Animal Spirits, Higher Rates & Expectations...

Posted by urbandigs

Fri Aug 16th, 2013 01:27 PM

A: Never discount the element of 'buyer emotion' from the equation when trying to understand what has been going on in the Manhattan marketplace since February/March. There continues to be strong buy side competition for reasonably priced quality products at a time of year when we typically see a slowdown in both deal vol & supply trends. So far, deal vol has slowed a bit since May but we are still producing at a very high level considering this time of year. The action is in the higher price points and not so much for the under $1M market, or for those properties that lack views & renovations but are still testing the market with a very high asking price. As for supply, we have actually seen a tick up in the Year over Year trend although not enough to see any change of market dynamics in the field. I think the best way to describe the marketplace for serious buyers out there is..."there is a lack of 1-on-1 negotiations going on right now". What I mean is, as buyers weed out the most desirable property in their sub-market and ultimately bid on them, there are almost always offers in or "coming in" already. Buyer's expectations must be managed property and seller's testing the market shouldn't wait long to adjust their strategy if no 'acceptable' bids come in after the first 3-4 weeks. Lets discuss and look at some charts to see what the data says.

Before I get into the charts, I want to re-iterate something that must be understood if you are an active buyer out there: SELL SIDE HAS WAY MORE INFORMATION THAN YOU. THE SELLER KNOWS TRAFFIC LEVELS, WHEN BIDS ARE ON THE WAY, WHERE THOSE BIDS ARE COMING IN & THE QUALITY AND TERMS OF THOSE BIDS, ETC.

In today's marketplace, buyers are not only competing on bid amount but also bid quality. Given what I have been discussing since Feb-March here on UrbanDigs and the real-time data to confirm it, it's not surprising to expect sellers to play into those conditions as much as they can.

So what is a realistic seller of a desired property thinking these days when a few bids come in? There are 3 general ways they can handle their listing strategy when multiple interest presents itself:

1. If a Strong Bid is in but More Bids are Expected ---> Sellers can leverage the high demand for the property and create an even deeper sense of urgency by waiting 5-7 days and holding one last 'open house' for everyone to get a fair shot at the property. This drives buyers who already have a bid in but are put on hold, crazy! Either you bid against yourself to a seller that has stated you will get no response, or you wait for other bids to arrive and see what happens next. Tough one to deal with but hopefully the seller and their broker are transparent on their plans and have a stop date where they will no longer wait for bids that may or may not come in.

2. Private Negotiations w/ the Strongest Multiple Offers in --> Sellers can negotiate privately as they see the quality and bids of all offers in. If one bid is both higher & stronger, well that 2nd bid is not going to get much of a response and there is not much you can do about it other than raise your offer until u get a response, or just put your best foot forward and put a 24 hour deadline on it. The thing is, when buyers do NOT hear that a best and final is planned, they tend to not put their best foot forward. So they bid expecting a response, only to find out the seller decided to outright accept another offer and not even give the other buyer a chance to play the game. Buyers and their brokers have started to adapt and bid more aggressively as the 'bid low and negotiate' strategy has failed too many times.

3. Declare a Best & Final for All --> Seller brokers will provide a deadline for all required bid docs to be submitted with buyers' best offers. A day is taken to review all offers and clarify whatever needs to be clarified, and 1 is accepted and given a chance to produce a signed contract in a short but reasonable period of time. If a contract is not produced by then, the seller can proceed on next steps with the backup offer.

These 3 scenarios have been the majority of the situation for our clients over the past 4-5+ months. If you are in the field, you are likely experiencing this for your top choices. The most frustrating part of it for me are the unrealistic sellers out there that get a strong, realistic bid but demand 'all cash' or 'no finance contingency' because they know the deal is at high risk of not appraising -- so naturally, they dont want the banks involved, or at minimum, they want the deal not contingent upon financing.

Now, what does the data show?

Here is a preview showing 2 of the new Manhattan charts that will be on our upcoming site re-launch:

MANHATTAN DAYS ON MARKET TRENDS -- 2 YEARS (this chart uses the old design as I have to keep the new designs out of the public for now -- shows to June 1, 2013):

dom+new.jpg

Conclusions --> Days on market is a new trend UrbanDigs will launch when our new site goes live. It really does compliment our other real-time charts and puts the recent Manhattan strength into perspective. The sharp decline in days on market trends since the start of the year confirms the frothy nature of today's marketplace as the majority of new supply is absorbed very quickly by waiting buyers.

MANHATTAN CONDO $ PER SFT TRENDS -- SINCE 2008 (this chart uses the old design as I have to keep the new designs out of the public for now):

condo_quarterly$.jpg

Conclusions --> Our new quarterly chart system showing Condo Price per sft really does a nice job showing the progressive reflation Manhattan experienced since 2009 and where the market is now. The trend shows the recent strength and seems to compliment the SE Condo Index; especially in Q2-2013. Still, buyers & sellers would be advised to track relevant comparable sales in the target building when devising a bidding or pricing strategy. Let's try not to forget that in Manhattan every building is it's own little marketplace. Comparing a target building to a nearby one that is deemed similar introduces many variables that are impossible to quantify for. So, keep it simple and stay in-building when trying to determine fair market opinion for any unit.

Final Thoughts -->
So lets first address the big elephant in the room -- rising rates and their perceived 1:1 relationship on Manhattan price action. In my opinion the recent surge in lending rates has not had a meaningful impact on the Manhattan market. We are talking bids in the field right now here, not lagging closed sales data. I mean, I would see it right? Either it would show in overall Manhattan deal vol (which it isn't) and it would show across our buyer clients (and it isn't). It's the fact that Manhattan monthly deal volume continues to come in at levels 40%+ from what we are used to seeing in the month of August! And this is happening with Total Supply down 11% over the past 30 days. The data is the data, and the data is still seasonally very strong.

There has yet to be a sustained disruption in equities or credit (think 15% plus decline in equities & widening credit spreads) to change the mindset of Manhattan buyers en masse. And until that happens, buyers will have to continue to adapt to a tight marketplace with stiff buy side competition. There is just a lack of fear out there right now and no reasons to give buyers 'pause' -- in the end, buyers will see for themselves what's going on out there. If anything changes I will be the first to let you all know...trust me, you will start to see me writing a lot more if my data systems start flashing warning signs that the Manhattan marketplace may be shifting.

Nobody knows what's going to happen with rates after the recent surge. All I know is, the market is not prepared to see a selloff in both equities & credit at the same time rates surge. That combination is both mysterious and worrisome and seems to be the new trend. Keep an eye on that dynamic as we go through the next few quarters. For now, the buyer pool seems to be adapting to higher rates in stride. Otherwise my daily ticker would show a sharp decline in deal vol as sellers initially balk at lower bids that are pricing in a higher cost of carry.

Exciting times ahead with the new site coming & all, so please stay tuned for UD version 2.0!