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Sandy MattinglyPosted on Posted in psychology of the market — No Comments ↓
 
bring down the duck
The really old among you will remember that Groucho Marx TV show from about (forty-five?) years ago (and the really old without CRS will remember the name of it – You Bet Your Life), in which one segment featured Groucho attempting to get an (innocent) interview subject to say The Word of The Day. When the Word was uttered, down came a quacking duck.
 
I heard a lot of quacking yesterday involving “jittery”. I had conversations or email dialogue yesterday with three sets of buyers, all of whom were somewhat ‘anxious’ about the “jittery” financial markets, all of whom asked “what does it mean for Manhattan real estate?” (Actually, they all asked “what does it mean for MY [Manhattan] real estate?”)
 
Judging from the news and blogosphere, these are not the only three people out there asking these questions.
 
my (unhelpful) answer
I tend to answer such questions in a way that sounds (at first) unhelpful: “it depends”. Because whether the immediate environment is going to lead to something else depends (d’oh!) on what happens next.
 
If mortgage rates rise precipitously or significantly, or if Wall Street heads towards lay-offs, there will have to be a negative impact. If the ‘only’ thing that happens is a continued tightening of lending standards, there will have to be some impact.
 
Since all three buyers are financial sector professionals, I tell them that they have better access than I do to professional data and interpretations about each of those macro factors. But Manhattan is clearly a different real estate animal than the rest of the country, driven much more by the cycles of “Wall St” than by the cycles of the national economy. (I tell them “we will have our market slump in real estate when Wall St drops”, but the national drivers are not as significant to us.)
 
buyer psychology
For our incredibly local real estate market I see the currently most risky factor as the ever elusive Buyer Psychology. If buyers get too jittery, they will put their wallets back in their pockets, the number of transactions will drop, and sellers will react by either taking the best price available in that market (a lower price than is available now) or by holding firm and not selling for a while. What happens after that ‘while’ depends on … what happens after that while (in psychology, and in the economy).
 
I believe we saw an instance of this in 2006, in the run-up to the Congressional elections. I am pretty sure the number of transactions in Manhattan were down (I will check Miller Samuel [later]) and prices were more or less flat. The smart people’s commentary after the fact was that buyers were nervous about the effects of a change in party control in Congress. Once it happened, it turned out not to roil the financial markets and Manhattan buyers took their wallets out of their pockets in greater numbers, leading to two quarters beginning 2007 with huge numbers of transactions.
 
telling stories, hidden numbers
One of the problems with assessing buyer psychology is that there is no direct and hard data – nobody surveys or indexes Manhattan Buyer Confidence. So we are left with anecdotes and happy talk (or gloomy talk) from Talking Heads who (a) all have an agenda and (b) have very little direct information themselves.
 
What is really happening in the market now is impossible to know broadly because the only public information (closed sale data) has such a long lag time. (Lofts that close this week probably went into contract in May or June.) No one has valid data about the number of Manhattan coop or condo contracts signed this week.
 
indirect data
But mortgage lenders and brokers have data about whether their mortgage applications are up, flat or down, which is some indication of the level of market activity – though not about the direction of prices. Unfortunately, this information tends to come out unsystematically and anecdotally.
 
best direct data
The best direct data about the level of market activity is from appraisal firms, as they should get a call within a week of a new Manhattan coop or condo contract for sale. Which is one reason I rely on Jonathan Miller of Miller Samuel and his Matrix blog. But if each appraisal firm only sees their firm’s business, there is the uncertainty of market share (are they seeing more business because they are taking it away from competitors, or because there is more activity in the Manhattan market generally?).I see that Miller Samuel’s business is up this August (“my own appraisal company set a record for sales in our first half of August”; from his blog yesterday), but is that because Jonathan does a great job marketing??
 
I follow Miller’s blog and Noah Rosenblatt on UrbanDigs for economic analysis relevant to real estate. They are both more interested and more competent than I am with the data. Check out Noah’s A Marketplace With Vulturesfrom yesterday for his analysis of the strength factors in Manhattan real estate and how they may weaken. He starts with these factors (a pretty good blogging summary, IMO), then considers what may happen if they weaken:
 
Fundamentals I see that are crucial in maintaining the NYC housing market RIGHT NOW include:
1. Very Tight Inventory
2. Strong Jobs
3. High Salary’s & Bonuses
4. Weak Dollar Increasing Foreign Buyer Demand
5. Rental Vacancy Rates Below 1%
6. Skyrocketing Rental Rates
7. Trend To Live Closer To Where You Work
8. Urban Lifestyle Demand Very High
 
an impertinent question: so what?
One thing that freezes some buyers is that they are reluctant to buy an asset that may decline in value (even if they put money in “growth” stocks). Periods of uncertainty make them … uncertain.
 
I ask about their time horizon for buying (or continuing to own) an apartment. For anyone with a moderate term time horizon (five years or more), I don’t think it matters much when they buy if they have made a decision that – in general – buying is better than renting for them. Timing the market is hard (or, impossible).
 
But the really impertinent question to ask “buyers” who say they won’t buy because the Manhattan real estate market is due for a fall is “if the real estate market here falls, what will happen to the rest of your assets?” So long as one buys with a stable cost structure (fixed rate for a long enough period) and one’s income remains stable, an affordable apartment that declines in value near-term is as affordable after the decline as when it was purchased. And is likely to recover value if one’s time horizon is long enough.
 
I suppose that if we are in a global liquidity crisis and Wall Street deal-making dries up, the impact may be limited to (a) lower compensation and bonuses for that industry’s workers, (b) even lay-offs restricted to that industry, and (c) a drop in Manhattan real estate values as The Engine dries up. But if that global liquidity crisis bleeds into the stock market generally, what then?
 
It is hard to see how national economic factors that might impact Manhattan real estate values won’t also impact stocks or other asset classes. Recession? Unemployment spikes?
 
Such a long meditation, so meandering. Well, that’s blogging for you! I will try to come back to this and add links to relevant articles and blog posts. But I wanted to get this off my chest this morning, so I could go to work!
 
© Sandy Mattingly 2007
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