The Quality Spread

Did you mean "dearth" or "glut"?

Well it started out as a dearth of quality, then morphed into what you see above. Thanks ah, please x "dearth" and insert "glut."

It occurs to me this is why we are seeing two diametrically opposed opinions on the market, those who are actively looking and saying there is nothing out there vs. those who are on the sidelines pointing to the glut of inventory and saying the market is weak.

Short term, everything depends on psychology: for sellers, what they think they'll get next year, and for buyers, what they think they'll have to pay next year and get next decade. And for both, the prestige and consumption value as well as investment value.

This is especially true at the top of the market, where both buyers and sellers tend to be less constrained. For one-of-a-kind apartments, it is easier for buyers to justify overpaying as consumption, not investment, or to make up stories about one-of-a-kindness. And given the huge runups in the bubble, perhaps there are more long-term holder sellers for whom the difference between a gazillion dollars in expected profits and half a gazillion isn't meaningful -- it's still far more than they imagined when they paid 100k on Park Avenue in the 1970s.

So it may be easier to find a meeting point than in the cookie cutter market, where buyers have no reason to buy now if they expect prices to drop later, and sellers may still be anchored to peak prices, and higher turnover means that more sellers are facing actual dollar losses.

But these are all just-so stories: if you gave me opposite data, I would spin opposite stories, and I wouldn't be surprised at your data. (Actually, without data, I'd probably expect faster adjustment in the cookie cutter market, since it is more transparent). I have no theories to predict which short term market psychology will prevail this spring.

I don't think it reflects any real safety: one-of-a-kindness is just a bubble trope like "it's an island." It isn't hard to create new one-of-a-kind apartments (Time-Warner) or even whole new neighborhoods of one-of-a-kind apartments (Tribeca), so if prices get above cost of production (as they did during the bubble), builders will make more. Unique apartments, like cookie cutter ones, eventually will drop in price to the cost of production. They cost more to make, so they will be more expensive, but that's no reason for the ratio to steadily increase.

I think the key variable isn't quality, exactly; it might be expected hold period. Buyers have lost confidence in their ability to trade up, so they are reluctant to buy apartments that may not suit them (from a practical or aesthetic PoV) after a few years. That change in psychology naturally hits stepping-stone apartments harder, because people don't imagine themselves growing old in a stepping-stone apartment, and owning such an apartment no longer seems to give them a leg up on the next rung of the real-estate ladder.

Cost of production is a start but it doesn't come close to explaining the disparity in prices across almost every consumer good. Why are people willing to spend more for a bottle of Tylenol vs. its generic equivalent if its all about cost of production?

I have also made the same observation having looked for a place in Park Slope and the UWS for the past two years. I think all sellers are reluctant to place their units into the markeplace during depressed pricing. The "good" apartments, when available, are sold quickly UNLESS unreasonably priced (there are plenty of nice places at 2007 pricing). I also believe many quality palces never make it to the marketplace - they are sold directly - word of mouth, doormen references, etc. - and the general population never get to see them. The other thing - it is all perception. In a boom market, even crap looks like gold. Now, well....it just looks like crap.

I think the dichotomy also reflects the fact that during the bubble period "crap" started selling at a premium to what it had in the past relative to the market. People "needed" to own real estate because it was going to appreciate. So if 2BR's were going for X and going to Y, any 2BR needed to be bought, only an idiot didn't see that. (Buy now or be priced out forever.)

Now that the heat is off the market it is time for the relative values to readjust. Good apartments keep selling, lesser quality, or more generic ones need to find their price.

w81 - That's a great observation that never occurred to me. In the end I think both share similarities. Now what to call this... thing?

The Quality Spread vs. If We're Going To Do This Lets Make It Count Index.

I'm one of those screeching that there's no inventory for my buyers, yet the market is certainly insanely hot when an "appropriately priced" property comes up. Case in point: I may be taking clients into an eight-bidder auction downtown.

So I think it's a psychology thing, and since confidence doesn't seem to be coming back with any real strength the market is going to need the other force to push it back to health, which is rising rents. Those stepping-stone, cookie-cutter apartments are going to look a lot better as the cost of renting their alternatives rises.

ali r.
DG Neary Realty

Spinnaker: then I would suggest looking at "quality" 1-bedroom apartments. Quality but not really a long-term hold unless you're telling me that the baby-boomers are going to retire to Manhattan.

My partner has suggested that in an uncertain market like this, the renovation premium is bigger than before (i.e. more likely to get a better deal on a gut bcs of uncertainty going forward).

Yes, the baby-boomers are retiring in Manhattan.
The empty-nesters.
The boomers who have a nice-deal place in Florida for the cold-weather months.

They want to purchase appropriately priced apartments in Manhattan.

Baby-boomers are ABSOLUTELY retiring in Manhattan. I've been in the market for a 2BR/2BA OR "quality" large 1-BR/1.5-2BA for 18 months and the majority of my competition in bids have been baby-boomers. I see more of them at the open houses and when you're competing with an all-cash bid...it's pretty obvious.

I think this is mainly a function of properties at the lower end of the spectrum. Go high enough, and every property is special. I've been surprised, actually, by how some well-priced "special" properties have been languishing on the market higher up.

So, maybe it is two things. First, I think there may be a compression down on lower-end listings from people who would have bee purchasing higher up in another day. Maybe they have less money, maybe their outlook has changed, maybe they are looking more to take advantage of mortgage benefits afforded to the lower end. But, they still want "special" at a price-point that is bread-and-butter, a needle in a haystack. So when one shows up priced right, they jump as you did.

Which gets to the second point: "special" apartments at the lower-end tend to get priced right coming out of the gate more. Suppose we have a building where the generic units go for $1000 a sq ft, and the "special" ones go for $1500 across various-sized apts. An 800 sq ft generic unit should go for $800K, but it isn't hard to imagine that it comes out priced 30% higher at $1.04M. The owner talks about what a great building/location it is, how the average of the market is $1200 ppsf, so pricing it at $1300 is right. The broker just wants the listing and plays along. The special place, one of few 800 sq ft special places, should sell for $1.2M. However, pricing it 30% higher would put it at $1.56M. For whatever reason, it is easier to understand that just won't fly: no one is paying $1.56M for a 1BR.