Below-the-Surface Struggles in Manhattan Housing Bust Seep to the Surface


by Wolf Richter, Wolf Street:

“The market doesn’t care what you think.”

That the Manhattan market for condos and co-ops has been heading lower is no secret. The price and sales data I’m going to briefly lay out here is just to provide a backdrop for what comes next – the struggles below the surface that rarely make it to the surface. But this time they did.

The average sales price of condos and co-ops in the third quarter dropped 14.1% from a year ago to $1.66 million, according to the Elliman Report. The median sales price (half of the condos and co-ops sell for more, and half sell for less) fell 8.2% from a year ago to $1.03 million. That was down 13% from two years ago.

The number of closed sales fell 14.2% from a year ago to 2,592 units. The only price category that saw a year-over-year sales increase (+4.8%) was the below-$500,000 category. In all other price categories, sales fell. In the above-$5-million category, sales collapsed by 42.9%.

Months’ supply of listed inventory – not including unsold units that have been pulled, as we’ll see in a moment – rose 22.9% year-over-year to 8.6 months. And this has occurred despite a steep decline in mortgage rates over the 12-month period.

Back in the second quarter, there had been a rush to buy before the Mansion Tax took effect on July 1, and sales surged at the time, “prompting some market observers to interpret the formation of a recovery,” the Elliman Report said. But as the Q2 Elliman Report had predicted, that surge would unwind in Q3, and it did, plus some.

This is the backdrop to what comes next. Jonathan Miller, author of the Elliman Report and principal at New York City real estate appraisal firm Miller Samuel, exposed today a fascinating aspect of the dynamics beneath the surface in the Manhattan housing market.

But first a distinction. In Manhattan, there are two common types of legal structures for apartment ownership, a condo and a co-op. In a co-op, according to the New York City Bar:

You own shares in the corporation which owns the building, but you are also a tenant who rents an apartment from the corporation. You will be considered a tenant/shareholder. The lease between you and the building is called a “proprietary lease.”

So when you want to sell your apartment, it gets complicated because legally you don’t own the apartment; you own shares in the corporation that owns the whole building. And the co-op board not only gets to say yay or nay over the buyer but also over other things, such as the sales price. And in a down-market, folks appear to be clinging to prices as they used to be.

Jonathan Miller wrote in his Housing Notes today: “I’ll be writing about this phenomenon a lot in 2020, but I’ve been told that a growing number of boards are killing sales they deem too “low” even though the sale was vetted by the market – properly exposed, fully qualified buyer, etc.”

He cites a letter that Donna Olshan, president of Olshan Realty – whom “I’ve known for most of my career,” he says – sent to the board of a co-op that had rejected a sale that finally took place after months of price cuts, because the price was too low. “The letter conveyed the reality of selling co-op apartments in today’s market,” he said and added:

Here’s my message to all co-op boards who do this: The market doesn’t care what you think. By killing sales you think are too low, you are violating your fiduciary responsibility to the shareholders by acting this way. Co-ops that do this are damaging shareholder equity as brokers steer would-be buyers away from boards that are violating their fiduciary responsibilities.

This is the letter by Donna Olshan. He redacted “everything that would reveal the parties.” Note how the apartment gets pulled off the market and is then relisted at a lower price. As this happens with more apartments, it makes the “days on market,” an important metric, look a lot rosier than it actually is:

Dear Board of Directors,

I am writing to provide context for the sales price of $[redacted] million of apartment #[redacted] located at [redacted].

Before being listed for sale, the apartment was professionally staged and refreshed at great expense to [redacted]. Additionally, a professional photographer was hired to insure the portfolio of listing photos were just right. (Please See attached photos):

On May 22, 2018, the unit was listed in the multiple listing service run by the Real Estate Board of New York (REBNY-RLS) and disseminated electronically to its approximately 12,000+ residential members. The original listing price was [redacted]. The apartment was shown numerous times however the owners received no offers and by the end of December 2018, the unit was withdrawn from the market so the listing did not appear as stale.

On March 13, 2019, it was relisted at a reduced price of [redacted] million in the hopes that listing earlier in the Spring at a lower level would draw buyers. It did not.

On May 6, 2019, the price was lowered to [redacted].

By August 2019, a contract was signed at [redacted] million.
This was the ONLY offer that the seller received during the entire marketing period.

The current market has been on a consistent downward swing since Congress changed the tax law at the end of December 2017 when the deduction for state and local taxes (including real estate) was capped at $10,000. The mortgage interest deduction was also reduced to a maximum of $750,000. Since 2018, the pool of buyers has shrunk and there has been an increase in inventory. Unit [redacted] was caught in a downward cycle and by any metric available, the market continues to head south. Below is a 3rd quarter report written by the appraiser Jonathan Miller for Douglas Elliman. Jonathan is considered the dean of appraising in the industry and is frequently cited in mass media and is consulted by various institutions:

I have been a professional in the real estate business since 1980 and my career spans many markets, properties and clients. I am very experienced in the market and conditions and can confidently state that the price achieved is fair market value and the unit has been thoroughly market-tested.

Very truly yours,
Donna Olshan

The letter conveys the nightmare a seller faces – after the expenses of preparing and marketing the apartment followed by serial price cuts – when the co-op board nixes the only offer, thereby killing the sale. This creates the prospect of being stuck with the apartment because the board won’t allow it to be sold at the price the market is willing to pay; and the market doesn’t care what the board thinks and won’t pay its fantasy price.

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