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Manhattan Loft Guy

Oct. 19, 2006 - Manhattan apartment prices / more like Tom Cruise than a truck

“economic rent” explained (it is not what you think)
UC Berkeley prof Hal Varian is an occasional contributor (I think) to the Economic Scene column in the NY Times business section; today’s column is provocatively entitled “Why Old Media and Tom Cruise Should Worry About Cheaper Technology”. Which got me to thinking about the Manhattan coop and condo real estate market.
 
Varian talks about the notion of “economic rent”, using Tom Cruise’s movie salaries as an example (quoted below). Which reminded me of the insistence of some real estate commentators to talk about the “fundamentals” in the New York City apartment market (as in “the recent price run up could not be sustained because prices outstripped the fundamentals”).
 
cost vs. demand
Here is what Varian said about The Couch Raver’s salary:
 
David Ricardo, who lived from 1772 to 1823, developed the theory of economic rent in his essays opposing the 19th-century English Corn Laws. These were tariffs ostensibly intended to protect British farmers from cheap foreign grain.
 
Ricardo observed that the tariffs had two effects: the obvious effect of raising the price of grain and the more subtle effect of pushing up the rent of land suitable for growing grain.
 
From the viewpoint of an individual tenant farmer, the rent he paid to the aristocratic landlord was a cost of production. But for the system as a whole, the land rent did not really determine the price of grain. It was the other way around: the price of grain determined land rent. So the real beneficiaries of the Corn Laws were not the tenant farmers, but the aristocrats who owned the land.
 
And so it is with Mr. Cruise. His salary, as that of other Hollywood stars, depends on the fact that large numbers of people will pay to see his movies. If, in the future, these people spend more time on YouTube and less time going to movies, Mr. Cruise’s compensation will probably fall.
 
This is not true for other sorts of goods used to produce films. The movie business uses a lot of trucks — but the price of trucks won’t change if people go to movies less. Why? Because the price of trucks is determined primarily by their cost of production — the labor, steel, rubber and other materials that go into making them.
 
It’s quite different with star salaries. It’s not the cost of production that determines actors’ wages but the demand for the product that they produce.
 
What does this have to do with Manhattan apartment prices? Here is how I would turn Varian around to face my market:
 
Manhattan apartment prices depend on the fact that large numbers of people will pay to live in Manhattan. If, in the future, these people prefer to spend their money on suburban houses Manhattan apartment prices will probably fall.
 
Seems pretty simple and obvious, right?
 
I have often wondered about what fundamentals people are talking about when they talk about real estate. But here is why Real Estate Fundamentals don’t apply in Manhattan they way they may apply in, say, Houston.
 
My guess is that real estate prices in Houston – and in much of America -- are much more directly related to costs of production (buying land and building materials and paying someone to assemble those materials on that land) than here. If a buyer in Houston has a real opportunity to buy-and-build within a reasonable commuting distance to a job, the relative values of resale homes is limited in some significant way by that choice.
 
But in Manhattan, there is essentially no equivalent build-or-buy choice.
 
I wonder if there is any data that would help rank different US cities on the degree to which Costs Of Production are relevant to market prices.
 
Probably, Manhattan and San Francisco are examples of consistent demand being the market driver; “frothy” markets with a lot of investors (Las Vegas, south Florida?) probably swing in the degree to which demand is the driver; most of America is probably more weighted to costs of production. Not sure what the data would be, but I wonder if it is out there…
 
© Sandy Mattingly 2006
 
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Sep. 10, 2006 - yikes they did it again / NY Times recent sales report suggests optimism?

 
This week's set of 5 Manhattan sales in the Sunday Residential Sales Around the Region again reflects (a) a coincidence or (b) an editorial view to breed optimism about he market. As with the last time I commented on this, you could not tell from the five Manhattan choices that it was a buyer’s market.
 
Two of five listings went for the asking price; one went above, after multiple bids; one went for a $12,000 discount from a $4.5mm asking price, and the last took a ‘hefty’ $10,000 off a $298,000 asking price.
 
Bubble, what bubble?
 
Coincidence, or the Old Grey Lady is trying to keep our chins up?
 
© Sandy Mattingly 2006
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Aug. 31, 2006 - The politics (?) of press reporting on recent sales / NY Times picks two hot ones

  
I gotta wonder sometimes about the politics of press reporting on real estate….
 
I am not saying there is a grand conspiracy going on, or even necessarily a single editorial sensibility. And I have not paid enough strict attention to notice trends. But sometimes things jump out at me.
 
Like today, when the NY Times “Residential Sales” section of the Home & Garden section had exactly two Manhattan apartment sales in it and -- for reasons also unknown, but continuing an out-of-town trend -- six sales in Maine (!).
 
What struck me about the studio sale at 250 East 40 St (The Highpoint) is that it sold in ONE WEEK at the asking price. This was followed by a "25 King Street" two bedroom loft that took 14 weeks to sell, but sold ABOVE the asking price.
 
Is this a bubble-busting item? How many closed sales must the Times get each week to choose from? And do they look at their mix, or just pick “interesting” ones? I don’t know anything about real estate in Maine, but four of the six listings featured today sold at or above asking price (a fifth was $2,000 below). Hmmmmm….
 
And, while I am on a string of rhetorical questions – has the Times given up on their real estate blog? There have been two posts in August, for the newspaper of record…. Tsk, tsk, tsk.
 
And, while I am needling the Times … they got the address wrong on King Street. #25 is a rental building; 29 King Street is the former schoolhouse, now condo. And #3-I is the loft unit at 29 King Street that sold above asking price.
 
© Sandy Mattingly 2006
 
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Jun. 16, 2006 - Rah, rah, sis boom (or sis bah)? Too much happy talk from grown-ups.

 
Why do professionals in the real estate brokerage world feel compelled to spin all data toward price appreciation, rather than trying to be honest brokers of information and balanced analysis?
 
It is probably unfair to select any specific speakers on such a broad indictment, but Corcoran’s chief volunteered with this quote from the New York Times about Q1 06 data: "It shows that the New York market, after having a lackluster fourth quarter, is back in full swing with strong numbers across the board." [the article continued “She said recent transactions logged by her firm suggested that the stronger sales trend would continue into next quarter's figures as well.”]
 
Does Booster-ism Have a Price?
 
Leaders of other firms (including mine) have probably been guilty of the same kind of booster-ism. These leaders run the risk of alienating anyone who pays attention to the numbers, which are certainly not uniformly positive for price appreciation.
 
Jonathan Miller in his wonderful blog has made a similar point about the Stream of Positive-ness emanating from the Chief Economist of the National Association of Realtors®, David Lereah about three weeks ago and again this week with the lovely title Waking Up AT Sunset / NAR Declares Housing Boom Over (lamenting “another missed opportunity [by NAR] to reconnect with the public [that] does more damage to [NAR’s] credibility. Leadership on this issue would have been a whole lot cheaper than a new ad campaign.”).
 
I noted this whopper from NAR’s President, Tom Stevens, just before Memorial Day, which made me want to gag: “Inventories levels have come up to balanced levels between home buyers and sellers, so the pressure has come off of home prices and most owners can expect steadier gains in home values for the foreseeable future.”
 
Forecasting the Future (continuing sunshine)
 
While this may be a defensible general proposition based on past national housing value trends and reasonable forecasts of future national economic trends, but “most” owners own a single home, for whom national and general trends may not apply. To suggest that Joe and Mary Apartment-Owner should comfortably expect to see steady gains for the foreseeable future strikes me as (a) unlikely to assist Joe & Mary if they are unsure about their local market, and (b) invite ridicule from anyone paying close attention to local data that suggests that maybe – just maybe – the near term trends in inventory, employment and pricing portends a possible rough patch ahead.
 
The boosters seem like reverse Chicken Littles, running around shouting “the sky is not falling for the foreseeable future, the sky is not falling for the foreseeable future.”
 
Consumers will stop paying attention, at best, and may count the boosters among the sleazy salespeople of ill-repute, at worst.
 
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Sandy Mattingly is Manhattan Loft Guy; now with The Corcoran Group (http://corcoran.com/ ; but see the disclaimer at the bottom of the page), he can be reached most easily at Sandy@ManhattanLoftGuy.com or 917.902.2491, and followed on Twitter @ManhattnLoftGuy (note "mis-spelling"). After 7+ years, the blog has moved. Links here on RealTown will work for the foreseeable future, but new posts (and all the old content) has migrated to ManhattanLoftGuy.com.

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