Manhattan Numerology: Separating Fact From Fluff
Moving Past Doom and Gloom
With all the negative press of late about the future of residential real estate nationally, a dose of local number crunching might go a long way to demonstrate what is common knowledge to those of us who live and work on island: Manhattan just doesn't behave like the rest of the country when it comes to residential real estate activity.
Deconstructing the Numbers
In order to prove my point, I peppered Noah Rosenblatt, of Urbandigs.com, with a number of questions about sales activity in the Manhattan market using his inventory and sales tracking database. Here's our conversation:
RG: Just so we have a baseline, how would you describe the real estate data that Urbandigs is tracking?
NR: The system tracks Manhattan residential inventory as it moves from one listing status to another. All listings follow a general flow: new on market, to off-market, to back on market; in contract; and finally, closed transactions. By formulating tracking metrics to cleanse REBNY's "RLS" Manhattan industry listing database (which accounts for 92 percent of Manhattan listings), we ensured the highest data accuracy by avoiding redundancy and double counting and by removing stale or obsolete listings that never were updated by the listing agents.
What the Numbers Tell Us
RG: Compared to the first five months of 2010, how does 2011 look to you? In your view, have we hit bottom or are we bouncing along the bottom?
NR: Although I would call the first five months of both 2010 and 2011 thus far to be very strong, the pace of demand this year is slightly lower than 2010.
RG: Has Manhattan hit bottom?
NR: I think the Manhattan market actually bottomed back in early to mid 2009, when fear was highest and deals that did take place reflected the steepest discounts from peak levels. Since then, it has been a progressive improvement starting with the lower end. The data shows that the high end really started to get hot in late 2010 and continued into early 2011.
RG: Can you reach any conclusions on how much of a decline in apartment values has occurred in Manhattan "post Lehman," that is, since September 2008?
NR: Well, despite the limitations to evaluating "median" pricing and "average" pricing data, both of which have flaws, the decrease in residential real estate value in Manhattan since the crash looks something like this:
Properties under $1,000,000: currently down 7-10% (down 15-20% at the bottom)
Properties up to $2,000,000: currently down 9-12% (down 18-25% at the bottom)
Properties up to $5,000,000: currently down 12-15% (down 20-30% at the bottom)
Properties above $5,000,000: currently down 15-20% (down 25-35% at the bottom)
RG: What are the hottest areas of Manhattan in terms of sales this year?
NR: In terms of pending sales this year, Gramercy/Flatiron, Upper West Side and Tribeca, in that order.
RG: What were the average number of contracts signed per month in 2011? How does that compare to 2010 and previous years?
NR: To be consistent, let's compare the average number of new contracts signed for the first five months of each year since 2008:
2011 -- 899 new contracts signed per month;
2010 -- 957 new contracts signed per month;
2009 -- (post-Lehman) 583 new contracts signed per month;
2008 -- (pre-Lehman) 1134 new contracts signed per month.
RG: By percentage, what type of apartments sales are driving the Manhattan market this year?
NR: Right now, the high end is really on fire. Both the two million to five million and five million plus markets are seeing very solid pending sales up trends. Money has definitely been going into Manhattan luxury properties in the last six to eight months.
RG: So on the "rising tide lifts all boats" theory, will there be a trickle down to lower price points?
NR: It's certainly possible, but I don't like to predict future price action in any market category. If the reports come out showing strength, it's likely there will be a minor media effect that enhances confidence in all price points, including the lower end. Still, in my view, for Manhattan, it's all about sales in particular buildings and neighborhoods and not about market sales as a whole.
Getting a Grip on "Lagging Sales" and the Importance of Inventory Levels
RG: Real estate data is always a reflection of what has happened as opposed to what the future may bring. Is it possible to craft predictions of future activity, based upon tracking contract signing and closings in real time?
NR: Due to the delay in the reporting of closed transactions as reflected in the New York City ACRIS database, all industry reports that focus on closed sales will be a four- to six-month rearview mirror of the marketplace. The only way to get a real time picture of the market, is to move away from actual sales data and focus on the pace of inventory trends; that is, pending sales (signed contracts), active inventory (new product coming to market), and off-market trends (properties removed from active status for a variety of reasons). Taken together, it's the most real-time picture of the current state of the Manhattan marketplace. You have to track off-market trends because if active inventory falls, one may misinterpret that as a function of rising demand. But in reality, inventory levels can and do fall as a function of rising off-market trends as well. It's possible to take this real time information and make predictions on future activity, but I stay away from my crystal ball unless the macro environment is clear on where the local and national economies are heading. In an artificially induced Fed-driven asset reflation environment like we see today, I continue to question the sustainability of the pace of improvement we have seen over the past few years.
RG: New York included?
NR: Yes. Although the Manhattan market has proven to be the most resilient market in the country following a severe credit crisis, no trend goes one way forever. If we do see unintended consequences from Fed policy actions taken to stem deflationary pressure, Manhattan likely will not be immune to the psychological forces that occur during downward asset cycles. Emotions will always play a role in real estate transactions.
RG: How do you describe the current state of the market to your potential buyers?
NR: I tell them exactly what the broader market, plus their targeted submarkets, are signaling in real time -- whatever that may be. Although the Manhattan market may be very active, it's possible the targeted submarket that is of interest to the buyer may be under or over performing the broader trends. So I generally give new and existing clients a broad market report plus a more granular report of the markets they are interested in. Today, most markets and submarkets are performing well. When it comes to a price opinion on a specific property, I always perform a comparable market analysis with similar sales from the same building. In essence, every building in Manhattan is its own little marketplace.
RG: There is a bottomless pit of enthusiasm for predicting the future of real estate prices. How does the balance of 2011 look to you?
NR: I think the performance of the mid- and high-end markets in the past few months will eventually be interpreted as an improvement in those markets when those deals close. Since most industry reports focus on sales that have occurred over the past four to six months, it's likely readers will interpret those reports as reflective of the current market at the time the reports are released. In reality, those lagging sales may or may not be indicative of future trends.
RG: Time for your crystal ball.
NR: Given the pending sales trends for the 2-5 million and five million plus price points as reflected in the Urbandigs tracking data, it looks like we have many higher end properties still waiting to close. So, I'm fairly optimistic that the next two quarters will show market stability, if not increased pricing.
RG: You are fairly optimistic in what sense? I'm not fishing for a prediction, just curious about what you mean.
NR: Pending sales are at a high point right now, up from much lower levels five to six months ago. The market has performed wonderfully in terms of new deal volume and I can tell from the charts that the higher end is outperforming. At some point, these deals will close and will be counted in the quarterly reports. So near-term, I'm bullish in regard to what the future reports will say and its impact on the market.
Residential Reality: Real Time Data May Be a More Accurate Read of Market Trends
The vast majority of real estate tracking data shows past performance by month, quarter or year. The trackers of record, such as Case Shiller, will always use that data to make predictions about future performance. At least in Manhattan, there may be a better view of what the future might bring, by digesting the transaction data as it actually occurs and by tracking inventory levels in real time. All bets could be off depending upon macro developments such as increased unemployment or global developments, like a certain country defaulting on its obligations. That being said, it might be time to use the rearview mirror for what it's good for: a view of what's behind us.