Luxury residential "simply overpriced"?

I think he is right about the new development ultra-luxury properties being simply overpriced. Plenty of demand in my opinion if the developers price it at cost+plus reasonable profit despite some developers overpaying for land in 2013-14.

See this one as an example of right pricing despite poor location.
https://streeteasy.com/building/one-west-end

Both Steinberg and you may be right that a downwards price correction will result in a more stable market but I just don't see simply lowering prices to be the solution. But maybe its a classic chicken or egg scenario- What came first, were prices too high to begin with or did they become too high because of less demand? In other words, Is it a supply problem or a demand problem?

Since we are talking about luxury new developments, they got priced too high to start with in addition to oversupply as everyone got too excited about how much money Extell made on the first sale in 157 West 57th. For new development, pricing right at the beginning is extremely important as price cuts scare the buyers for remaining apartments away. I do not think demand has changed, it just has not kept up with lofty price expectations and lofty supply of ultra-luxury prices. The rest of the market is very healthy.

Otherwise, how would you explain 1 West End? Many others developments priced around $2k per sq ft in good areas, good light, and nice finishes are selling.

300, I agree with everything you are saying except your point about demand not changing. To me, it clearly had changed for the worse and until I see evidence to the contrary, I will be pessimistic about this market. And just because one Chinese buyer plucked down $91 million at 432 Park doesn't mean everything is back to normal with foreign investors- whatever normal means these days.

Although, as I am writing this, I see that Extel just secured financing for his biggest project yet:

https://therealdeal.com/2018/01/01/barnett-closes-on-1b-financing-for-central-park-tower/

This one is clearly overpriced as it is not unique. They drop prices by 15-20% to $2k per sq ft for units without view and $2500/sq ft for units with view, they can move it quickly and still make money.

https://streeteasy.com/building/212-5-avenue-new_york#tab_building_detail=1

What do you think of this chart as a proxy for demand for ultra-luxury?

http://www.millersamuel.com/charts/manhattan-residential-closed-co-opcondo-sales-%E2%89%A5-10m-%E2%89%A530m-2/

Or this one as a proxy for overall demand.

http://www.millersamuel.com/charts/manhattan-co-opcondo-listing-inventory-v-number-of-sales-index-1q01-100/

Yes, 300 these charts reflect what I have read in the article I linked. Chart 1 shows some softness in super luxury segment which may or may not filter down to the lower price segments. Chart 2 shows improvement in sales prices but Miller himself says that this is merely due to seller's reducing their asking prices. Also could be due to sellers pulling their aspirational listings from market.

Stats that discourage me are as follows:
- increased days on market
- increased discounts to asking prices
- reduction in foreign investors
- increased interest rates
- inventory higher than peak 2013
- sales volume lower than peak 2013

Add to that the risk that softness in luxury sales could filter down to mid-tier and risk to the overall economy which may be nearing the end of an extremely long successful run.

None of these stats taken individually mean that the market is tanking. But put it all together and I have concerns. Maybe not this year or next year but soon enough it will run its course. Soft landing? If history is any judge, that's not what usually happens.

Is it better to look at averages or peaks?

10y rates at the end of 2013 were actually higher since we are looking at the peaks.

Discount to ask is meaningless if you list at aspirational prices.

What is aspirational today was realistic a year ago. That's why I think discounts off historical peaks are relevant. Its the mindset of buyers and sellers that makes the market. Same with any asset, they're only worth what people think they're worth. That's why Hermes scarves and Rolex watches never go on sale and luxury brokers will never admit the market is soft. Just my $0.02.

The only place where are you getting discounts off the historical peak is ultra-luxury. Mostly in 157 West 57th. That has already gotten a lot of press. Will appreciate any examples of meaningful discounts relative to 2014/5 in non ultra-luxury. Most price per sq ft matrix are positive YOY including Streeteasy condo index which is based on repeat sales of the same unit.

I am trying to predict when the market will decline. If there were discounts to peak prices in all segments, it would mean we are already in a decline. Again, I would only point to the warning signs I indicated in a earlier post. At this point in the cycle, are there more favorable signs or more unfavorable signs? That is the question potential buyers need to be asking, unless you are a very long-term buyer.

the decline already occurred... sales are lagging, meaning by the time they close and are counted in stats, they are reflective of a market 5-6 months prior.

I'll try to post some charts of the new www.urbandigs.com when i get a public url tool for my new charts system. right now it's behind paywall.

Digs, Would love to see some data for "the decline already occurred" by segment. Thank you.

Favorable Signs: Strong Economy, jobs, stock market, growing income of global top 0.1%, and continued desire for two income couples to live in the city.
Unfavorable: Excess supply of Ultra-luxury development and undersupply in $1000-$1500 per sq ft segment. Significant increase in real estate taxes over the last 10 years.

Would love to hear what other think about favorable and unfavorable signs.

On the favorable would like to add: Creation of public spaces at various intersections - Cooper Square, Flatiron building, Harold Square etc. Makes the city more livable. Bike lanes are an attraction for young generation. Uber has solved the waiting for taxi issue to a certain extent for those who desire a car.

Favorable sign - all markets are strong, the rich continue their ascent, this feels like 2005

I don't think he was talking about new construction. I think he was referring to any of a number high end resale units which came on at crazy prices, stayed on the market for a long time, and finally ended up selling at a 40% to 50% discount off of original ask.

In terms of the market coming down - I admit that this is a small data point, but look at the 1 BRs in London Terrace and Chelsea Gardens.

Noah,
I would really love to see some of those statistics. I really appreciate your effort to make them available to us.

no prob... may be 1-2 weeks though. it's#10 or so on a very long to do list

From the Journal:

Manhattan’s Real Estate Market Had Lackluster End of 2017

Luxury sector sees price correction due to inventory overload and skewed averages in prior years

JANUARY 03, 2018

Manhattan’s real estate market experienced a stable but lackluster end of 2017.

Manhattan’s real estate market ended 2017 in a more stable condition than 2016, but the recovery lacked velocity and there were few bright spots, according to year-end reports from major brokerages, all released Wednesday.

While the median sales price in Manhattan edged up 1% annually to $1.06 million by the end of 2017, the average sales price declined to $1.897 million, falling 10.6% year-over-year and below $2 million for the first time in the last seven quarters, according to Douglas Elliman reports prepared by Jonathan Miller, chief executive of real estate appraisal firm Miller Samuel.

“The diminishing ‘legacy contracts’ in luxury new developments are mainly to blame,” said Mr. Miller of the fall last year in average prices.

Those contracts, which were signed in 2014 and 2015 during a construction boom, had previously skewed average sales prices upward.

Overall, 2,514 Manhattan homes sold in the fourth quarter of 2017, down 12.3% from the same period in 2016. The average sales price per square foot declined 20.6% year-over-year to $1,609, according to the Douglas Elliman report.

Other brokerages observed a similar market trend in Manhattan with slightly differing data due to some methodology nuances.

For example, the Corcoran Group found that median sales price in Manhattan reached $1.068 million in the fourth quarter, up 5% from a year ago. The average sales price, on the other hand, dropped 8% year-over-year to $1.695 million, as a result of fewer homes selling with sky-high price tags. The brokerage recorded 3,140 sales in the fourth quarter, down 15% year-over-year.

Luxury market continued to suffer from too much inventory

Market oversupply as well as tax reform-related concerns slowed the luxury Manhattan market in the fourth quarter, according to Douglas Elliman and Stribling & Associates.

The average luxury sales price, defined as the top 10% of the market by Douglas Elliman, stood at $7.58 million by the end of 2017, down 20.7% compared to the fourth quarter of 2016.

This segment had an entrance threshold of $3.895 million in the fourth quarter of 2017, dropping 13.4% from the comparable period in 2016. The number of luxury sales fell 13.4% to 252, while active listings grew 13.2% to 1,439.

There were 152 sales in the fourth quarter of 2017, fetching a price of at least $5 million, 38% fewer than the same period of 2016. One notable trend in this segment was the prevalence of all-cash buyers, Mr. Miller said.

“Almost 90% of deals in the $5-million-and-plus market were all-cash deals, compared to the normal range of 70% to 80% seen in the past couple of years,” he said.

The reason for this was largely related to the new tax law, Mr. Miller said. As the discussion of tax reform began last fall, it caused uncertainty, especially with regards to mortgage financing.

According to a separate report by Stribling & Associates, $5-million-and-plus sales only accounted for 6.2% of the Manhattan market, compared to 13% of those sold under $500,000. The two segments previously had a more equal market share.

Luxury homes priced between $10 million and $20 million logged the most significant price declines, with the median price dropping 9% to $12.46 million and the average price falling 6% to $13.31 million.

“The glut of new luxury development projects coupled with the uncertain tax bill changes caused many buyers to hesitate on large purchases and financing,” Elizabeth Ann Stribling-Kivlan, the firm’s president, wrote in the report.

“In return, we saw that sellers came down on pricing and created more room for negotiability. This is a trend we expect to continue into the new year,” she continued.

New development markets saw further correction

New developments, which mostly fall into the luxury category, continued to see price corrections. According to Douglas Elliman, the average sales price in this market dropped 7% to $2.74 million. The median sales price also slumped 16.8% to $4.06 million.

New development inventory expanded for the sixth consecutive month to 1,054, accounting for 15.4% of all the Manhattan listings in the fourth quarter, according to Douglas Elliman.

Throughout 2017, a total of 1,320 units in new developments entered into contract, an increase of 4% year-over-year, according to the year-end report by Halstead Property Development Marketing.

The average price-per-square-foot rose 2.2% year-over-year to $2,282, which has remained essentially flat for the past 10 quarters.

“In 2017, we saw a correction—which is still underway—at the top end of the Manhattan market; a continued flat-line for pricing in Manhattan,” Stephen G. Kliegerman, the firm’s president, said in a statement.

The percentage of new development deals entering contract over $5 million fell to 19.5% from 24.6% at year-end 2016. Conversely, the share of those under $5 million rose to 80.5% from 75.4% at the end of 2016, according to the report.

I agree with 300 that we really need to look at stats on individual market segments, e.g. mid-tier coops and condos. The WSJ article concentrates its analysis on 1) the overall market and 2) the ultra-luxury market which is not penetrating journalism IMO.

At this stage in the market, little can be learned from closed sales - as urbandigs has suggested - due to the long lag times between signed contracts and actual reporting of results. But we can study real-time trends in listing prices, days-on-market, etc. especially if we can narrow these stats by market segment.

Perhaps a look at stats on coops only which have a much greater tendency to reflect the mid-market as opposed to ultra-luxury and new construction?

According to recent surveys, the overall coop market still appears to be fairly strong:

https://therealdeal.com/2018/01/03/manhattan-resi-sales-volume-down-13-in-q4/?utm_source=internal&utm_medium=popular_widget&utm_campaign=posts_popular

Ximon, WSJ article is indeed poor journalism. Any conversation of price down has to be on a per sq ft basis, which has its drawbacks, rather than median price basis. Per sq ft matrix by market segment (size, coop, area) can give a fairly reasonable view. Coops are probably the best barometer as the new ones are not being created and the quality is fairly similar once you exclude say >$4mm coops.

The chart in this report remains the best indicator in my opinion which shows flattish. I do not know why Streeteasy does not give it better coverage any more. There is indeed a 3 month lag but since we have been talking about market going down for last year or more, it gives a reasonable view. Of course, one may say that inflation adjusted, the apartment prices are down a touch.

https://streeteasy.com/blog/november-2017-market-reports/

Perfect example of initial price having nothing to do with reality. And it is 4800 sq ft as per city records. This makes a great story for the press. Is it fairly priced now? I would say close. Is the price cut reflective of the general market being down. No way. People forget listing prices do not have to do any thing with real trading price.

https://streeteasy.com/sale/1313372

Another aspirational price. I think worth no more than $$20mm in the best case given that it needs a full reno. Will people say market is going down when it takes a price cut of $10mm. Of course!!

And yes. Ethan is not using my login.

Saying that 90% of the luxury sales are being done as all cash is a bit of a false flag because an ever increasing amount of sales being done in that market are with Shadow financing.

Here - https://medium.com/@noahrosenblatt/manhattans-high-end-looking-for-a-bottom-6068960eb045

Found a hack to get few charts to you guys sooner from the new www.urbandigs.com

Cheers! I can now separate marketwide, from new dev, from resale, etc. Whats posted in the link above is marketwide. Cant wait to get back at blogging again!

Thank you Noah. Is it easy enough to add $2-3mm, $3-4mm, $4-5mm Price Per Sq ft Charts as well? Guessing you can only do it for condos as the coops do not always list square footage.

Sorry, the above separated by new development vs resales, if possible.

300, go to www.urbandigs.com, register for free, and then invite me as your agent. that way you can access charts

I am a basic member. Will try these charts.

https://therealdeal.com/miami/2018/01/22/it-is-2005-all-over-again-in-terms-of-the-valuation-extreme-the-psychological-excess-and-the-denial-bear-warns-that-housing-market-is-overheated/

https://therealdeal.com/2018/01/29/this-was-the-worst-january-for-luxe-sales-since-2012-olshan/

https://therealdeal.com/issues_articles/condo-loan-take-two/

30, Good article. In my opinion, any properties priced over $3k per sq ft barring a few with exceptional views / penthouses / marquee residents or buyers have only one way to go - down. Inventory financing ... ha. If I were to be a bank, I would not finance more than 90% of the cost which may be 60% of the marketed price. Who knows, banks may be doing just that.

Coops priced at $1100-1300 per sq ft (very few available at $1000 per sq ft) needing some work, nothing special, in good areas seem to be only going up with bidding wars. I think the price gap needs to narrow between resales (more than 10 year old building) and new development as real estate within a particular general location is not clothing where you can sell a gap t shirt for only $25 (cost probably $10) and Prada can be sold at $200 (cost probably $25-40). A condo building I watch with interest had a listing go in contract within 2 weeks as it is around $1500 per sq ft. I think it is a red hot market below $1500 per sq ft resales. Just not in ultra-luxury.

Leonard Steinberg is right on the money with "Simply Overpriced".

Very interesting article, 30. Lowering minimum or so-called release prices makes no sense unless equity cushion is close to $0 or additional security for the construction loan was given such as a guarantee or cross-collateralization with another project. And loan extension periods typically come with a higher rate of interest say another 100bps or more. I would not want to be a mezz lender on any luxury project today as 80-85% leverage is now closer to 105-110%. This will probably get worse before it gets better and these loans could be restructured again in another year or two.

Met a friend today from Hong Kong who has a few words to say on over priced. NYC is nothing apparently compared to HK property prices.

A condo in the 80's, normal re-sale and average condition that goes for $1700 PPSF will easily trade for $3000 PPSF in HK. He told me of a luxury new development unit with no windows going for $10,000 PPSF.

Talk about an affordability problem ..

JR1, You should ask him about property taxes in HK? You will surprise how low they are. Believe appx 25% or less of Manhattan. Maintenance is 25-35% of the cost of NYC due to cheaper labor with more amenities. Most apartment in HK also have a view as the buildings are not that close together. That said, all the factors I am mentioning were true 10 years back as well and property prices in the last 5 years have been growing at 10-15% per year in major cities in China and HK.

It's hard to compare one country to another but it's clear that many Hong Kong investors look at the US markets as cheap which is part of the risk in our housing prices when these investors retract. I know a lot more about China than Hong Kong but Chinese residential markets have been restricted only to the cash rich for many years. Few in China under the age of 30 can afford to buy a home without financial support from relatives. Income has not kept up with housing prices - sound familiar?

Lower carrying charges only makes the bubble worse. RE taxes are on the rise in China and common charges are not enough to keep up these properties. Debt to income ratios mean nothing in these markets which lack discipline as well as alternative investments. Problem loans are increasing dramatically. And for those that borrow, lower carrying charges are more than offset by high financing charges in the shadow banking system.

Bubble in China may take a while to burst due to continued economic growth and government support but when it bursts, it will be a 9.0 on the economic richter scale with immediate resonance worldwide.

http://www.scmp.com/news/china/economy/article/2112873/chinas-household-debts-soars-it-being-stalked-subprime-spectre

And we all know the eventual result of an overactive subprime loan market.

the market appears to continue to soften at 2 million plus now.

essentially with RE taxes going up, maintenance other costs going up, borrowing costs going up and other aspects (stagnant stock market, increased dollar strength, not able to write off all RE tax and State / City income tax) results in home prices going down

http://www.crainsnewyork.com/article/20180703/REAL_ESTATE/180709985/manhattan-home-sales-slide-again

I'm sticking with my prediction of a 35% to 50% Market correction.

Which segment of the market in price per sq ft? I think ultra luxury can indeed correct by 35 percent and still be over $3k per square ft. $1500 per sq ft or below segment in Manhattan, 10 percent if that. It may actually go up 5-10 percent if the economy keeps chugging along for another 18 months. 10y rates are still below 3 percent.

yes mercer u r correct. the entry level market 1500 per sq is completely opposite the luxury market right now. Entry level has no inventory so that is what is keeping sales pretty strong and the future even stronger.

Prices are still rising. I look at this thread 6 months back, they were expected to come down as the recorded sales catch up. Grant Long is completely right when he says the sales are slow due to a lack of right type of inventory - which I take it to be 1200- 1500 segment for Manhattan condos.

https://streeteasy.com/blog/may-2018-market-reports/