Warburg Blog

No, apartments in New York are NOT selling for fifty cents on the dollar. And that is not exactly what that front page article in today’s New York Times said. What it said was that some developers who are not selling units, and the banks which increasingly dictate to them, are deciding to bring in auctioneers to sell individual units or blocks of units. These sales could discount the units “as much as 40% to 45%” from the asking prices at the peak of the market.

There is an enormous inventory of unsold condo units in Manhattan, especially in Harlem and south of 14th Street. There are also many in downtown Brooklyn and in Williamsburg. Given that the resale market is down between 20% and 35%, depending on location and property size, 40% does not seem like such a stretch for a bulk sale or a unit in a neighborhood which is flooded with inventory.

But let’s wait and see what actually happens before believing that Manhattan is on sale for half price. Those headlines may sell papers, but as always the real news is a little more complicated.

I have just read the recent Barrons cover article on real estate and find it another exercise in market bashing…typical of what reporters do these days but surprising to me in its lack of a fully informed perspective. No question about the fact that the luxury market in Manhattan has lost substantial value. But the ASKING price of the Brooke Astor apartment, which was at least 10M too high from the moment it was placed on the market, is not a benchmark!

Since discovering actual selling prices so often requires more work, reporters have a tendency to do the easy thing and talk asking prices or get information from big media names while failing to get the perspective closer to the earth. What we see is that Warburg signed a number of deals this month between 5M and 14M, all substantially lower than where they started out AND where they would have sold 8 months ago, but with enough velocity to make it clear that the market has actually regained a little traction. Buyers who were priced out or for whom the market made no sense are re-entering now as they see the opportunity to buy a better property than they expected and move on with their lives. These days the big challenge is more getting sellers to accept the new realities (not as ghastly as made out in the press but still substantially off) than it is getting buyers to make currently reasonable offers.

Following is a preview of my upcoming Manhattan Market Watch to appear in the March issue of Mann Report.

Buyers are back!  Sidelined during 2008’s fourth quarter, they have returned to the residential marketplace in these first few months of 2009, visiting open houses again as they scout neighborhoods and evaluate inventory.  Releasing pent up demand and testing the waters with low offers, they seek value and discover that prices are down as much as 20% from six months ago in all categories.  Many who were priced out of the market previously can now afford to buy more for less, and deals are being made once again. 

Some of the doom and gloom is lifting in Manhattan even as our national and local economies continue to struggle with mounting layoffs and still dysfunctional credit markets.  Even as the downturn persists, buying opportunities are surfacing, and well priced properties are getting attention from multiple purchasers. 

On January 18, a banner headline on the front page of the Sunday NY Times Real Estate section announced:  “For the Brave, the Moment is Now!”  The story reported that first time buyers especially were positioned to take advantage of “reduced apartment prices and interest rates that have fallen to the lowest levels in a generation.”  Similarly, there is increased purchasing activity in the $2-3.5 million market as families demonstrate they can no longer delay gratification, and there is renewed and heightened interest in this sector. 

Last September 15, Jim Cramer, New York Magazine’s “The Bottom Line” columnist predicted that on June 30, 2009, the nation’s housing market would turn around, New York would find its bottom and home prices would become “irresistible.”  By mid year 2009, Cramer expects we will face “the best opportunity to buy since the 1989-1991 real-estate crash.” 

For much of last year’s fourth quarter, seller expectations were misaligned with buyer perceptions, so transactions were stalled.  We’re now in an adjustment period of sorts, having shaken off our market dependence on Wall Street.  While some sellers remain in denial, others are demonstrating flexibility and are negotiating to make deals happen.  Contracts are being signed, but we are returning to 2005 price levels.  Those who bought after 2005 will undoubtedly lose money with a sale now.  Those sellers who will also buy in this market—regardless of whether they are trading up or down—will make up any perceived loss with savings from a reduced future purchase.

Current low interest rates are extremely appealing, but there are new reality checks with obtaining financing.  Not only must borrowers have sterling credit scores of 720 or higher and be able to verify income with reams of documentation, but the building must also meet all fine print qualifications previously ignored by underwriters:  like having enough cash reserves to cover 3 months of maintenance, having sufficient fidelity bond insurance, and in the case of new construction developments, having 70% of the building sold or in contract.  Additionally, some lenders are beginning to discount appraisals by 5% because of Manhattan’s sudden new classification as a “declining neighborhood.” Confounding the financing process, national lenders like Chase, Wells Fargo, Citibank and Bank of America are no longer working with mortgage brokers.  In this climate, delays and the unpredictable can occur.  As a result, financing contingencies have returned to contracts, and many attorneys are also adding a contingency clause that the full amount of the loan is funded at closing. 

In this environment, bottom fishers are unlikely to conclude a deal.  Cemented in place with their low ball offers, these bargain hunters may regret a missed opportunity later, since only with the benefit of hindsight or a rear-view mirror, can the bottom be timed. 

Sellers need to acknowledge that the playbook for 2009 underscores a buyer’s market with changing rules and tightening standards.  They are advised to price realistically, paying attention to value and leaving room to negotiate.  Most bids warrant a counter, because two months down the road, offers may be even lower.  While well priced specialty products might fetch multiple interest quickly, there is a pile-up of inventory in many other categories where scores of similar products compete.  When the product is interchangeable with the rest, only price can make the property compelling.

The buyers have returned to the marketplace this quarter, and hopefully I’ll be joining their ranks.  “Just hold your nose and jump,” coached my boss and friend Frederick Peters in a supportive email.  No different than other buyers who fear further price declines in a weakening market, I admitted I was hesitant.  Suffering a mini identity crisis as both broker and buyer, I rationalized that even if prices came down more, I wouldn’t get hurt over time if I bought quality merchandise and I had a 5-7 year horizon.  As of this writing in the early days of February, I’m positioned to take the plunge and offer this advice to others:  We’ve neared the bottom, so if you see the property that you’ve been waiting for, don’t hesitate to begin a dialogue.  Make a sensible purchase and acknowledge your opportunity costs.  Come on in—the water’s fine. 

No one knows where the bottom is. So for most buyers of Manhattan real estate, the question is simply “Are we close enough?” In recent weeks it appears that for many the answer is yes.  Several factors are at work here:

First, the flood of post-crash apartments so many were expecting has never materialized. Property absorption rates are down, inventory is certainly up, but those “Bear Stearns apartments” and “Lehman Brothers apartments” everyone was talking about have failed to pour onto the market and further depress prices (and consumers!)

Second, with residential properties now selling at anywhere from 15% to 30% below their historic highs (the rule of thumb is the bigger the property, the bigger the reduction), many buyers who were priced out two or three years ago are seeing value in the marketplace and stepping back in. Bottom or no bottom, they are willing to bid and to buy, especially with the historic lows in mortgage rates. Since most buyers care most about their monthly payment, a great mortgage can be worth 5% to 10% in the price. 

Third, New Yorkers have a famously brief window of tolerance for delayed gratification. Sooner or later (preferably sooner) they want to move on with their lives. They are still marrying, divorcing, having babies, getting on with life. And if the perfect property to suit the new phase is right in front of you, and 25% cheaper than it would have been a year ago, for a lot of them that is enough.

Many buyers still want to wait for the second quarter, or for yet another shoe to drop economically, before making a purchasing decision. But for an increasing number of others, today’s values are good enough to entice them back into the game.