Property Grunt

Tuesday, June 13, 2006

Manhattan Market: Monkey wrenches of doom

Tom Acitelli and the Real Deal have presented an excellent set of articles on the current state of the market. I really commend the Real Deal crew for their in-depth perspective on the market.

One of the articles by Vanessa Londono examines the trend of brokerages hiring more agents in the face of a cooling market.

My only conclusion why real estate brokers are not downsizing and cutting costs is that they are counting on the sellers losing the game of chicken.

Real estate brokerages want to have their armies in places when sellers blink and the panic sets in. As soon as they feel the heat of the fire sale brokers will march in with their buyers and exclusives agreements in hand. There is alot of money trapped in those properties and with exotic interest only mortgages, those sellers will be hard pressed to get rid of them.

I know it doesn't make sense but remember real estate is illogical in many respects. Usually when an industry realizes their market is going to take a hit the last thing they want to do is expand their operations but real estate brokerages view hot and cold markets as a profitable theater because whether it is a buyer’s or seller’s market, a broker is always needed to close the deal.

However there are three potential monkey wrenches that can be thrown into the works.

First of all when will the sellers become lucid? It appears never according to NY1.

These stratospheric prices are caused by a variety of factors including seller denial and seller’s who need the money to cover their mortgage or for their down payment their next home.

The second thing that can screw up the perfect storm is how sellers will try to lower their overhead by outsourcing brokers through FSBOs, online e-commerce solutions e.g ebay, craigslist and zillow.

If they have the luxury of time, they might just pull their properties off the market and wait for the next cycle which will probably occur two presidencies later.

A third uncertaintiy is how buyers will react when they smell blood in the water. Will they jump in as soon as they see the prices drop or will they wait in the wings while watching sellers slowly die on the stage of the market begging for them to take their cue?

If either of these factors occur, I would not be surprised that some brokers forego REBNY health insurance and opt for the Starbucks plan.

It's going to be a long summer.