Best Leading Indicator of Residential Market?

Go over to www.urbandigs.com -Chart and data heaven like no where else. If there is not already such a chart, indicator you will have the resources to put something together. I am sure Noah can offer something here as well...

Keith Burkhardt
TBG

Thanks Keith. Interesting data. I liked the article suggesting that the co-op market is a lower risk and lower reward play versus condos and that condos may be a better predictor of the market than coops.

I think that StreetEasy might be in the best positon to survey public sentiment given the significant number of active participants on their site. Perhaps they could ask people that save a listing to participate in a survey? Could be very compelling results.

Ximon, Premier Agent is a program where salespeople pay for buyer leads. Those salespeople are only going to pay if they think they can a) convert the buyer leads (so there must be enough inventory to find those buyer clients homes and get them into contract) and b) they can't get the buyer leads more cheaply somewhere else (so agents with established businesses and programs for contacting their past customers may generate referrals at a lower cost than new leads).

As such I don't think it's got any correlation with property prices, which is what you as a potential buyer might be concerned about.

FIRE + TAMI employment adjusted for interest rate expectations might be better for your purposes.

Traditional leading indicators are too hard to predict and they do not say any thing about supply. Biggest indicator of housing prices is current and upcoming supply vs recent number of sales. Just do not forget to adjust for supply and demand type as it currently the case in Manhattan.

Front, my thinking on Premier Agent was that, in a strong market, a broker may not feel the need to pay fees to buy leads but in a weak or weakening market, it might be considered necessary in order to stay competitive or to simply "keep the lights on". As such, it is akin perhaps to banks spending more on mortgage brokers when borrowers are fewer and farther between.

300, although you describe a common way to predict future performance, looking at anticipated supply vs. historical demand seems a bit apples and oranges to me as one is prospective and the other historical. Also, it does not take into account actual market sentiment which may relate to these data points but may be based on market factors that are unrelated.

What about market surveys? Appraisers use them all the time for estimating cap and discount rates.

My main point was that starting point is new development related supply (one can estimate is fairly accurately based on ground broken) rather than economic indicators. If you adjust the demand 5 percent upwards based on your employment estimates etc and you are still over supplied, who cares about economic indicators. Just do not forget to look at oversupply by price point.

I agree with 300. Premier agent program has too many other factors at play to make it a reliable indicator. I think capital markets is a safe answer but I would further look at state of underlying rents of condos/coops, international demand which spreads speculation, affordability (how many years would a professional to work before affording a studio or one bedroom), direction of future mortgage rates, and strength of USD.

Karanc, if reliable, all of your suggested indicators point to a downturn. Is that your, and the market's, sentiment? I personally see signs of a downturn but am not convinced its that near on the horizon. Still lots of demand it appears.

What I mean to say was that all these indicators appear show the market is at the peak (fully priced) or on the way down. Are there any indicators that show the market still has room to move further upward? Maybe the tax cuts will help create more demand for some buyers?

"all of your suggested indicators point to a downturn. Is that your, and the market's, sentiment?"
- Correct. I think we are headed towards a correction. Tax cuts is a factor and I have heard investors mention it all year. I try not to discuss politics but let's just say I have little belief in our leadership's ability to deliver. This dependence on tax cuts might result in even a stronger downturn if not delivered. I am encouraging my clients to sell if their apartment is worth below the $3M mark. Above $3M is tough in this market. If selling is not an option, then embrace for a correction in 2018 while holding for long term growth. 2016 was not a fantastic year for real estate. 2017 started off strong but has declined since Summer.

hi guys...which market? luxury? Condo? Coop? Entry? New Development? Resale?

One strong possibility is that the sub<1m market will see an influx of condo buyers. This will occur as a result of investors taking advantage of the increased rental demand sure to result from the tax reform(mortgage interest and property tax limits).

I am not confident in using trend reports to project future performance and I see signs on the demand side that point in both directions. On the positive side, we have continued forecasts of low unemployment, rising capital markets and generally low interest rates not to mention the possibility for tax cuts. On the negative side, we have lower international demand, lower affordability, and risk of higher interest rates.

Interesting to note that although The Conference Board Consumer Confidence Index is at its highest level in 17 years, their Measure of CEO Confidence declined for a second consecutive quarter in the third quarter of 2017.

I am beginning to agree with others that this market needs to be bifurcated in order to understand correctly. Maybe the question isn't IF the market will crash but WHERE. and of course, WHEN.

“This imaginary person out there -- Mr. Market -- he's kind of a drunken psycho. Some days he gets very enthused, some days he gets very depressed. And when he get really enthused, you sell to him and if he gets depressed you buy from him. There's no moral taint attached to that.”"
---Warren Buffet

“Markets can remain irrational longer than you can remain solvent.”
– John Maynard Keynes

The problem with using any of these pieces of data which you are looking at is that the Real Estate Market never changes based on those. It changes because of some trigger event. Black Monday. 9/11. Lehman Brothers and Bear Sterns get abducted by space aliens. Someone gets impeached. Someone starts a nuclear war. A really expensive building collapses and it turns out it was built by the same construction company using the same techniques as half the new buildings built in the last decade. Oceans levels rise 2 inches. The MTA collapses. One huge developer goes bankrupt and their inventory gets auctioned off at a 60% discount. A barge dredging the Gowanus Canal hits something which poisons half of Brooklyn. The police commissioner uses the N word and half the city burns down overnight. Someone assassinates Archduke Ferdinand.

Yes, and yet for every one of those trigger events, there is someone - often a lot of someones - who will say they saw it happening. But for every self-made billionaire who guessed right on the market, there are ten Chicken Littles who guessed wrong and a few hundred who just sat on the sidelines.

Buying a home is generally the biggest investment decision we make. So the question I am most interested in understanding is - are we rational decision makers?

Ximon, It is very hard to time any market. Real estate is even harder as it is not purely financial decision for a vast majority of people in a market like Manhattan. When are well-off, you want customization of your living space, freedom from arbitrary rent increase, and freedom to stay put.
30 nailed it that Manhattan real estate decline is even driven. I think the event will be extel blinking and cutting their prices.

Ximon, you are right that brokers will buy leads when their business is slowing -- but brokers are generally worried about the VOLUME of business. We don't really care (except for the fact that we are often homeowners too) whether prices go up or down. Whereas our clients are really concerned about PRICE. If I close one more deal a year than I have in my business plan, I'm doing super; if I close one deal a year less than I have in my business plan, then I'm suffering -- but neither of those have anything to do with apartment pricing.

As an example, let's look at the UWS, sub-$2million submarket. Pricing fairly flattish (I'm with Digs that I think peak pricing was generally probably summer 2015, though maybe it peaked later for some categories of apartments.) My buyers and sellers were generally driven by demographics (had another kid, need bigger apartment; nearing retirement, seeking smaller apartment, etc.) As such they were happy to complete their deals, but I don't think either side were big "winners" in terms of the prices they achieved or the prices they paid. But I as a broker had a very nice year, because ... Mayor DeBlasio rezoned 11 Upper West Side schools, and that caused a lot of churn, so I did better on volume than I was expecting.

I think a few of you have hit on one of the fundamental problems with the current market - it serves multiple and often conflicting interests.

1) Although I understand the point about a home purchase not being viewed as purely a financial decision, I would assert that it should be viewed this way as it is increasingly too important a decision to make for the average home buyer.

2) Buying a home in the current market is not just about the desire to simply put a roof over one's head, find safe neighborhoods or place their children in good schools. I see too much "irrational exuberance", the desire to "play the market" and to earn a substantial capital return. Not for all buyers but certainly for many. Perhaps too many.

3) The problem with such exuberance is that it does not always result in rational decision making, at least rational in the mind of a traditional home buyer.

4) Most people would rarely invest in the capital markets without professional advice but think little of spending much of their hard-earned wealth buying expensive primary and secondary homes without the advice of an expert. How many financial planners specialize in real estate? How many buyer-brokers would tell you to avoid the residential market and invest in something else?

5) I have little concern for wealthy buyers who have plenty of excess capital to serve their basic needs. Instead, I worry about middle and upper middle class buyers who are forced to play this game without either the proper financial cushion or financial advice needed to protect their interests.

6) Too much speculation in this market makes it harder for the average home buyer to "play it safe" by forcing them to pay higher prices to live in their preferred neighborhoods, close to their jobs and extended family. The economic and social implications of this phenomenon are enormous.

As a result, if the market ever returns to basic fundamentals by stripping away speculation, it will come crashing down for sure. Not sure if/when this will happen but the risk keeps building IMO. Of course, I thought the Chinese market would have crashed years ago.

Who is the "average home buyer" in the Manhattan market?

Multi-millionaires.

Great discussion. I remember these discussions in 2010, one of my favorites by the infamous poster West 67th Street was convinced the market would trade at $500 a square foot based on fundamentals. It had to go there. It didn't, he's still a brilliant guy, but Mr Market had other ideas. Let me tell you it wasn't easy pulling a trigger in 2010, I had plenty of clients crapping their pants.

30 years hit the nail on the head, so you can wait for one of these events to take place and then buy. Or else buy now and know that if one of these events does take place given enough time the market will come back. That said it can be tough buying when the shi** hitting the fan. I did it in Florida in 2012, it wasn't easy psychologically but of course now it's paid off in spades. But I figured I'd own the property a long time and it was something I would enjoy. And I felt pretty confident with enough time things would work out.

Most of the buyers that I work with are at least 50% emotionally driven and maybe 50% financially driven. They want a beautiful home they won't have to move out of in year or two, can customize and enjoy etc.

If there were truly any leading indicators for Real Estate or financial markets that worked with any regularity, I would be posting this from my organic coffee Farm on Kauai

Well said Keith. I am glad we pulled the trigger in 2011 with you on a beautiful home and wonderful community we really like. Somehow the street has become the hottest street in the village.

Keep in mind those looking for a cheap entry into Manhattan...... When some negative economic trigger occurs and liquid markets sell off and the world is ending(2009-2010) there happens to be a safe haven out there... Manhattan. When the subprime crisis was happening you would think that Manhattan would have gotten bludgeoned. Yet that did not occur. Why not? Every other housing market across the country was suffering why not Manhattan? Because Manhattan is all about COOP and Condo boards preventing the subprime market from entering and allowing only those with very good financial security to purchase. Manhattan owners just wait it out because they can. Of course some people will need to sell out of personal necessity but otherwise owners stay put. That's exactly what happened here. Manhattan was the last to suffer, the least hurt and the first to recover to previous highs. So take comfort in the beautiful structure that is Manhattan real estate.

Yes, SteveFR, there is some security built in to the established coop/condo market which helps to create some stability. However, over-speculation and excessive risk-taking has occurred in new condo construction as rules regarding over-leveraging, subletting, pied-a-terres, etc. do not apply.

We all seem to think that foreign investors prefer all-cash transactions which will help them survive a downside but I suspect that much of this investment activity is highly leveraged with unsecured debt from off-shore banks and shadow finance companies. And we already know that much of Manhattan residential is increasingly owned by less-than-transparent LLC's. Maybe this is the trigger that will bring the market crashing down?

Does anyone know how much of new condo construction is held in corporate form and how much is fully leveraged?

Barring a large financial market catastrophe, I don't see any serious downsides in Manhattan and I tend to be incredibly conservative. The fact is that a lot of people are making millions and the zip codes where they are interested are narrowing and the market is becoming more global. I see healthy demand in NYC from $1-5m in the long run. That's not to say I wouldn't be surprised by some weakness with the current administration's changes but I don't think it will be a bloodbath by any means. US corps are as healthy as they have ever been and the income gap keeps widening, suggesting further growth in prime parts of the world.

Going back to talking about numbers, a lot of the statistics you see are skewed to present a more favorable picture and actually exists. Take number of units on the market / absorption rate. Back in March of 2016 Miller Samuel talked about 14,500 units of new construction coming on the market between 2015 and 2017 and that by the end of 2017 only 5,000 of those would be absorbed:
https://therealdeal.com/2016/03/18/by-the-end-of-2017-manhattan-will-have-5-years-of-excess-inventory-report/
When you see the current numbers for number of units on the market and absorption rate they are in the real numbers. Because of the Staggering amount of new construction and the growing use of Shadow listings there is a lot more on the market then being reflected. In the case of new construction condos, the minute the Offering Plan is accepted every unit in the building is on the market. However the only thing reflected in the published numbers is the units which have been "released'.

Take for example 1 Manhattan Square. While it's hard to say how many have been sold because Excel is holding that somewhat close to the vest, let's be very generous and say they have sold 200. Well, that means that there are 600 units on the market in that one building alone that aren't being counted in the on the market numbers. Same for 217 West 57th Street: whether those units are officially listed or not, they are on the market - it's not as if something is going to happen and extel is going to choose not to sell them. They're being built, the offering plan has been accepted. Or 220 Central Park South - which as far as I know is being entirely marketed with Shadow listings. But there's still a hundred Apartments there which are on the market. Or 138 Willoughby (Extell's Brooklyn Point) - there's another 450 units.

Anyway, I could go on for a long time listing of all of these. But the point is that when you see a number of 5,569 units on the market, the actual number is actually somewhere between 50% and 150% higher. And of course as a result absorption rate is affected similarly.

30, would you add 15 Hudson Yards to that list? 285 total units but SE shows 17 offerings and 73 sales.

That's my point - the list is pretty much every new development out there and when you add up all those units...

"Does anyone know how much of new condo construction is held in corporate form and how much is fully leveraged?"

Trying to answer my own question, I found this NYT article from early 2015:

"About $8 billion is spent each year for New York City residences that cost more than $5 million each, more than triple the amount of a decade ago, according to the website PropertyShark. Just over half of those sales last year were to shell companies."

The following condo projects were surveyed showing % of residences owned by shell companies:

The Plaza 69%
Time Warner Center 64%
One 57 77%

https://www.nytimes.com/news-event/shell-company-towers-of-secrecy-real-estate

But that doesn't really tell the whole story because at lease in some cases you have the actual person behind the "shell" corporations living in the unit (fairly common for celebrities). In those cases would you still call it an "investor purchase"?

Correct does not tell the whole story or about excess leverage, money laundering, etc. One proposal is to require a tax on foreign purchases or non-resident purchases. I don't like the idea of raising taxes and not sure how this could be enforced without a lot more disclosure. But a lack of beneficial ownership transparency is not just an issue of national security, money laundering or tax avoidance, it is important for a better understanding of the market and its possible early warning pitfalls.

How many times have we seen the Miami market collapse much worse than other markets due to the speculation of investors owning multiple units and then flipping (sometimes pre-construction) for a quick profit. Guess what, its happening again as we speak.

I also remember when people said New York City was more protected than other places since little of that speculative activity took place. Is that still true today?

Well, in terms of NY and Miami, there was something done about transparency
https://therealdeal.com/2017/08/22/treasury-department-finally-adds-teeth-to-llc-disclosure-rule/

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how is 2018 projecting? any anticipation in downturn or market upturn?

Grindr proximity. Caracas' loss is West Hell's Kitchen gain.

as bill clinton would say, 'its the economy stupid'
no better indictator

The question is not where the economy or the NYC residential market is now, its where it will be soon enough. That's why an early detection measurement is so critical. How long will this economic expansion last? How long can apartment prices continue to increase? Historical data, no matter how recent, doesn't answer those questions.

Are we at the top of the market? If so, buying now would seem a bad decision.

So we need to ask ourselves, are there more signs that the market is strengthening or weakening? Will the tax cuts and general economic growth raise wages enough to support higher housing prices? What about interest rates? Property taxes? Local income taxes? Fuel costs? Overconfidence has led to every economic downturn we have experienced.

Trying to predict this is obviously difficult. Very few hedge funds are able to predict the next downturn. If you have that level of predictive ability, of course, all apartments in NYC will be cheap to you because you can make enough in the markets to be a major player.

Right now, markets are strong and the job market for the upwardly mobile has never been better. Those technological companies are not going anywhere. Even if the PE or Sales/Rent ratio drops (cap rate goes up), there is plenty of positive information in regards to US companies currently due to the new tech world we inhabit. It is much easier to make money today than 10 years ago. That trend will likely continue.

That’s partly because it can take several months for homebuilders to construct a new property. putting the stock perilously close to bear market territory.
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