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April 30, 2009

The Ripple Effect of Northside Piers' Price Cuts

When Toll Brothers slashed prices at Northside Piers' Tower 1 back in February, the effects rippled through the oversaturated Williamsburg condo market, reports The New York Post. The cuts took prices from a pre-market-slide average of $900 a foot down to about $700. "When they dropped those prices, they made anyone inland have to look at their prices," explains David Maundrell, head of Aptsandlofts.com. "We had to be realistic and do what Toll Brothers is doing because it's only a matter of time before buyers realize they can buy for $650 [per square foot] near the water." For, example, at the Evry, a new 14-unit development AptsandLofts is marketing at 273 Manhattan Avenue, prices are under $600 a foot.
Will of the People [NY Post]

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I don't know the W'burg market so I can't really comment on whether these price cuts are enough to make anything actually happen. But I can offer the observation that recent price cuts in the Park Slope condo market simply aren't even close to enough to get the market started again. The gap between buyers and sellers is not being closed, and it's up to sellers to close it if they want to sell. Waiting for the market to "get back to normal" is a fool's errand. Going down is getting back to normal.

Posted by: lechacal at April 30, 2009 10:20 AM

I hear ya. Take a look at the prices at 500 4th Avenue:

- http://www.streeteasy.com/nyc/sale/390832-condo-500-fourth-ave-park-slope-brooklyn

$826 per ft²?

One 4th Aveue at 12th Street?

Ain't gonna happen.

Of course they are offering this lame incentive: "Early Bird Special: 10% off the purchase price of any home at 500 Fourth for those who get in early!"

Posted by: SnarkSlope at April 30, 2009 10:27 AM

The prices at 500 4th Ave are an absolute joke. I am starting to organize my bottom-of-the-market thinking around the $500 psf level. Some properties will bottom out at or below $500 psf. I think basically everything along 4th Ave falls in this bucket. Some will bottom around $600 - say, good coops in center slope. I think all but the most extraordinary properties in the slope will be below $700 psf by the time we hit bottom.

There is a lot of inventory below $1,000 psf in good Manhattan neighborhoods (eg UWS). Some good stuff in the $700s and $800s. I love the slope and all, but I just can't see prices for center slope coops at more than $600 when I can get an equivalent place on the UWS for $700 or $800.

Posted by: lechacal at April 30, 2009 10:40 AM

Snark...how do you get your keyboard to type that "squared" raised 2????

Posted by: daveinbedstuy at April 30, 2009 10:41 AM

ew lechecal park slope is 50000 x nicer than the upper crust side.

*rob*

Posted by: PitbullNYC at April 30, 2009 10:48 AM

Don't let the development crowd tell you that high housing prices is the result of high labor costs or strict regulation. This shows that high housing costs are due to developer greed, looking for a price that is well above construction costs. I mean, if they can cut prices like that, what kind of price premium are they taking in? Unfortunately, the only thing that will bring housing prices to a reasonable level in this city is the construction of more housing. Developers think they can ask such high prices because people are desperate for housing in transit accessible neighborhoods. I've said it before, but I think we need to upzone more neighborhoods, especially those around transit. We need more housing!

Posted by: GWH at April 30, 2009 10:55 AM

"Snark...how do you get your keyboard to type that "squared" raised 2????"

Character Map?

Posted by: dirty_hipster at April 30, 2009 10:57 AM

Lechacal is right. Manhattan prices have dropped much faster & this will have an effect on prices of apartments in some parts of BK. Only caveat is that maintenance tends to be much higher (and amenities often better) in Manhattan.

Rob - similar to Park Slope, the UWS used to have some very gritty parts. Some of my older friends that live there tell stories about having to walk in the road up Amsterdam Ave to avoid getting jumped, SRO's and drug dealers on the blocks near the Naural History museum etc. Then it gentrified and a good number of those priced out moved to Park Slope!

Posted by: etson at April 30, 2009 11:11 AM

GWH: I don't agree with what you are saying at all. The price is set by the market. If the market is $1500 psf and costs are $300 psf, then good for the developers for building more buildings and making money for themselves. How can you in one breath blame developers for being "greedy" (god forbid anyone makes a profit!) and in the other breath complain about lack of housing? If they can't make a profit, who do you think is going to do all of this building you are asking for?

My observations are limited to what the market will bear. When it comes to how much you should pay for something, that's all that really matters.

If people can make a profit based on building costs and market prices for the finished product, they will build. If they can't, they won't. As an aside, building costs are coming down, so don't assume that the drop in market prices will mean nothing gets built.

Markets really aren't complicated. It amazes me how few people understand them.

Posted by: lechacal at April 30, 2009 11:15 AM

Lechacal;

I can't speak about the Williamsburg condo market either, but can also speak about the PS condo market, as that is where I live. I live in one of the new condo developments around 4th Ave and 2nd/3rd Street. My particular complex has 46 units, the large majority of them being identical 3BR units, making comps easy.

From what I see, the sales volume has gone way down, but prices are holding up. Here is the record to date:

Fall, 2007: $1.05M
Winter, 2009: $1.03M

The units are 1300 square feet, so it works out to about $800/square foot.

I've seen a number of folks pull there units off the market, rather than accept a lower price. With the lower inventory, the prices have held up so far. To my great surprise, folks have been able to pull back inventory even in the face of the tough economy. For instance, my downstairs neighbor was laid off, and put his unit up. I thought he was ripe for lowering his price. He eventually found another job, which pays less. They are thinking of downsizing, and so still have their unit on the market. The pressure is off them, however, to sell asap.

I think, therefore, that the pricing pressure on the prime markets like PS will depend upon how long and deep the economic recession works out, and that is far beyond my ability to predict. Unlike Williamsburg, there is not a huge number of new projects coming online. The Crest and Novo are almost filled up, and the two developments higher up on 4th Ave (near Baltic) are rentals.

Posted by: benson at April 30, 2009 11:24 AM

Lechacal;

Thank you for your response to GWH. I didn't have the energy to respond to him/her, so I'm glad that someone did.

The mindset on this site ("Greedy", "Evil" developers are the scum of the earth) makes one weary after a while.

Posted by: benson at April 30, 2009 11:27 AM

benson: A lot of electronic ink has been spilled on this board about the relatoinship between volume and price. Classic topping of the bubble behavior is for volume to go way down and prices to hold up for a period while people hold our for the market to "return to normal." All the while a shadow inventory develops. Eventually prices start to decline as the weakest sellers are forced to sell, and as prices decline more and more sellers have their hands forced. Inventory increases. Prices decrease. Finally, prices go low enough for buyers to start buying in meaningful volume. Transactions increase. Prices bottom.

By the end of the process, I expect that people like your neighbor will regret not selling at a discount at the beginning. They can end up riding the market down all the way and selling much lower than they would have to if they bit the bullet and took a chop to begin with.

All of this has happened before. And all of this will happen again.

Posted by: lechacal at April 30, 2009 11:33 AM

lechacal,

I never said that developers shouldn't be able to make a profit. At $600 a square foot, I'm sure they're still making a handsome profit.

I'm just tired of the argument that high housing costs are a result of union labor:
http://www.crainsnewyork.com/article/20080709/FREE/151713859
http://www.gothamgazette.com/article/housing/20080916/10/2647

Thanks for the lesson in market economics.

Posted by: GWH at April 30, 2009 11:34 AM

benson - Don't tell me you are out making money today!!! You should be ashamed!

(I'm on your side)

Posted by: lechacal at April 30, 2009 11:35 AM

> "Snark...how do you get your keyboard to type that "squared" raised 2????"

I copied and pasted the text from StreetEasy.

Hey lechecal - thanks for once again sharing your rather clear and concise analysis.

Posted by: SnarkSlope at April 30, 2009 11:40 AM

GWH: You are right that high housing costs are not a result of union labor. But high construction costs sure are!

Posted by: lechacal at April 30, 2009 11:40 AM

Lechacal;

I understand your point, but doesn't it also relate to the extent and depth of the recession? In any market contraction, there is always a flight to quality, to the benefit of areas like PS. Will this not sustain the pricing there for some period of time? If, for instance, the economy were to suddenly pick up tomorrow (for whatever reason), would it not first work to the benefit of shoring up prices in prime areas?

Clealy there is wealth in PS, and folks there have a greater ability to hold out than in more marginal areas. So again, doesn't this speak to the issue of the depth and length of the recession, how long one must wait out the cycle?

I will admit that timing the market is not my game. I'm a buy-and-hold type of stock investor, so I do not study market dynamics all that much.

Posted by: benson at April 30, 2009 11:52 AM

...and housing prices in new construction in brooklyn seem to have nothing to do with the actual cost of construction.

Posted by: GWH at April 30, 2009 12:06 PM

It doesn't matter how wealthy people are or how much they can hold out. The buyers just aren't there at current asking prices. And frankly I don't think we will see 2007 prices for many years to come. And no matter how wealthy people may be, sometimes people just need to sell. Job relocation, divorce, death, etc. affect even the wealthy, and then of course there are many people in the slope who keep up appearances but can't stay above water for more than a few months after they lose their job.

Some people just need to sell. And if they wait for prices to get back up to a level we only saw briefly at the top of a historic bubble, they will probably be disappointed. Inventory may be low at the moment, but trust me, that is very much temporary.

Another thing - and there isn't any way to sugar coat this, so I will just say it and hope you understand this is not a personal attack at all - I don't think a flight to quality would benefit anything within a block of 4th Ave. It's really on the fringe of park slope. It's a half mile walk just to get to the park, and for me being that close to 4th ave and that far from prospect park is a non-starter.

And as for the Novo: I really think resale values may end up at less than $500 psf within the next couple of years.

Posted by: lechacal at April 30, 2009 12:17 PM

"...and housing prices in new construction in brooklyn seem to have nothing to do with the actual cost of construction."

See - you're starting to get the hang of this. That's my point exactly.

Posted by: lechacal at April 30, 2009 12:18 PM

Lechacal;

No offense taken, but I would beg to differ. I can respect your points, but I think there are others who feel otherwise about what is the draw. Having a modern, spacious, 3BR apartment near 5th Ave and in the 321 school district is quite attractive to many a PS buyer. Also, my apartment is directly across the street from Byrne/Washington park, and it's nice to have a playground nearby for the kiddie corp. Given these amenities, my building is chock full of young families with tons of kiddies.

Good debate. Let's see how it goes. Also, I wish you the best in your search. Maybe we'll be neighbors - you never know!

Posted by: benson at April 30, 2009 12:27 PM

I'm pretty familiar with the development and have looked at several of the places on 2nd st between 4th and 5th that have been on the market in the past couple of years. The development seems very nice. My issue is with location, but I of course can't argue with your statement that different people are drawn to different things.

Posted by: lechacal at April 30, 2009 12:42 PM

I generally agree with Jackal's price targets. We've been seeing some pretty decent Brownstones sold at or below $600 psf. I'm no longer sure mine would get $600.

It'll be interesting to see what happens with ps 321 and those 4th ave developments. Already overcrowded, ps 321 is a ticking time bomb. Can't they just have the principal take over 282 as well?

Posted by: FatLenny at April 30, 2009 12:56 PM

I'm with Benson on the assessment of the location of his condo.

Sure, closer proximity to the park would be nice, but he is "steps to 5th Avenue."

I think many people find that far more useful on a daily basis.

I know I do.

Posted by: SnarkSlope at April 30, 2009 1:20 PM

I don't really see why anyone would be against lower prices. The benefits are obvious if you're a first time buyer. And if you're up/downgrading from one house/condo/coop to another then you're saving on closing fees, transfer tax, mortgage tax and broker fee - as those are all percentages of the price/mortgage amount (well, maybe not the closing fees). The R/E taxes should be lower as well (or not go up as much) for some owners. I'm assuming that whatever you lose on the sale of your existing place, you gain on the purchase of the new one. Your mileage, of course, may vary.

Posted by: heck_of_a_job_brownie at April 30, 2009 1:32 PM

heck of a job: Well that's pretty easy to respond to. If you are underwater on your mortgage you can't just trade into another apartment whose price has also gone down. You're stuck where you are. Falling prices can turn a home into a ball and chain for someone with no equity. It's a very scary thing. If all owners had 100% equity your comment would make sense. But financing changes everything.

Posted by: lechacal at April 30, 2009 2:22 PM

FatLenny: Do you have kids in 282 or are you familiar with the school? Can you tell me anything about it? I am very interested in learning more about that school.

Maybe I should start a forum post about 282.

Posted by: lechacal at April 30, 2009 2:25 PM

As long as prices are higher than construction costs, developers can make profits by new construction -- and some will.

As long as land prices are higher than the available uses of vacant land (gardens?, parking lots?), landowners can make more money by selling to a developer -- and some will.

As long as owner-occupants are willing to pay more than renters, landlords can make a profit by selling rental units to owner-occupants -- and some will.

As long as owner-occupants are willing to pay more than commercial or industrial users, developers can make a profit by converting -- and some will.

Each of these increase supply. Even if other owners hold out for higher prices. More supply, same demand, means that some sellers will be unable to sell at current prices. Some of them will cut their prices to make the sale. Those who hold out, won't sell.

The pressure to reduce prices does not end until prices are no higher than the cost of producing new supply. So, if you want to make a pretty good guess about the maximum sustainable price for housing in NYC, calculate the cost of construction, conversion or rehab. The lowest one wins.

This is the equilibrium ceiling. Friction (it takes time to create new supply) combined with rapidly growing demand fueled by a mass belief in perpetual motion machines (buy now or forever be priced out/RE only goes up) can sustain prices above the equilibrium ceiling for a while - we've had them for most of a decade.

But prices above cost of production are not stable. Eventually, profit seekers will find a way to meet the demand.

Reduced demand -- due to difficulties in borrowing, bonus, employment or income drops, or cuts in MTA service -- could lower the equilibrium ceiling (e.g., by reducing rents), or even push prices below it too (see, e.g., NYC from 1930-1980, when prices were well below replacement cost).

If you buy above equilibrium during a bubble, you are basically betting on friction and irrationality: that you will be able to sell to someone else willing to pay more (because they expect to find someone else willing to pay even more) before development/rehab/conversion/rezoning/boundary changes increase supply to meet demand. Or you are demonstrating a great faith in perpetual motion machines.

If you buy above-equilibrium prices after the bubble has popped, you are paying a very large amount of money for the right to live in the place in the near term before price adjustment happens. Or you are betting that adjustment will happen by rents and construction costs rapidly rising to meet current sale prices.

Markets are not efficient and they can take a long time to adjust. However, the trend today is downward, and there is nothing visible that could reverse the downward trend above the equilibrium ceiling.

I have trouble seeing rental values much over $375/psf anywhere in Brownstone Brooklyn, and that's doesn't seem far off construction/conversion/rehab costs either (at least excluding bubble-prices paid for development sites). Those with better numbers will correct me, I'm sure. Why won't Adam Smith take us there?

Posted by: FinanceGuy at April 30, 2009 2:29 PM

Benson, you've used that example in your building several times now. But things have changed a lot in the last few months. Friends of mine have a lovely family sized pre-war apt in prime PS that's been on the market a long time now. The same apt in their bldg sold last year for over 1 mil, whereas my friends have already cut their price once and are now certain they will have to take under a mil, and even with that in mind, they have no bites (in fact, they have only one offer period, which is over 20% below ask). I think this puts a real dent in your theory that PS (or other prime areas, for that matter) can somehow withstand the downturn as well as you hope.

Posted by: Miss Muffett at April 30, 2009 2:36 PM

"The Ripple Effect of Northside Piers' Price Cuts"

From bidding wars to selling wars...

***Bid half off peak comps***

Posted by: Brownstones Half Off at April 30, 2009 2:37 PM

MM: I am curious what apartment your friend is selling (I have probably looked at it if it is a 3 bed). If you are willing to share the info I am lechacal2008 at gmail.

Posted by: lechacal at April 30, 2009 2:46 PM

Finance Guy;

Always good to see you on the scene!

I have a question for you: where does inflation fit in? As I said above, it is far beyond my capabilities (I'm an engineer) to read the economic tea leaves. However, I've been reading more and more commentary that predicts that inflation is right around the corner, given the Fed's moves. If that were to come to pass, wouldn't it affect housing prices, given RE is a hard asset?

Looking forward to your comments.

PS: hello to Miss Muffet!

Posted by: benson at April 30, 2009 3:11 PM

Benson: A good rule of thumb for getting rich is to observe what most people fear most and fear the opposite.

Posted by: lechacal at April 30, 2009 3:14 PM

...or put another way, I am not concerned about inflation. As I have said in other threads, as soon as midwestern retirees are responding to TV ads telling them to buy gold you can be pretty confident that isn't where the smart money is moving.

Posted by: lechacal at April 30, 2009 3:15 PM

Lechacal;

Can't disagree with your advice. It's what I tend to do in the stock market. Best investment I ever made was to buy Lockheed-Martin in 1999,at the height of the tech bubble. The stock was in the toilet. My broker thought I was nuts, and he was pushing me to buy JDSU and the other hot stocks of the day. Well, where is JDSU today, and where is LMT?

I can't do it for real estate, though. My emotions get in the way, which is why I don't invest in it, other than for my primary home.

Posted by: benson at April 30, 2009 3:25 PM

At $500/sq foot would any of you folks buy at the Edge?

Just curious. . . .

Posted by: IronBalls at April 30, 2009 3:36 PM

That really brings me back, benson. Everybody I knew was buying JDSU, CSCO, pets.com, you name it, and they all thought they were geniuses when they made money for a little while. And they all called me an idiot when I told them they should get the hell out of equities. Then after they lost their shirts in the tech crash they started over, saved up a few dollars, and started buying real estate. Then they were all geniuses again until....

All of this happened before. And all of this will happen again.

It sounds like you are happy with where you live and you don't plan on moving. From your perspective, current market conditions should be irrelevant. Enjoy your home.

Posted by: lechacal at April 30, 2009 3:46 PM

"At $500/sq foot would any of you folks buy at the Edge?"

i'd need to take a look at the quality of the edge first - as its just not there at northside piers. If i could get a studio on the water for 250-300k I would consider it.

I'd much prefer one of the warehouse conversions over on Berry though.

Posted by: dirty_hipster at April 30, 2009 3:49 PM

But lechacal, exactly what form of gold are the ads selling? There are a lot of scams out there for the elderly. Real gold bullion is almost a certain hedge against hyperinflation. Don't forget what used to back the dollar. Debt/IOU's as a backer is not working right now.

And inflation can't "save" home prices. You still have to adjust the dollar amount of your latest appraisal or comp to that of the year that you purchased it. If you bought in 2007, you have to adjust the dollar amount of your sale price, whenever you sell, back to 2007 dollars. It's the real value that matters.

***Bid half off peak comp***

Posted by: Brownstones Half Off at April 30, 2009 3:49 PM

$500 sq ft at Edge is a good price but given we KNOW the developer is screwed timing-wise, think we need to be greedier - hold out for $400 sq ft

Posted by: more4less at April 30, 2009 4:14 PM

i actually read the article in the paper first and thought it was one of those "just taking up space articles" that's pointless. no kidding, real estate is down and the economy sucks. why write this even?

if you are seriously shopping for a condo, i'd say look for bldgs with c of o's that already have people living in them, and make a crazy low offer if you love the place.

seeing as the Edge isn't even finished, i wouldn't compare it to northside one. northside one has some good deals, and if you could get even lower, i'd say that it's going to have a big upside in the 5 year plus plan.

they do have some family sized apts, and is zoned for ps 17 which is a decent school. also, it's an easy trek down kent to greenpoint to send the kids to PS31 which is terrific.

it's also close to williamsburg northside pre-school on N.5th.

had their giant townhouses been this cheap and available when we were looking, would have bought one. they are huge.

Posted by: wine lover at April 30, 2009 4:22 PM

Finance Guy,

I'd suggest taking a look at Ed Glaeser's "Why is Manhattan So Expesnsive" from 2004. Glaeser suggests that land use restrictions prevent home prices from reaching what you call the equilibrium ceiling (I hadn't heard that term before).

Posted by: GWH at April 30, 2009 5:44 PM

GWH:

Zoning can't explain why owner-occupied properties are more expensive than rentals. We don't have any significant zoning restrictions on changing one into the other.

If zoning really restricts building in NYC more than elsewhere (which is not clear to me: we have high rises and mass transit, which suggest that it might be easier to build densely here), it would help explain why NYC is more expensive than unzoned regions.

But I didn't argue that NYC is overpriced relative to less zoned areas. I don't know how to value the relative attractiveness of cities enough to do that.

(The more standard term is equilibrium price, but I wanted to emphasize that the argument is asymmetrical. There are strong market pressures preventing prices from staying above the equilibrium price, where owner's price = rental investor's price = marginal cost of production = marginal cost of conversion/rehab, for long. The pressures preventing it from staying below that point are far weaker.)

Posted by: FinanceGuy at April 30, 2009 8:13 PM

Benson: Inflation is very good for debtors, so if you think inflation is coming in a big way, you might want to get in debt.

The easiest way for small scale investors to do that is to take out a mortgage. However, I wouldn't buy an overpriced house just to get a mortgage. Coming out of a bubble, inflation would likely make REAL house prices drop faster: sellers will resist the inevitable drops less if they are only in real, not nominal, dollars. Or put differently, there is no reason to imagine that an overpriced house will go up with inflation. It'll just stay still until the underlying costs (rents/construction) catch up.

However, before planning an investment strategy based on runaway inflation, keep in mind that the Fed is fairly powerful and deeply dedicated to restricting inflation, at least when it reaches ordinary wages. The Fed knows it can always raise interest rates as high as necessary to create a recession big enough to squelch inflation, and it has demonstrated that it is willing to do so. So a bet on runaway inflation is a bet on major political change: that the Fed won't use the tools it knows best in the cause it believes most in.

I'm not very good at predicting macro stuff, but if I were in a pessimistic mood, I'd be more inclined to worry about (1) deflation (because that is what is happening now, and the Fed doesn't have guaranteed-to-work tools to deal with it), and (2) a dollar collapse (because we buy more from abroad than we sell, and eventually the manufacturing countries will want to paid for the stuff they're selling us, which means we need to sell more, which means the dollar has to get cheap enough that our exports are competitive).

Deflation makes debt extremely painful: it's hard to pay back a loan when the asset backing it, and the income that is supposed to pay it, are dropping. It's deflation that put the Great in the Great Depression. If we head that way, you want to have lots of cash and to stay employed and to pray the government acts decisively.

A drop in the value of the dollar strikes me as unavoidable. We can't buy more than we sell forever. But it is largely a matter of market psychology and Chinese domestic politics whether the drop will be deferred until the recession is over and then be comfortably gradual, or come as a sudden whoomp one weekend in the near future.

I have no idea what the impact of dollar drop or collapse would be on NY real estate. I guess our tourism business would go up, and our houses and investment banks would be cheaper for foreigners to buy, which might increase demand, but on the other hand any foreigner already invested in NY would lose money, which might make others worry about investing here, and decrease demand. Medium term, it'd help manufacturing in the US, which would probably hurt NYC relative to other US cities that still make things. How big would the relative impacts be? I don't know, but even if demand increases, it is unlikely to revive the bubble.

Inflation, deflation or dollar collapse -- there is no reason why home ownership should cost more than renting a comparable space. On the contrary, if people are worried about any form of economic instability, the price of economic assets -- especially NYC real estate that is valuable/habitable only if the government functions well -- should drop. Fearful people rent.

Posted by: FinanceGuy at April 30, 2009 8:56 PM

FinanceGuy knows what he is talking about.

If you think you should be worried about inflation, remember that what is happening now is deflation. These cycles are slow. When inflation comes back then you can worry about it. In the meantime protect yourself against immediate deflation rather than planning for eventual reinflation.

Posted by: lechacal at April 30, 2009 11:07 PM

Thanks, FinanceGuy.

I always enjoy your take on things.

Posted by: SnarkSlope at April 30, 2009 11:48 PM

Deflation makes hard assets, like gold and other commodities, cheap now. Inflation will make them expensive later and thus profitable in real terms if you buy 'em now. So I don't agree that you shouldn't worry about or act against inflation now. I'd say a mix, like half cash, half commodities (especially real tangible gold). An inflation problem is all but inevitable.

***Bid half off peak comps***

Posted by: Brownstones Half Off at May 1, 2009 10:43 AM

« Ingersoll Community Center To Open As Soon As July Victorian Flatbush House Tour in Jeopardy! »

April 30, 2009

The Ripple Effect of Northside Piers' Price Cuts

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