As I often tell one of my good friends, one of my flaws that is that I ever expect people to behave logically and rationally.
This, despite a psychology degree and 20 years of sales experience.
Yet, I’m clearly not alone in having expectations that people are going to act with much sanity.
Now that we’re past the inauguration, I thought that people might have the opportunity to move forward to focus on other things, but we continue to be drawn to quite a spectacle these days.
People are certainly astonished with the goings-on these days.
Specifically, as the real estate markets kicks off for the year,
my team and I are meeting with buyers and sellers and mapping out their goals.
Additionally, I’m showing my listings to prospective buyers.
What I’ve found is that despite my best efforts, buyers and sellers often hear what they want to hear, see what they want to see, selectively pull data points which are tangential to their situation, and think that the market is very strong or very weak, depending on their vantage point.
Perhaps these are standard approaches to negotiation, but let’s unpack where things stand at the end of the 4th quarter and the beginning of the 1st quarter.
I don’t know that sellers are resistant to reality exactly, or that all buyers are doom and gloom, but we are somewhat plagued by reports that can be misconstrued.
Is real estate reporting morphing into fake real estate news?
Let’s find out.
First, the 4th quarter report
Yes, the average apartment price set a new record last quarter: $2,110,556, 9% higher than a year ago and just above the previous record set in the first quarter of 2016. And yet, the number of sales was 13% lower than a year ago, with 39% fewer new development closings and 4% fewer resales.
New Development played an outsized role in these numbers.
First, these sales comprised nine of the top 10 sales in the fourth quarter, sold for an average of over $4.7mm, a record that was 51% higher than the fourth quarter of 2015.
At the same time, the resale average price (of $1,512,074) was 1% lower than a year ago, while the median price rose 2% to $920,000.
Our economist Greg Heym wrote:
The headline number implies prices are still increasing, but a closer look at the data tells us otherwise. Looking at just resales, we see a market where the average price has been drifting lower for the past few quarters. Resale listings spent 10% longer on the market than in the fourth quarter of 2015, and apartments are selling at the lowest selling-to-asking price ratio in more than three years. Buyer hesitancy and seller overpricing have led to sharp rises in inventory, particularly for larger apartments, which increases the need for price adjustments for many listings.
The full report can be found at the link here.
To be clear, new development has skewed the perception that prices are up, when they aren’t.
What is happening closer to “real time” is the level of units that are going into contract, which we call the absorption rate.
The December report is here, and shows the rate increasing by 35% year over year.
That story, then, points to the pessimistic side of the market, which means that it is simply taking longer for properties to sell.
Another article points to fewer bidding wars, the lowest since 2012, another sign that prices have softened.
So the pendulum, it could be argued, has swung quite far in the other direction since things were red hot in 2014.
Buyer’s market! Doom and gloom! But wait.
The truth, the real real estate news, is somewhere in the middle.
Limited inventory below $3mm has frustrated buyers, who are still incredibly active all over the city.
Fatigue still plagues the market, as buyers struggle to find good options, and have wonderfully lower rental prices.
Yet, there is a strong undercurrent of action- Uptown on the West Side- bidding wars.
Brooklyn, 150 people at open houses.
A pickup I’m hearing of brisk townhouse sales and price chops when deals get done.
Sellers who have not adjusted pricing are disappointed to see a less friendly landscape.
Thankfully, we are seeing more realistic pricing behavior.
And despite lots of distracting news, buyers are making offers in greater number than we’ve see in the past 1-2 quarters (apparently, there have been some studies that look at election year slowdowns).
There seems to be much more action in the market place.
But everywhere we are seeing buyers who feel they are empowered to lowball sellers.
I understand the instinct to try and get the lowest price possible, definitely as the market tries to find a new level.
But unfortunately, my sense is that buyers, especially, those armed with information that is partial at best.
What I mean is that selective use of statistics had helped this divide
between buyers and sellers grow a bit.
Now that the market is seeing lower “strike prices” aka contract prices, buyers are pouncing on sellers.
Without a steady hand, I believe a lot of buyers will remain frustratingly locked out of purchases, getting outbid by those getting better advice.
I’m not arguing that prices are all sustaining at 2015-2016 levels, but many are.
And one must have a very nuanced understanding to know which properties are holding value.
That’s the big takeaway for me.
I think that buyers and sellers have to be open to moving away from the market they think they know, and really focus on the market that exists in the numbers of current signed contracts, open house attendance, and recent closing prices.
Pull out all the new development condo sales that do not represent the current market, and we see much clearer that buyers and sellers are engaging in a struggle that seems to be searching for equilibrium.
It’s messy stuff, but it’s happening.
Be cautious, yet, but not overly so.
Until next month -Scott