Tuesday, August 22, 2006



Buyers and sellers are standing nose to nose and something is going to give.

The Manhattan real estate market - with a median price now four-times the national average - has always been a law unto itself, but increasingly apartments are sitting on the market, unsold for months.

Although the average price per square foot of a Manhattan apartment hit a record $1,083 in the second quarter, the number of units on the market is at its highest in more than 10 years, according to Miller Samuel, the real estate research firm. The inventory in Manhattan rose from 3,922 units at the end of 2004 to 7,640 in the second quarter.

"We have a classic stand-off between buyers and sellers in New York," said Miller Samuel CEO Jonathan Miller. "Housing inventory is at the highest level since the late 1980s and demand has cooled off." [Emphasis added.]

Anyone wanna bet on the sellers winning this? I didn't think so. The reason why housing was the last sector to be affected by a recession is because people have the majority of their assets in their homes and while they are unwilling to be patient about a stock which has no tangible meaning other than a blip on a screen they do know the value of their home. That is, what they perceive the value to be. It is a peculiar habit that we humans have when we assign a high value to the familiar. The growing inventory of houses for sale at the same time as prices still increase is an artifact of this trait. Oh, wait a minute. We haven't had a recession. Yet. So why is housing leading the way down? We had a housing bubble. It is the only explanation.

It used to be difficult to find stories about the end of the housing boom. Now they appear on a regular basis. I don't watch any of the network nightly news shows so I don't know if the news has hit them but I would be surprised if it hadn't.

Margot Ray, a radio-ad saleswoman in Stockton, Calif., put her five-bedroom, three-bath house on the market in February for $480,000. There it sat, along with about 3,000 other homes for sale. She dropped the price to $465,000 in April. Nada. "We'd have an open house and maybe one or two people would come by. I had an open house where nobody came," Ray says.

In July, she had a brainstorm: Why not advertise on the radio? The ad put the house on the map. Now agents remember the address. The price is down to $427,000 and, at a recent open house where Ray raffled football tickets and a spa day, 15 groups of potential buyers showed up on a 107-degree day.

But it still hasn't sold.

Unfortunately for Margot Ray, this article is probably not going to make it any easier for her to sell her house. At least at the current price. What this article describes is a spiral of deflationary expectations or, as we used to say to say to reporters at the CBOT when prices went down, more sellers than buyers. Expectations are important because they can drive prices well beyond what appears reasonable. They are also very hard to change. Since housing price increases nationally were near zero last year I expect that prices will start down very soon and we will have a lot more people in the same situation as Margot Ray.


The National Association of Realtors said existing-home sales plunged 4.1% to a seasonally adjusted annualized rate of 6.33 million in July, its lowest level since January 2004. Economists surveyed by MarketWatch were expecting a decline to 6.56 million.


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