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Tuesday, April 7, 2009

First quarter 2009 Manhattan Market report shows a slow down in transactions and re-sale price declines of 8%

"There are three types of people who emerge when a market shifts. First, those that fearfully predict the worst and are unnecessarily pessimistic; second, those who hopefully wish for the best, believe they can't fail and are unrealistically positive; and, third, those who respect the fact that they might fail, actively prepare for the worst and strive for the best...They are matter-of-fact about the market and sensible about their situation"
— FROM SHIFT BY GARY KELLER


1Q 2009 Corcoran Manhattan market report Corcoran Manhattan market reportI'm reading a great book called shift by Gary Keller of Keller-Williams Realty, which is a "how to" for agents working in shifting real estate markets. The quote above describes agents' attitudes, but they characterize those of buyers and sellers, as well. Since the economic crisis began last November transactional volume has been way down. Corcoran's first quarter 2009 Manhattan real estate market report (6.8 mb download) cites a 60% drop in the number of deals getting done, owners who want to sell are not yet embracing the new realities of the market; they hopefully wish for the best. Buyers, on the other hand, can be dire in their predictions about the market, fueled in part by negative press and blogs that irrepressibly look for the worst case scenarios. They miss the fact that scenarios are just that, a projection. They can get lost in an ocean of data all day long, but most will miss the market bottom anyway, because their point of view is based on the hope that they will emerge victorious from a negotiation with the deal of a lifetime. Both suffer from unrealistic expectations, hence a marketplace with reduced activity. Buying or selling property is a hugely important event in most people's lives, so it should be no surprise that in uncertain times making a commitments of this magnitude is going to be more difficult. Corcoran's report includes this five year trend chart of sales activity which speaks volumes.

click on the chart to enlarge
nyc real estate sales volume- 5 year chart

a buyer's market?

There can be good opportunities right now for buyers and sellers, whose view is rooted in real market knowledge and guided by a competent broker. The slow down of sales, means rising inventories of apartments, and one would expect a shift to a buyers market. But is it really a buyer's market yet? If you define a buyer's market as one in which there is a great choice of properties that are fairly priced, then there are still some adjustments to be made. Buyers have a good choice of properties, and a potentially higher degree of negotiability today; But sellers need to adjust expectations, and then adjust pricing, to meet the market and be successful. We're starting to get there, but sellers need to get ahead of the market instead of chasing it down. I've had several unsuccessful negotiations on behalf of buyers where the properties have subsequently been reduced to asking prices south of the one we offered. The market has changed quickly and those sellers have arguably left money on the table.

manhattan sales prices trend down— rapidly
Here's an excerpt of the market wide 1Q 2009 sold and closed sales data in the report. It shows both median apartment prices and average price per square foot down 8% from a year earlier. However the market snapshot we published last month on contracts signed in the same period paints a different picture. The reason is that the sold & closed deal figures show the market negotiated three or four months prior. As 2009 has unfolded, we have noticed even greater price reductions in the market and more negotiability than is reflected in the Corcoran Report; in February, sellers lowered their asking prices by an average of 9% and negotiated another 10% from the revised ask before a contract was signed. The aggregate difference between original listing price and selling price in February was somewhere around -19%; it was about -4% in 2008. Download the full report and feel free to email questions or leave a comment.

click on the chart to enlarge
manhattan real estate market prices q1 2009

links:
first quarter 2009 Manhattan real estate market report (6.8 mb pdf) »
buy the book "SHIFT: How Top Real Estate Agents Tackle Tough Times" by Gary Keller »

related post:
A snapshot of today's Manhattan residential market
download the first quarter 2009 market snaphot of contracts signed (212 kb pdf) »

Friday, March 13, 2009

A snapshot of today's Manhattan residential market

corcoran reportdownload the market snapshot (212 kb pdf) »
Last week I wrote, "Values have dropped, and there is a lot of wild speculation at this point about how far" in Making the best of the Manhattan real estate market. Buyers are cautious of paying too much, and sellers know that their values have gone down, but don't know by how much. The uncertainty has contributed to the slow pace of sales. This week The Corcoran Group issued an update to last quarter's data with a 'Market Snapshot' based on Corcoran's contract signed data in Manhattan, from January and February of 2009. It helps to give us some insight on what is actually happening in the market at the moment. The snapshot confirms that it is a good time to be a buyer in Manhattan; and that when pricing hits a certain perception of value, deals will get done. The report is available for download, and I've pulled the three charts here from it, along with some key takeaways.

continued+

Monday, March 9, 2009

Making the best of the Manhattan real estate market

selling a manahattan co-op or condoThe NY Times ran an article on the market downturn in Manhattan real estate. Looking for Bottom in N.Y. Real Estate reminded me of conversations I've had recently with buyers, and it gets to the crux of the slowdown. Sellers and buyers simply are entrenched in their mindsets. Buyers are being cautious of paying too much, and sellers are in denial that their values have dropped. The result is that fewer deals are being done. They call this a buyer's market, yet the irony is that fewer people seem to be actually buying.

“What we’re seeing is a big disconnect — sellers need to get more realistic, but buyers don’t even think it’s enough. Buyers are not hesitating to walk in and bid 40 percent off the price, but sellers aren’t taking it.”
PAM LIEBMAN, CEO, CORCORAN GROUP IN THE NY TIMES

It's not like the phones aren't ringing, and properties aren't being shown. Traffic at open houses has been both decent and steady, but when one gets down to bargaining, it is harder to close the gap. The number of transactions taking place are off by 55% since last year by some reports. Values have dropped, and there is a lot of wild speculation at this point about how far. The correction is real, but in the downtown neighborhoods like Tribeca, the Village and Soho where I work, the anecdotal evidence would indicate that the deals are happening well above 40% off asking. It pains me as I read anonymous comments on blogs from people gleefully looking forward to an economic meltdown in which they can profit. No one likes a bottom feeder, and they rarely close a deal since greed gets the better of them. The market is pricing fear into its bidding and it is as hard to justify it, as it is difficult for sellers to accept that they have lost value.

how does a listing broker respond to the new market?

Some agents would have you believe that the market has absolute control over pricing and that their contribution to marketing the transaction is irrelevant. They will approach this market as a an exercise in financial analysis, and drown in a sea of data. Where is the value of what they bring to the table in that? It does require an approach that is different from a year ago when the market was still climbing. To close a deal today it takes better brokerage, advice on pricing that understands the realities of pricing in the marketplace, and uses the best approach to marketing it available. With less money chasing more listings, can a seller really afford to not have their property stand out? I see the broker's job in the context of market forces (macro influence), and using tactical promotion + pricing + negotiation (my influence). Striking the right balance is crucial to closing a deal in which everyone wins.

marketplace.gif

It is painful to see some sellers making decisions which will hurt them in the short run. Pricing their homes too high, in a declining market, and not closing the deal, means that you are going to be chasing the market down and quite possibly selling even lower in a few months. I wouldn't be the first agent who lost an exclusive to another firm that pitched an unrealistically high selling price to get the business. Agents get to meet buyers by "buying" listings this way. It is a huge disservice to their clients, who will sit and watch their values decline, and reduce their price eventually to a level that they will be pitched on later. The real rub is that level may be lower than it would have sold for if they had listed at a proper go to market price in the first place. I had an unusual year in 2008 in that almost all the properties I listed were taken over from other agents after their exclusives expired, then turned around and closed by me.

A good broker will lay out the hard and soft data that supports asking price, and will actually want to get paid for representing you. The one who walks in with inflated figures, and sells a discounted commission is often someone to be wary of. If you can't sell the property, you'll try to sell the fee, and get the customers. It's the oldest trick in the book. We will have real 1Q/2009 data next month, and while I don't expect it to be pretty, it will be better for the marketplace to know where it stands.

can sellers be successful in this market?

I believe that a professionally represented property will still sell for it's highest price possible, most will trade within a range that will vary and in relationship to it's features, and how well the marketing highlights them. This can still be a surprising market. I had a conversation recently that summed it up. I got a phone call from a colleague who was looking for some advice on pricing an apartment at the Cielo on East 83rd Street, which is a building that I've done some business in. The conversation went something like this:

"Peter, I see you're in contract with your exclusive at the Cielo, I have a friend in a similar unit in the building. Can you tell me what the negotiated price was?"

"Not until after until it closes, but it was not that far away from asking."

"Incredible! The market's is really sputtering, there are 17 apartments listed for sale in the building, but yours is the only one that's gone to contract. Why is that?"

"Since you're asking, my practice operates a bit like a boutique advertising agency. The quality of the graphic design, photos, and overall presentation are things I spend a lot of effort on— I think it makes the difference. We actually had simultaneous, multiple offers, for all cash on it, within just a few days of each other."

Her line of questioning was actually going to "did you have a fire sale?". We did not. It was sold within 5% of asking. Within that conversation are mentioned each of market forces that every real estate deal has in common. Pricing, promotion, and negotiation; subject to the environment of the marketplace. The first three being the levers which a broker can use skillfully to produce results. When your broker gets them right, you will get a closed deal. They work in every market. In this one in particular they are of more value than ever.

Tuesday, March 3, 2009

First time homebuyer tax incentive for 2009

buying a manahattan co-op or condoI've had a couple of people ask me this week about the new tax credit on a first time purchase. This is a sweetened incentive for first time buyers, or if you have not owned a home since 2005, that increases the credit from $7500 in 2008, to $8000. More significant is that the new credit which is part of the American Recovery and Reinvestment Act, will not have to be repaid if a buyer holds the property for three years or more. The previous version of the tax credit had to be paid back. This is not anything that will cause people to run out and buy a condo in Manhattan, but the government kicking in a few bucks can't be a bad thing either if you are moving out of a rental, and buying your first home before the end of November. This is part of the Obama administration's stimulus package, and a step in the right direction. All home purchases involve a host of transactional, moving, and home improvement costs, so these dollars will likely be funneled right back into the local economy. One bedrooms are actually where most of the activity in the market is right now and this will be of benefit to a few of my customers. You should check with your accountant or financial adviser for more info about if your purchase will qualify. Here is a Q&A that the NAR recently distributed about it:

1. What’s this new homebuyer tax incentive for 2009?
The 2008 $7500, repayable credit is increased to $8000 and the repayment feature is eliminated for 2009 purchasers. Any home that is purchased for $80,000 or more qualifies for the full $8000 amount. If the house costs less than $80,000, the credit will be 10% of the cost. Thus, if an individual purchased a home for $75,000, the credit would be $7500. It is available for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009.

2. Who is eligible?
Only first-time homebuyers are eligible. A person is considered a first-time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the 2009 purchase.

3. How does a tax credit work?
Every dollar of a tax credit reduces income taxes by a dollar. Credits are claimed on an individual’s income tax return. Thus, a qualified purchaser would figure out all the income items and exemptions and make all the calculations required to figure out his/her total tax due. Then, once the total tax owed has been computed, tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return a person has total tax liability of $9500, an $8000 credit would wipe out all but $1500 of the tax due. ($9,500 - $8000 = $1500)

4. So what happens if the purchaser is eligible for an $8000 credit but their entire income tax liability for the year is only $6000?
This tax credit is what’s called “refundable” credit. Thus, if the eligible purchaser’s total tax liability was $6000, the IRS would send the purchaser a check for $2000. The refundable amount is the difference between $8000 credit amount and the amount of tax liability. ($8000 - $6000 = $2000) Most taxpayers determine their tax liability by referring to tables that the IRS prepares each year.

5. How does withholding affect my tax credit and my refund?
A few examples are provided at the end of this document. There are several steps in this calculation, but most income tax software programs are equipped to make that determination.

6. Is there an income restriction?
Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals filing Form 1040 as Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Married couples who file a Joint return may have income of no more than $150,000.

7. How is my “income” determined?
For most individuals, income is defined and calculated in the same manner as their Adjusted Gross Income (AGI) on their 1040 income tax return. AGI includes items like wages, salaries, interest and dividends, pension and retirement earnings, rental income and a host of other elements. AGI is the final number that appears on the bottom line of the front page of an IRS Form 1040.

8. What if I worked abroad for part of the year?
Some individuals have earned income and/or receive housing allowances while working outside the US. Their income will be adjusted to reflect those items to measure Modified Adjusted Gross Income (MAGI). Their eligibility for the credit will be based on their MAGI.

9. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?
Not always. The credit phases-out between $75,000 - $95,000 for singles and $150,000 - $170,000 for married filing joint. The closer a buyer comes to the maximum phase-out amount, the smaller the credit will be. The law provides a formula to gradually withdraw the credit. Thus, the credit will disappear after an individual’s income reaches $95,000 (single return) or $170,000 (joint return).

For example, if a married couple had income of $165,000, their credit would be reduced by 75% as shown:

Couple’s income $165,000
Income limit 150,000
Excess income $15,000

The excess income amount ($15,000 in this example) is used to form a fraction. The numerator of the fraction is the excess income amount ($15,000). The denominator is $20,000 (specified by the statute).

In this example, the disallowed portion of the credit is 75% of $8000, or $6000:

($15,000/$20,000 = 75% x $8000 = $6000)

Stated another way, only 25% of the credit amount would be allowed. In this example, the allowable credit would be $2000 (25% x $8000 = $2000)

10. What’s the definition of “principal residence?”
Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50%). It is also defined as “owner-occupied” housing. The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of new or existing dwelling. Even some houseboats or manufactured homes count as principal residences.

11. Are there restrictions on the location of the property?
Yes. The home must be located in the United States. Property located outside the US is not eligible for the credit.

12. Are there restrictions related to the financing for the mortgage on the property?
In 2009, most financing arrangements are acceptable and will not affect eligibility for the credit. Congress eliminated the financing restriction that applied in 2008. (In 2008, purchasers were ineligible for the $7500 credit if the financing was obtained by means of mortgage revenue bonds.) Now, mortgage-revenue bond financing will not disqualify an otherwise-eligible purchaser. (Mortgage revenue bonds are tax-exempt bonds issued by a state housing agency. Proceeds from the bonds must be used for below market loans to qualified buyers.)

13. Do I have to repay the 2009 tax credit?
NO. There is no repayment for 2009 tax credits.

14. Do 2008 purchasers still have to repay their tax credit?
YES. The $7500 credit in 2008 was more like an interest-free loan. All eligible purchasers who claimed the 2008 credit will still be required to repay it over 15 years, starting with their 2010 tax return.

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