "risk-off" story as it seems that is the trade in play again on wall street. But then I got curious about how closely the Manhattan marketplace is actually tied to equity markets. Now that we have a way of tracking Manhattan demand in real time, how close is the UrbanDigs measure of "Pending Sales" to the direction of equity markets? So here is a chart comparing Manhattan Pending Sales versus the S&P 500. In short, its more closely tied than I thought!

I would think there would be a lag, perhaps a few months, between whats happening on the street and the pace of demand for Manhattan property. But since we now have a real-time measure of demand, lets check and see how deep any lag might be. First, lets discuss how to capture real time demand. By far the best way to track the pace of demand in any real estate market is to get an accurate data source for when actively marketed properties enter a 'Contract Signed' listing state. Since it generally takes between 2 and 4 months to go from initial contract signing to actual closing, there will always be a 'pool' of listings in a 'pending' state. That pool of listings is constantly growing and shrinking as new market demand changes. Any measure of "Pending Sales" should look back at least 4 months to account for the time it takes to ultimately close.

Q: What is Pending Sales in the UrbanDigs tracking system?

A: The pool of listings that have been changed from an ACTIVE listing state to a CONTRACT SIGNED listing state and are awaiting closing. If a "Pending" listing does not close in 6 months, it is removed from the "Pending Sales" count. This is to ensure that the measure is sensitive to real time changes coming in the front end, and not diluted by old deals that may have delayed closings (i.e., new development units that may not close for 6+ months). There are currently 1,967 listings "pending" closing in the Manhattan marketplace today. That # is up 7% over the last month but flat over the last quarter. As new deals signed today are captured, older deals either close or fall out of the measure.

Therefore we have 4 ways to fall out of what UrbanDigs calls a "Pending Sale" to track demand in the Manhattan marketplace:

1. The deal closes
2. The deal fails to close and is changed to "Back on Market"
3. Its been longer than 6 months from original contract signing
4. The listing agent fails to meet REBNY mandates to update the listing in a 90-day period (REBNY mandates updates every 14 days)

If the market shuts down, the lack of new deals will cause Pending Sales to plummet; signaling to us that demand for property at current asking prices is falling - and that is exactly what happened in late 2008 and into early 2009.

But how close was it to declines in the stock market at the height of the credit crisis? Take a look at this chart comparing Manhattan Pending Sales (green line) to the S&P 500 (orange line):

s&pmanhattan.jpg

Some notes on the numbered bullet points on the above chart:

1. Lehman Fails (Sep 2008) - Bids for Manhattan property quickly disappear and new deal volume plummets sending the UD Pending Sales measure sliding more than 63%. Financing markets shut down, especially for higher end. The high end of the Manhattan marketplace experiences the most drastic discounts from peak levels in early 2009, as fear drastically rose.

2. The Bottom (February 2009) - In terms of new deal volume, Manhattan experienced its bottom around February of 2009. Fear continued for a few more months, but by the time we got into Fall of 2009 it was clear buyers were taking an interest in Manhattan property again. By Fall 2009, sellers were not nearly as quick to hit uber low bids.

3. The High-End Boom (March 2011 - July 2011) - Even though the S&P 500 and the lower end of Manhattan started to progressively reflate throughout 2009 and 2010, the high end didn't see a real resurgence until 2011. Manhattan's high end exploded between March 2011 - July 2011 (subscription required), just as the S&P reached its highest reflation point and sustained that level for a few months. Its as if higher end buyers needed 2+ years to gain back their lost confidence and for financing markets to open back up for those $5M+ deals.

4. Greece/EU Woes Hit Markets (Late July - present) - Right as Manhattan usually experiences a seasonal slowdown, equity markets took a beating in the middle of 2011. It's hard to separate a normal seasonal slowdown from a temporary downturn due to a 17% selloff in stock markets. The last 5-6 months in Manhattan look fairly seasonal to me as we see the end of a Post-Labor day tick up before the end of year holiday season.

Now here we are today facing the same risk averse trade on wall street as EU concerns intensify. Seeing money flow out of the Euro, stocks and commodoties and into US Dollars and US Treasuries is a sure signal of RISK OFF! It's about preserving capital and time will tell if this unfolds to a new lower level. So far we have been lucky, but the luck has been provided by global central banks and governments. At some point the markets may not get what they are used to getting. Look to gold for a barometer of general faith in currencies as Central Banks & Governments finish out this debt deflationary cycle. The light at the end of the tunnel will coincide with gold sustainable selling off!

Cheers!



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