Cracks in the Foundation? Equities Selling Off - Volatility Rises

Posted by urbandigs

Mon Feb 3rd, 2014 04:33 PM

A: Its been a while since there has been a reason for me to write something other than "equities continue to rise & so does Manhattan real estate" stories. Lets face it, in this fed engineered environment for the past few years volatility was non existent. This translated into a "risk on" mentality and utter lack of fear in the Manhattan marketplace. But looking at the markets 'unglueing' over the past week or so, could there be some cracks in the foundation?

For the past year or so this market has experienced a lack of "1-on-1" negotiations amidst a very tight inventory crunch. In its simplest terms, there has been too much demand chasing too few quality properties out there in Manhattan.

Buyers had to get very aggressive to win deals and in multiple offer situations, it isn't hard for one very interested buyer to "gap up" their bid to win out. I already know of a few pending deals from a few weeks ago that will blow away some brokers/consumers once the deal closes and becomes public record. The first few weeks of January 2014 is reminding me of the peak back in May last year. But things could very easily change over the near term.

As I often say here on UD, its all about the buyers ('the bids')! When the bids pause, its up to the market to adapt and right now I am telling you that sellers have nothing but incredibly strong comparable sales to base future price expectations on. I wonder if a gap will open up between bid & ask if equities & credit continue their current selloff.

Here is what has happened in the past week or so:

-- Equity markets are roughly 5%+ off their peak highs
-- VIX (volatility index) surges; Emerging Markets VIX sells off most in 2 years
-- Credit Spreads starting to widen

Putting aside what is causing this (who the heck really knows anyway, we could simply be selling off after a ridiculous reflation for the past 4+ years), lets discuss the dangers here.

Now, one week won't impact Manhattan markets unless some kind of surprise event akin to Lehman failing occurs and kicks off a much more aggressive deterioration in markets. I mean, if volatility comes down tomorrow and equity indexes just muddle around these new lower levels, I don't see Manhattan real estate being impacted by recent events. However, what we have to watch out for is whether this current selloff starts deepening and feeding on itself.

Its something to start watching for one reason alone --> all it takes is continued rising uncertainty to put a bit of pause in buyer's bids . There is no quicker way to insert uncertainty & pause in a buyers mind than (a) a fierce selloff in equities + (b) a surge in volatility indexes + (c) widening of credit spreads which might indicate more weakness is yet to be priced into equities. All of which seem to be occurring to some degree.

Its all about the bids. Lets face it, for over a year now sellers have been tapping what seems to be an endless well of aggressive buyers with tons of cash! A long enough time for brokers/buyers/sellers to adapt and change their expectations.

Should this credit/equity selloff continue it would be hard to imagine buyers not being impacted and being the first to update their expectations.

It starts with rising uncertainty and real reasons for buyer confidence to fall --> that leads to less aggressive bids and a shrinking of the buyer pool (some buyers decide to wait) --> dropping deal volume will be the first sign of trouble when compared to historical averages for that month --> sellers will have to adapt until either bids come back or their price expectation falls to meet the new market.

There is a cycle to this madness and if equities reach full correction territory, I am sure the media will amplify the affect and quicken the cycle. The psychology of asset cycles tells us that down cycles often feed on themselves changing euphoria very quickly into anxiety, then denial, then fear, then panic, and then depression.

TheRealDeal posted its 2014 Predictions story and I was quoted saying this:

"The warning signs will likely first appear in credit spreads and then equities and bond markets will react. That's how it started last time, in 2007, so that is where I'll be looking again. The hard part is figuring out whether a minor blip is just that, a blip on a longer-term positive trend line, or if it's a true warning of some bigger event."
I didnt think it would happen this quickly but I find myself right now in that position wondering if this selloff is another "blip on the longer term trend line" or "a true warning sign of a bigger event".

Lets keep our eyes peeled and watch credit for an indication if this selloff has legs or not. In the meantime I will report if there is meaningful change in what I see in the field or in the Manhattan data coming in.


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