Will brokers lead the price of Manhattan Real Estate DOWN?

nope.

the way the system works is that the seller pays both brokers. hence, when someone wants to sell, different brokers almost "bid" to get a seller's business. imagine if you were selling your condo - you get one broker saying this is worth $800K, and another convincing you they can get you $900K. for most people who dont trade condos all the time, the extra $100K seems enticing. If the condo sits on the market for a year - the broker loses nothing. the seller is out on year carrying costs.

knowing this, in a similar scenario, if you were a broker soliciting business - what would you do? promise the seller $925K or $800K?

depends on whether you want to spend 3 Sunday afternoons showing a place at a price you know nobody's going to bid...

Sure, but what would stop a broker from telling you he can get $900K to secure the listing and then after 2 months trying to convince you to drop it a ton to sell it? I certainly agree the best way to get a listing is for a broker to act like they can get the big price, but once a broker has the listing they can try and nudge a seller to lower the price if there is no action. The only real obstacle they face is the expiration of the exclusive I think.

I doubt it. Its going to be up to the sellers to realize the change in the marketplace. The brokers I have dealt with are just completely ignorant of reality. I still laugh at the interview that Prudential's Vice Chairwoman gave following the Bear Stearns collapse. I forget her name, dolly, dottie or polly or something along those lines stated "The Bear Stearns collapse will be a positive for the market because people now realize they must own hard assets". She must be so accustomed to bold face lying that she said it so sincerely. The host on CNBC had the most confounded look on her face.

I would hope so, the prices soard in 2002 now they need to be adjusted. Let normal people back in the city. Leave a little room for the working class.
Vic Parise

most likely, the abundant amount of inventory and unfinished buildings may be converted to hotels, offices, rentals to tighten up the market to protect the pricing.
Vic Parise

Eric - I don't think you're reading John's question correctly. He's asking whether brokers who are already hired and actively trying to market a property for a certain figure might convince their clients to drop the price to stir activity.

I happen to think that brokers absolutely will lead the price of real estate down. The psychological effect has as much an impact on prices as anything else. And the fact is, many people are a) paranoid about buying now and b) convinced that prices will continue to decline, thereby making it foolhardy (in their minds to buy now). Sellers, too, may well begin to panic. Thus, irrespective of what the reality of Wall St and credit availability are, and thus, what the 'true' value of real estate is (if such a thing could ever be quantified), if people's perception is pessimistic, it will lead to lower sales prices...just as perceptions about a bank's insolvency can lead to a bank-run (as we saw after the Fed took IndyMac over), even if there's no true reason to do so.

By and large - and I say this after 5 and a half years of buying and selling - brokers are a selfish and dishonest lot. Like lawyers, brokers are ostensibly supposed to serve the best interest of their client (from my perspective, the seller) IRRESPECTIVE of how doing so affects their own bottom line. Thus, in a normal, non-panic stricken market, an honest broker who gets an offer of $200K on a property who knows (based on comps, etc.) that the true value of the unit is $225K will advise his client to hold out for more money. But in reality, brokers seldom do that. Because the difference between $200K and $225K is $25K, a hefty >10% sum for the seller to pocket, but a pittance for the broker. This is because the typical commission on a transaction is 6%, and most deals are co-broked. That means that the broker has to split his commission with another broker (so he's down to 3%), and then split at LEAST once more with his office (not to mention any further splits with partner brokers), dropping him down to 1.5%, at best. 1.5% of $25K is a paltry $375. If someone offered you the choice of either $3,000 today (1.5% of $200K) or $3,375 if you bust your butt for the next several Sundays sitting in an apartment, printing out flyers, making sales pitches, email blasts, phone calls, and possibly paying for advertising out of pocket - which would you choose?

The choice is obvious if you're only thinking of your own self-interest, and unfortunately, that's how most brokers act. Understandable from a human nature perspective, but duplicitous and dishonest when you consider the promise they make to their clients when they take on a listing.

And this long-winded answer is precisely why brokers will lead the upcoming price drop, in my opinion. Because from their own, purely selfish perspective, it doesn't make sense to maintain properties on the market for extended periods of time if a 5 or 10% reduction in price will yield a quicker sale and virtually the same commission in their pocket (if not a higher commission, if, again, they're forced to pay for advertising out of pocket, as Corcoran and some other offices do.) The financial crisis has created a perfect excuse, regardless of its ultimate impact; as it is the brokers who will start persuading their clients to lower prices 'because of what's happening on Wall Street' for their own selfish reasons. Jittery sellers will likely follow suit, and a decline in prices may then occur at a far more accelerated pace than Wall Street's problems 'should have' precipitated.

I can tell you first hand that the brokers are still delusional about what is going on. I looked at an apt. on Friday which was clearly way overpriced. The listing broker (from one of the biggest firms in the city) was quacking about how she has had her best year ever and sales were "chugging along nicely". I just smiled and nodded. It is going to take some time.

Literally, the answer, is "no". Buyers and lenders are leading the market down, and will continue to do so.

But if you really mean to ask whether brokers will convince sellers to adjust their expectations because it's in the brokers' interest to do so (as well as their clients), that's a different question. I know at least one successful broker for whom the answer is a definite "yes". I don't know whether he's typical, but it only stands to reason that brokers will play a role in narrowing the bid-ask spread to improve transaction volume. That's a big part of what brokers do, in any market.

SWK - interesting perspective on brokers, thanks for the post. agree that a broker has every incentive to convince a seller his/her price is unrealistic and that they should drop price if they really want to sell. but i think there are still a surprising number of unsophisticated sellers or just those that are in denial out there in nyc. for those, only when they will lower prices only when they start seeing definitive proof that prices are in fact, declining and that there is a real penalty for selling in 6 mos rather than today.

sorry "for those, they will lower prices only when they start seeing definitive proof that prices are in fact, declining and that there is a real penalty for selling in 6 mos rather than today."

I'm a broker with a very small company in Brooklyn. I wonder if one of the factors propping up prices is the fact that many buyers are lowballing every asking price - even the reasonable ones. I think there may be a psychological element at work, in which the asking price has become the MSRP of the real estate industry - a number from which to discount so the buyers feel victorious.

Because we mostly work in resale, this isn't really an issue in our market. But I do wonder if we're moving through a phase in which buyers who pay full asking price feel ripped off, so brokers have to build in the discount to make everyone feel better about the deal.

Tina: Why do you think those prices are "reasonable"? Isn't the definition of a reasonable price that somebody is willing and able to pay it?

If your criterion for reasonableness is simply that you can substantiate a price with valid comps - even very recent ones - you may need to broaden your definition. Comps didn't constrain asking prices during the runup, and they may not persuade bidders on the way down.

West81st: Let's say by "reasonable" I mean at a lower ppsf than recent comp sales. I'm just wondering if, as you point out, "Comps didn't constrain asking prices during the runup, and they may not persuade bidders on the way down" means that buyers' distrust of those comps is one of the factors keeping prices where they are. Purely unscientific!! Just floating a possibility...

I'm not an out-and-out believer in the magic hand of market forces, but in this case I don't think a broker has the power to cause a sale at a low price, unless with totally illegal collusion involving money under the table from the buyer or some such thing.

If priced much too low (assuming proper listing in REBNY's system, and presenting all offers), a bidding war would result and bump the price higher.

Tina: Possible, but of the myriad factors driving prices, I think that's a pretty minor one. Besides, if the seller's "real" bottom-line price for an apartment is lower than the official list price, then the asking price should be highly negotiable and should not pose a significant obstacle to a deal. That's the MSRP model: both sides know that the list price is just a starting point or guideline.

Another flaw in your MSRP analogy, by the way, is that no price-driven car buyer pays attention to MSRP these days. The first considerations are what a buyer needs, and what she can offord. Then educated consumers look at dealer invoice, factory holdback/rebate programs, and other cost-basis data that used to be hidden behind the MSRP. I might occasionally buy a sweater because it's marked down from the list price; but nobody buys a car that way, much less a home.

SWK --

Your argument about how brokers work (basically the Freakonomics argument) is true up to a point. Yes, brokers make money on volume, and prefer quick transactions to slow ones.

But I think you're wrong about how much influence the big, bad brokers have, because I think you're wrong about how easily gulled sellers are.

First, real estate agents work for sellers, not the other way around. We convey market information to them, and that's a valuable service, but ultimately, pricing is a seller's decision.

Second, part of pitching a listing is coming to agreement with the seller on what price the property ought to clear at, and what pricing and marketing strategies to pursue to hit that optimal price.

Now, the list price may be above optimal price -- that's a common strategy in many markets -- but the seller has in mind that they're going to get that optimal price. That's a figure that's been arrived at through careful study of the current market, and recently sold comps, and on-market comps, and in the process of taking the listing, the broker has gotten the seller to essentially buy into that number.

The idea that everybody's suddenly going to abandon that plan when a low offer comes in -- well, in my experience, it doesn't happen. That marginal 10% is money for the seller's retirement, for their next home, for their kids' education. Most sellers don't sell in volume -- maybe one transaction every couple of years at most -- and they're not going to give up that kind of ground that easily.

To move from anecdotal to aggregate, the appraiser Jonathan Miller tracks the "listing discount" -- the price of closed sales versus the price of listings -- and for Manhattan in 2Q 2008, it was 3.6%.

ali r.
{downtown broker}

Anecdotally, I've seen a number of price drops in the last two days. Scared brokers spooked by the news on wall street. Brokers have never been accused of looking out for the best interest of their clients. They are chasing commissions, period. Nothing wrong with that, but just like chasing returns drove the stock market up and ultimately down, so too will go the real estate market in manhattan.

once lis pendens tick up for the middle and high end, broker sheep will run down the prices just as they've run them up. Its the wheel of life. I believe the Hindu call it "moksha".

front_porch: re. "listing discount", isn't that calculation based on the FINAL asking price? If so, it may be a fair indication of receptiveness to lowball bids (which apparently remained low through Q2), but it doesn't reflect overall negotiability, since the may have been price cuts prior to that final ask. Also, some brokers tweak asking prices after a deal has been struck to make a sale look more successful, so the data may reflect some manipulation.

West81st:
"Then educated consumers look at dealer invoice, factory holdback/rebate programs, and other cost-basis data that used to be hidden behind the MSRP." Right - if you extend the analogy, educated buyers are looking at an unprecedented range of information, readily available on sites like this one or through DOB, ACRIS, etc., and making their own determinations. All good things, as far as I'm concerned.

Brokers make money on transactions. Better to get 90% or 80% (discounting from original prices) than 0% (not getting a listing, not getting it sold). So brokers have every incentive to push prices down at this stage. They'll take a pay cut but not be out of business.

tina, I realize you are a broker and your job is to get the best price for your client. However, the adage, history does not guarantee future performance, certainly applies here. Looking at recent comps and ACRIS only show transactions that went into contract 9-12 months ago and closed recently. Its a completed different market place now. However, I realize that sellers and brokers typically would use recent comps to price their apartments. I think we will start seeing material declines in about 6-9 months, but not immediately.

Tina -

Thank you for the reasoned insight, but your experiences do not reflect my reality.

I'll preface this by saying that the vast majority of my apartments over the years have not been in core Manhattan, and thus, the brokers I've hired to sell may be of 'lower' quality than typical Manhattan brokers like yourself.

But I have sold in Manhattan and in the boros, and I've used everybody from the big boys like Corcoran and Elliman to smaller, boutique neighborhood outfits.

There's one constant among most brokers: almost NONE of them have any real understanding of the bones of real estate. Yes, I'm extrapolating from my own experience to brokers overall, but:

How many of them understand how to read a set of financials? How many of them understand the intricacies of financing property? How many understand the first thing about foreclosures? How many understand how to utilize online acris properly? How many understand the first thing about real estate contracts (brokers in other states negotiate the contracts themselves; not here)? How many understand how to get around co-op downpayment requirements through creative runarounds like seller financing and seller concessions? How many understand share allocations in co-ops? How many understand the content of proprietary leases or offering plans in general?

The answer: virtually none.

My conclusion after 5 years of working with brokers is that they are glorified door-openers and application-filler-out-ers. I use them (as well as sell myself) because I don't have time to shlep people around to see apartments all day, and because there really is value to having a property listed on a Corcoran or Elliman site and having that, in turn, fed into the big repositories of open sales like Street Easy - none of which I can do alone. But I *NEVER* rely on brokers for information about comps because I *ALWAYS* have better and more accurate information than they simply by using resources that anyone with some understanding of real estate can attain. Brokers know how to utilize their databases to print out a list of what's available for sale, and what brokers claim have sold, exactly as they've been trained by their bosses. There is no broader understanding of the market or the intricacies of the business - all there is incessant, vapid declarations about the efficacy of their company's website, how many millions were poured into its design, and how many thousands of hits it gets each day (a mantra particularly prevalent among Corcoran agents - is that in the training manual, to wax incessantly about how wonderful the website is?).

Sorry to be harsh. Just speaking from my own experience.

West81st, you're right, listing discount IS off final, so it is possible that the price has bumped down one step at a time -- but that's still not quite: oh, push the broker to get 10% off for you, he or she is so transaction-motivated that it will happen instantly.

And SWK, I'm sorry that you've had such an overall negative set of experiences with agents, I'm not going to pretend that I don't know what you're talking about, because I have certainly met those people.

However, it's not every agent who is a dunce. My credentials are solid, and so are those of many agents I know -- lots of us are attracted by a level of flexibility, variety, and upside potential that wasn't available in our first or even our second careers.

ali r.
{downtown broker}

someonewhoknows, i couldn't have said it better myself, and couldnt agree more

SWK - My company has a mediocre website, very little name recognition, and we don't spend a lot of time or money on branding. So how do we survive? A small but loyal client base of people who have had lousy experiences with other brokers - the type you describe with devastating accuracy in the post above.
But Ali R is right - we're not exclusively creeps. Just as not every buyer, seller, landlord or renter is an angel. But putting nice, well-informed buyers into homes they want and can afford is satisfying work - and the downturn in the market is making my job easier, not more difficult.

I had a 20 year broker veteran tell me on Sunday that I was wrong that there was a global recession/slowdown and a financial crisis... because apparently "everyone always says that".

I left her a nice VM on Monday.

nyc10022, maybe she's a McCain voter.

ali r.
{downtown broker}

I like how Ali thinks delusional brokers are the exception to the rule...

Ali R. - not to be snarky, but honestly, you just lost a potential customer by playing the politics card - I've always had a lot of respect for your posts, but that was a bad move.

mrsbuffet -- you'll still use any broker who's good for your bottom line and getting you what you want when buying or selling, regardless of your or her politics. And everybody knows it, so you're not fooling anyone (nor censoring anyone).

I think Ali knows what she's doing. For a broker in Manhattan, trashing Republicans probably scores points with more potential clients than it offends.

Ali's comment isn't just humorous (to some) it also makes sense given the Republican view on the economy....

I have to agree with alanhart and West81.... McCain comment doesn't bother me as it is accurate, and I say that not just because I support Obama...

I think a lot of sellers brokers weren't able to be honest with their clients because they wanted the sale. Sellers right now are delusional, and believe their property is somehow special or immune to the downturn. So, brokers who did tell it like it is were less likely to get the sale. Now, I think the events of the last few days give brokers a way to explain to their clients that their expectations may be out of line. That's not to say that the sellers wouldn't realize it themselves eventually.

Frankly, I think market forces will continue to be at play. That is, sellers who don't absolutely need to sell will continue to price high, as they try to capture every last penny possible - until they do need to sell (or else just take their properties off the market). And desperate sellers (i.e., people who just lost their job, divorce, move, etc) will find their hand is forced. If there are more and more desperate sellers, they may push the overall market downward as the casual sellers are forced to price their properties to be competitive with the desperate sellers. If the prices really start to move downward noticeably, then I think it will accelerate as people realize it's now or never (i.e., don't want to wait 10 years to sell their place) and the sellers who are just testing the market will eventually disappear.

New listings last couple days. Sellers still delusional. Brokers still bluffing.
Although I have noticed that decreases on new listings are coming faster - often within a couple weeks.
Previously people would wait for 3,6,8 months before a first decrease assuming the market would
eventually catch up. I think we are starting to see sellers chase a falling market.

I really is stunning how obtuse people can be. An apt is not your child. It isn't cuter or smarter and it doesn't have dimples. It is a home until it is on the market when it becomes just another product to be sold.
And usually it's not even shiny and new. It's just one of many old toasters at the rummage sale.

Will brokers lead the price of Manhattan Real Estate DOWN?

Yes they will. Buyers are on strike. Brokers not getting new commissions.
Brokers will soon be tapping into their savings to pay their own mortgages and rents.
When the brokers start to feel the pinch enough they are going to realize
that all of this bluffing isn't working and your going to see a lot of folding out there.