Monday, December 15, 2008

How Much Better Can This "Buyer's Market" Get?

There is an old saying on Wall Street: "buy them when they hate them, and sell them when they love them". No, this wasn't a Bernie Madoff quote, to my knowledge. This saying came up this afternoon when I was giving my sales team a pep talk. It occurred to me, how much worse can the NYC market get? One indicator of a bottom may be an article in the NY Times on Sunday in which a broker was completely unabashed to brag that the condo that she was working had signed 3 contracts in the past month. This, the article argued, is the new definition of "hot". Wow, what a far cry from just a year ago. Another interesting indicator came from Halstead last week. Sensing a very slow market, and bleak prospects for the winter, rather than increase incentives, and spend money on staff and advertising, the decision was made to simply close down the sales offices and put them on ice for now. I would argue that this is a bit defeatist, but that's beside the point. The important question is, have we reached some point of capitulation? Have people so thrown in the towel that we may be nearing a bottom? Is this the darkness before the dawn?

I would not argue that we are at a bottom, however, I would argue that it's better to be a bit early than a bit late. One thing that this market has going for it is that unlike prolonged dips during the 80's and 90's, we have mortgage interest rates at 40 year lows. Such low rates could make a bottom a blink and you miss it bottom.

On an empirical level, I have seen a few interesting developments in the past few weeks. First, the developers are desperate. I know that may seem a bit harsh, and the term applies more to some than others, but they are willing to work with buyers in a big way. Yes, mortgages are harder to get, and 20% down is the norm, but how bad is that if you manage to get the sponsor to write you a closing credit that can range up to 10%? Couple that with low rates, and affordability has increased markedly. Second, we are actually getting busier. Most clients we are seeing now are early bottom fishers. They want a great deal, and depending on their expectation levels some are getting them. How good? I would argue that a desirable apartment a year ago routinely saw a 10% premium to asking when the bidding war settled. Now, not only are asking prices coming down, you can negotiate up to 10%. What does this add up to? In many cases, 20% or more from the peak of the frenzy last year.

Nobody accurately calls a bottom. You always know when one happened months ago, but it is very difficult to time, if not impossible. As soon as the perception turns, the bargains dry up. If and when the developers and owners see a discernible uptick in volume, you can bet that these wild incentives will be gone in a flash. I, for one, am not ready to call a bottom, but all the great investments in real estate in my lifetime have been made when everybody hates them.

7 comments:

  1. The "early bottom fishers" are catching a falling knife. This disaster is still in its infancy. I understand that short attention spans create expectations of quick resolutions to such crises, but this credit collapse will be around long after your ability to stomach the destruction has been trounced.

    That's OK - I've been right for many years, but I still haven't gotten tired of saying "I told you so", and expect to be saying it for a few more years.

    (this, of course, does not mean a broker cannot earn in real estate, if they play their cards right)

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  2. Andrew - your logic is sound, but I think you're at least six months premature. The real estate economy lags the real economy, and the real NYC economy is an absolute mess.

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  3. The unusual thing here is that rates are so low. It looks like we'll have a massive stimulus package in place the day Obama gets into office, which could actually lead to real growth by the end of 09'.
    I just think back to all those times when a few people bought when things looked the darkest, and they are always the ones that made out like bandits. Sure, it may be early. Just reflecting on a few signs here.

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  4. Agree about the signs - I just think things can get a lot darker. I wish this were "when things are darkest" but I think it's not so. More financial sector and housing pain to be taken. 2H 2009 is probably when I become a potential buyer.

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  5. #4. Point well take. The true bottom will come when it is the darkest, and it is pretty dark, and could get darker. But how much darker?

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