Warburg Blog

Gradually, the national housing market has moved into recovery. Absorption and housing starts are up. But in spite of expectations to the contrary, the mortgage market remains tight. Getting a mortgage requires a number of steps, each of which, in today’s world, is still fraught with peril. Since large banks, which issue most mortgages, are still being sued by the federal government (new charges against both Wells Fargo and Bank of America came out last week), their guidelines are becoming more and more stringent; ironically, even as the national real estate market  improves, getting a mortgage is becoming harder. Borrowers need higher credit scores than ever before. And the always dicey issue of appraisals has, with the well intentioned but misguided intervention of Dodd Frank, gotten dicier than ever.

It is certainly true that, before 2007, many appraisals were faulty. Values tended to be determined by the contract price and then justified, rather than representing an arms-length perspective on the actual worth of the property. But today, as so often happens, the pendulum has swung too far in the other direction. For one thing, appraisers can no longer be selected by actual experience in the neighborhood where the property is located. For those of us working largely in Manhattan, that means we increasingly deal with appraisers from Long Island or Westchester and Rockland Counties. Manhattan’s micro-neighborhoods are tiny: a half mile can make a vast difference in value. An appraiser not familiar with the neighborhoods can easily select incorrect comparables in valuing a property . And these days, inappropriate comps never lead to a HIGHER number! Appraisers came under such harsh scrutiny in the days after the subprime mortgage market collapsed that they now protect themselves by aiming low in all their valuations.

Everything about appraisal is relative. While a skilled professional can do an excellent job of assessing value, the big differences in assigned value between one appraisal and another’s speaks to the variable underlying nature of each appraiser’s assumptions. Here’s an example from my own life: recently my wife and I refinanced our house in Connecticut. Because of appraisal problems, the process took six months. Our first appraisal took place in February of last year. We were not here, and the appraiser came in and out quite quickly. No one was here to explain to him the nature of our renovations, or to talk about the age and quality of the house. The comparables he used, to recently built or post-war houses in this and neighboring towns, had nothing at all to do with our fully restored 1793 colonial. And the appraisal came in SO low, never mind the value of the house, that we could not even refinance the mortgage, which had originally represented only 60% of the house’s value BEFORE we did our renovation!

So, since appraisal rules are now so strict that neither the owner nor the mortgage originator can have any influence, we waited a few months and got another appraisal. By then it was summer, and the garden looked beautiful. We made sure to be there, and we walked the appraiser through what we had done: the new plumbing and heating, the quality of the materials and finishes. We had explained all these items to the earlier appraiser, but actually showing them was different. This appraisal used redone antique houses as comps, and came in 50% higher than the first one. We got our refinance, and I got a big lesson in the new world of post-Lehmann appraising.

Here’s what I learned: as agents we need to be more proactive than ever in the appraisal process. We must ALWAYS be there when the appraiser evaluates the property.  We must arrive at every appraisal appointment with our own research, including the most suitable comps. Especially in a rising market, we need to bring signed contract info which supports a higher price than the closed comps, which are often several months old. We must discuss with the appraisers how they adjust for condition, outdoor space, location, level of service, and all the other variables which have such impact on the properties we sell. And we must prepare our buyers and sellers for the possibility that the market may dictate a different price for a property than the price an appraiser can justify. The market moves fast, and closed prices (from deals actually struck several months before) can lag the market by as much as 5%. This is particularly true when the property has been the subject of multiple bids.

Like square footages, appraisals appear to be scientific but are really a combination of fact and conjecture the accuracy of which depends entirely on the local knowledge and expertise of the practitioner. But they form an integral part of our purchase and sale process, so, like brokers, they are here to stay.

“What’s the square footage?” These words strike fear into the hearts of co-op agents for a number of reasons. First and foremost, no one really knows. Most co-ops were built before square footages were consistently calculated (or calculated at all.) Appraisers rarely agree, and frequently diverge by as much as 15% of the total area. And buyers, increasingly interested in a way to quantify their purchase, look to us for this information.

In the old days (before the mid-90s) agents threw around square footage numbers, usually inflated, with some abandon. Then came a lawsuit which ended all that: a buyer, eager to get out of a contract he had signed, claimed that the seller’s agent had misrepresented the square footage. Appraisers were duly sent in and determined that indeed the apartment was smaller than the agent had represented on her marketing materials. It was an expensive mistake for the agent and the agency, and we all learned from it. The Residential Division of The Real Estate Board made a decision that square footages would NOT be required on co-op transmissions, and most of us stopped doing it. The risks were too great.

So how is the problem solved today? In the condominium and new development worlds, it’s uncomplicated. The “Schedule A” in the prospectus every buyer receives has square footage information for each apartment, and we agents simply quote those numbers. Ironically, the numbers are usually based on outside measurements and overstate the usable square footage by some considerable percentage. My agents and I sometimes joke that the numbers seem to be based on measuring the property from the middle of the street! Nonetheless, those numbers are what they are, so for anything for which there is an available Schedule A (mostly buildings either built  from the ground up or completely rehabilitated within the last 25 years) we simply pull the square footage numbers from those documents and feel we are on safe ground.

The challenge is in co-ops, especially those in the prewar buildings which line the major avenues of the Upper East and Upper West Sides. And my sense is that each agency, and to some degree each agent, manage this issue in their own way. Very few of us market our co-op listings with a square footage included; the risk is simply too high. Many colleagues simply say “Co-ops are not sold that way” and leave it at that. For me and my agents, when the stakes are high enough, I will sit down with a scale ruler and try to measure off the floor plan to arrive at a square footage number. I make certain assumptions: most bathrooms are four feet across, most closets are three feet deep. I leave 6 inches for walls when measuring several rooms together. Hallways can be as narrow as three feet or as wide as five feet.

Most importantly, when we come up with a number, we disclaim like crazy. My numbers are usually low compared to those used by others, which makes me feel more comfortable. And I advise my agents, when they are doing a comparables analysis for pricing purposes, to say something like what I say: the one thing I can tell you about my numbers is that they are wrong.  However, for the purposes of estimating value for this unit relative to similar units, I am making the same assumptions, and therefore the same mistakes. So while the ACTUAL number I am coming up with for the square footage of any unit is almost certainly incorrect, its size RELATIVE to others to which I am comparing it is pretty close. In other words, if my calculations indicate that Apartment A, which sold recently at 200 Central Park West, is 3000 square feet, and Apartment B in the same building, which you are considering buying, is 3300 square feet, then all you need to know is that if you are paying about 10% more for B than was paid for A, you are OK.

Buyers and sellers are frequently baffled as to why agents are so noncommittal or uncomfortable about square footage questions. Now you know.

There’s a palpable boom at the top of the new development market as a growing supply of high end products sizzles with through-the-roof pricing.   At the same time, price conscious home buyers are choosing from a shrinking inventory of resale properties.  Both phenomena are reasons for optimism. 

At the market’s upper end which is buoyed by foreign demand, a growing crowd of global moneyed buyers is setting all time price records.  Gary Barnett’s One57, which has been billed by the New York Times as the city’s newest “Billionaires’ Club,” will offer concierge services from the 5-star Park Hyatt Hotel which sits at its base.  Though the 1,004’ glass curtained skyscraper is not expected to be completed until late 2013, a purported 60% of its 90 residences have gone to contract since the sales office opened last December.  The numbers realized are staggering and unprecedented:  $115 million, $95 million, $90 million to cite a few.  Featured this week in NY Magazine as the residence that will be bought by the “Kings of New York,” this steel and glass tower developed by Extell near Carnegie Hall is being likened to a safe deposit box where global citizens can park their currencies in a relatively safe haven, adding a Manhattan trophy to their collection of homes much like a new piece of art. 

Vying with One57 and creating much broker buzz is 432 Park Avenue now a hole in the ground at 56^th and 57^th Streets.  Rivaling One57 as New York’s tallest residential building, Macklowe’s ground up construction will climb nearly 1,400’ high.  Formerly the site of the Drake Hotel, its 90 stories will offer 129 residences above a retail and office complex and is anticipated to open by April 2015.  Ten full floor 8,000 square foot homes starting at $64 million will be available in addition to smaller apartments of approximately 1,400 square feet.  The Penthouse with helicopter views is for sale at $85 million even before a show room opens by year end. 

Indeed selling from floor plans has returned.  Another example is Walker Tower at 18^th Street west of Seventh Avenue in the heart of Chelsea.  Even before this project officially opened its sales office in late June, approximately 25% of the units had been spoken for.  Meeting the demand for a high end new development product downtown, this outstanding conversion of a 1929 Art Deco building offers homes ranging from 1,350-6,500 square feet with price tags from $4.5-$50 million and is attracting celebrities, entrepreneurs and techies.  The historic building’s wedding cake shaped structure has multiple terraces, widened windows, 12-14’ ceilings and will probably average out at $3,500+ a square foot. 

Uptown, on the Upper East Side in a 19 block span from 60^th to 79^th Streets, Park to Lexington Avenues, there are at least eight high profile projects that will offer about 400 apartments averaging $3,000 per square foot.  After a four year hiatus, the current wave of new development projects either from ground up construction or rental conversion underscores that developers are not only confident and bullish on New York, but they are properly leveraged and capitalized. 

While the upper end of the market seems to be running away with itself, in sharp contrast, everywhere else buyers are supremely price conscious and continue to hunt for value.  An expected flurry of activity before year end to avoid an additional 3.8% capital gains tax next year has yet to materialize.  For some time now, rising rents and low rental vacancies have been contributing to an expanding pool of first time buyers seeking to secure historically low mortgage rates.  All the while cash purchasers continue to be preferred over those who are unable to waive a financing contingency.  Because the lending climate is so radically altered with regulatory scrutiny and delays caused by time consuming checks and balances, sellers are recognizing that it’s often worth more to take less from an all cash buyer.  Increasingly, loan approvals are averaging 45 days or longer with equally comprehensive examinations of the borrower and of the property being financed.  Clearing to close can take weeks more as the property and borrower get reviewed a second and even third time with repeated requests for more documentation. 

In all price ranges, the number of sales continues to outpace the number of new listings coming to market.  With inventory levels of resales at the lowest they’ve been in seven and a half years, even if demand remains flat, sellers who price realistically will achieve a good outcome.  There is every reason to believe that for the foreseeable future, the Manhattan market will sustain a high level of activity.  If there is price movement ahead in resales, it is more likely to trend up rather than down.  Bolstered by capital flight, the spiked pricing of the flourishing high end broadcasts confidence to the rest of the market.

In last Friday’s Wall Street Journal, an article appeared describing the high correlation between Machiavellian behavior and success in the real estate business. According to the author, “brokers who score high in Machiavellian personality tests sell more real estate than their kinder, gentler colleagues.” While this finding certainly plays into the stereotype of the predatory agent swooping in to manipulate unsuspecting customers (two other industries specifically mentioned for similar correlation were stockbroker and car salesman), the reality is different. Here’s what I have learned over almost 30 years of hiring agents and observing who succeeds and who doesn’t.

There actually ARE personality types which are likely to succeed in real estate. At Warburg, we administer a quick personality test to every agent whom we are considering hiring. It is called a DISC test, and although it takes only 7 minutes to complete online, it is remarkably accurate. We correlate the findings of the test with the profiles of our top agents to determine the results most likely to lead to agent success. The four letters in the acronym stand for Dominance, Influence, Steadiness, and Compliance. In general the most successful agents have high Dominance and high Influence scores.  They are influencers: outgoing, charming, friendly. But they are also dominant – they know how to close. They are capable of saying, “You need to step up to the plate” when they see that their customer is about to lose a significant opportunity. They elicit warmth and respect but they are not timid. They are powerful, knowledgeable professionals who can be both strong and opinionated. This is a typical CEO profile.

Another successful combination is the high Influence, high Steadiness personality type. These agents more typically win through persistence. Once again, they are friendly and engaging, and they are usually great relationship builders. They are also steady and thorough. They do their homework, and they know how to counter one argument with another. Unlike high Dominance personalities, they are not impatient. But don’t cross them! They will give you a lot of rope, but once you have run out of rope, they are DONE with you.

The personality types less likely to be successful are Steadiness and Compliance combos, or anyone with a high C rating. Compliance is not a trait usually associated with independent contractors, who almost by definition have an iconoclastic streak, and, unlike many high Compliance people, are not timid. The best agents push the envelope and think outside the box. They suggest the property you weren’t looking for, in the neighborhood you didn’t consider, and demonstrate to you why it actually is the right choice.  And they provide such attentive service and make you feel so good about what you picked that you send all your friends, neighbors, and children to them for all their real estate needs going forward.

Machiavelli’s Prince was not in a referral business. We are. Successful agents, no matter how Dominant they may be, always deploy their skills in the client’s best interests. They are relationship builders. THAT, and not a scorched earth perspective, creates long term value in our business.

I read an interesting opinion piece about compromise in this Sunday’s Times. Tip O’Neill’s son, Thomas, wrote about his father’s working relationship with Ronald Reagan; how the two men, who disagreed about practically everything, learned to work together for the good of the country. This successful collaborative effort was based on compromise. In addition to being a serious indictment of TODAY’s governmental process, the piece made me think about the real estate business. Buyers and sellers so often get in their own way, shooting themselves in the foot by their inability or unwillingness to reach for common ground. As agents, we see this at every step in the process.

1. Pricing   All too often, a seller has a price already fixed in his or her head. This price may be based on other asking prices for similar properties (never a reliable gauge, since selling prices are often so different) or it simply may be based on what the seller would like to believe the property is worth. We often hear, “Oh, I was told I could get ten million for it.” Brokers all tend to have the same internal response to that statement: by whom? A dinner guest? An inexperienced agent trolling for the listing? No suggested asking price is meaningful unless it is presented with comparables which justify it. As an opening salvo in the negotiating process, a distorted asking price is highly counterproductive. Even in this tight environment, many fine properties linger on the market month after month. It is always about price. Buyers will rarely return to a property once they have decided against it. There is interesting psychology at work here: when buyers see a property which could be right but is priced wrong, they often convince themselves of its deficiencies so as not to feel disappointed. Then, when the price comes down to the appropriate level, it is too late. They have already talked themselves out of it.

2. The opening offer    Here we see the buyer equivalent of the excessive asking price: the aggressively low offer. Sellers (and their agents, who should know better) can be offended and put off by a really low offer. Frequently they refuse to counter.  This offer can also prejudice the seller against the buyer in further negotiations.  Very low offers are worse than a waste of time. They create a setback to the negotiating process, reducing the likelihood of a positive outcome.

3. The line in the sand  Agents experience this snafu with deal after deal. The negotiation proceeds, either smoothly or otherwise, to a point at which the parties are less than 1% apart. And neither side will budge. Each tends to become self-righteous about how they have given up more than the other side. Sellers feel that they have dropped too far from their asking price, while buyers fear they have  offered more than the market indicates the property is worth. And there the deal sits. Each participant has drawn a line in the sand; neither is willing to cross over.  

In each of these situations, the participants hang on aggressively to the fantasy of being right. Other forces are at fault: the buyer, the seller, the broker, the environment. This is only human. We all do it. But only in letting go of our need to feel right can we once again see the goal – a fair transaction for all.  We must compromise to arrive at the best outcome. The details drop away once we attain the desired conclusion. Did I pay a half percent too much? Did I sell for a half percent too little? Six months later, no one remembers. But in the moment, we tend to compromise our own ability to get what we want as ego, or a sense of the rightness of our position, blind us to the need for give and take. When we hang on too hard to our own positions, everyone loses.

Warburg Realty’s third quarter sales upend the conventional wisdom about real estate in the summer months. Traditionally, the summer is always the weakest quarter, with August the weakest month within the span. This year, the third quarter burned hot! With 30% more sales than in July, and 140% more than in August of 2011, Warburg saw more contracts signed in August than during any other month of 2012 so far (as the attached chart indicates, the market overall had a slightly different experience.) These results for the summer months are extremely unusual, as a look at 2010 and 2011 in the chart demonstrates. What is going on?

MONTHLY CONTRACT ACTIVITY
(click to enlarge)

Data provided by Urban Digs

First, a word about the deals themselves. The conventional wisdom about summer sales did prevail when it comes to dollar value. While the market was extremely active in August, most of those deals were not big deals. Those big deal buyers actually ARE at the beach.  But all summer long we have seen acceleration in the market for $2 million and under. These buyers, more than any others, are influenced by low interest rates and how the resulting cheap money and low monthly payments, not to mention the tax benefits which no one really believes are going away no matter who wins the election, make buying more attractive than renting. Add to that a continuing ultra tight rental market and you have an active summer on your hands.

Equally interesting, and more unexpected, is the acute lack of inventory throughout the sales marketplace. It has been true for some time that foreign money is snapping up the high and mid priced condominiums all over Manhattan. But the profound shortage of inventory which has developed in the co-op market defies expectations. Throughout the city, resident New Yorkers are hamstrung month after month in their new home searches. At $20 million, at $10 million, at $5 million, at $1 million – few new listings appear. The customers, hoping that there is still seasonality in the market (in my observation, there really isn’t!)  ask, “Won’t there be a lot more inventory hitting the market in September?”  Sadly, the answer was no. Many of these customers asked the same questions in April. As you can see in the attached chart from Urban Digs, my favorite source for analytical data, there was no major spike in inventory in the spring and not much more in the fall. And I don’t anticipate one any time soon, at least not on the resale side, not even with the almost certain increase in the capital gains tax burden for sellers looming on the 2013 horizon.

ACTIVE INVENTORY
(click to enlarge)

Data provided by Urban Digs

What we will see however, on the Upper East Side, is a remarkable number of new construction and conversion projects coming together this fall. Two beautiful new buildings on East 79th Street, two major conversions on Park Avenue and one on 72nd and Lexington – these are the headliners for this uniquely large crop of new condos available to buyers as the fourth quarter begins.

As I have suggested in the past, I believe a significant part of this tight market relates to consumer perception of our product. Six or seven years ago, real estate in New York (and throughout much of the country) was the lynchpin of everyone’s get rich quick scheme. Clearly that is no longer the case. No one, thank goodness, buys real estate these days because they hope to flip it and make a quick profit. But it has emerged as a hedge. Buyers, both foreign and domestic, see real estate as a safe place to park their money. As I have noted often before in this blog, bricks and mortar are, well, bricks and mortar. They exist. You can touch and feel them. And when they are in New York, one of the world’s truly international cities, with an ever expanding population – probably there will always be demand.

Some caveats still apply. While all the new condos in Williamsburg are long since sold, and most of the inventory in Harlem has been snatched up, while more and more younger people are exploring Bed/Stuy and Inwood, and artists are all over Bushwick, price sensitivity still defines most markets (townhouses in Brownstone Brooklyn may be the only environment where it seems that almost anything goes).  In general buyers, even the most eager, don’t want to overpay. That’s something  everyone learned  from the recession.

In conversation this week with a Warburg buyer, she expressed her fear, fueled by many of her Wall Street friends, that the market would plummet if Obama gets re-elected. Don’t believe it! I have heard this refrain countless times during my 32 years in the business. Regardless of your political persuasion, the fundamentals about New York will remain the same no matter who is President. New York will still be a world commercial hub, attracting people from everywhere. It will still offer its uniquely wonderful quality of life. There will still be more demand than supply for the foreseeable future. While we are certainly not immune to the play of market forces, I don’t see this election, however it comes out, as significantly impacting the value of our real estate.