Market Conditions: Did the Auctions Signal a Price Bottom?
Crain’s reported yesterday on the two South Loop condo auctions over the weekend that we all have been chattering about the past few days.
In a nutshell: more than 60 condos sold at the two auctions at prices reduced anywhere from 27% to 45% off the last asking price.
“It’s a declaration that the market has stopped going down,” says Garry Benson, Garrison’s president and CEO. “This proves that once you establish in the minds of the public a price/value equation, there is absorption.”
Accelerated CEO Jon Gollinger says that at 1400 S. Michigan the average sales price was about $280 a square foot, including three or four units sold after the auction was conducted. He declines to comment on prices as a percentage of the pre-auction asking price or the minimum bids.
Last March’s Vetro auction was the first auction of high rise units in Chicago this year. It was also a success (in terms of selling all the units available at the auction.) However, units are still available to purchase in the Vetro.
What will this auction do for additional sales at these two buildings?
The auction should spark additional sales not only at 1400 S. Michigan, but also at other South Loop projects, he says.
“The market has not known what to purchase at,” he says.
The 1400 S. Michigan auction did not include parking spaces, which go for about $35,000 a piece. About 25 garage spaces have already been sold, Mr. Gollinger says.
At the Motor Row project, the average sales price was lower, about $185 a square foot, or 58% above the average minimum price. The difference in pricing reflects Motor Row’s location farther from the Loop, and that loft projects, with their varied floor plans, may not be as well-suited to auctions, Mr. Benson says.
At 1400 S. Michigan, sales prices average $278 a square foot, or about 152% of the average minimum price. Demand was so strong that one unit was added to the auction, Mr. Benson notes.
Condo auction draws many sales at big price cuts [Crain’s Chicago Business, Thomase A. Corfman, Nov 16, 2009]
This is PR from the real estate development and broking community being thinly disguised as “news”. Of course, this is entirely consistent with my view that good journalism died about 20 years ago.
This is the news: A real estate developer cleverly staged an auction to exploit well-known cognitive errors committed by humans in making economic decisions. The end result was auction prices well in excess of prices achieved through normal sales channels. Let’s see if more developers follow suit.
“Garry Benson”
HAHAHAHAHAHA
“president and CEO”
Very impressive. Did the Board of Directors grant those titles?
HAHAHAHAHAHA
I don’t see how 27%-45% price reductions are “a declaration that the market has stopped going down.”
Check out my CNBC interview Friday for my take on the market:
http://www.youtube.com/watch?v=Khedb60vgSU&feature=youtube_gdata
Matt,
Whenever I see his “analysis” these days I actually feel sorry for you, a realtor, due to that unfortunate name choice.
We are in strange times, indeed.
It may not signal a bottom but it certainly establishes fair market value – by definition. Not sure what GLS is referring to. Perhaps that auctions sell items at higher prices? Heck, if that’s what someone is willing to pay then it’s the fair market value. When you look at how the prices were rational on a relative basis you see that it wasn’t just one person paying more than everyone else. Same thing you see on ebay, where at auction after auction items sell for similar prices.
Gary-
I agree. The question is how deep the bid is at that discount. In this case it sounds like there was extra demand after the auction. I wonder if the same would be true if there were 50, 100, 200 units auctioned.
MGG
G-
Garry and his lawyers made sure it was “Matt Garrison Group” back in the day. Thought it was odd that I couldn’t use my own last name without adding Matt added but I didn’t have the time to fight with them.
MGG
“I wonder if the same would be true if there were 50, 100, 200 units auctioned.”
Precisely, Matt. It explains why the Vetro hasn’t sold out at auction prices since April. That was GLS’ point, I believe.
Mark the remaining units at auction prices and they won’t sell out.
“It may not signal a bottom but it certainly establishes fair market value”
Help me out here, Gary. I thought you are on record here of already calling the bottom?
Garry where can I sign up for your newsletter?
LOL
And wow GLS if true, can’t people sue if they find out about that?
“if true, can’t people sue if they find out about that?”
Claiming what? That the auction fraudulently induced the buyers to act like normal people do in an auction environment? When did human nature become actionable?
fraudulent bidders? I don’t know dude i’m not a lawyer, but all I know is that we can get sued if we use the wrong words in an e-mail or newsletter, yet realtards and developers can bring in people to up bids on stuff with no intention to buy legally?
“fraudulent bidders?”
Well, yeah, that would be criminal fraud. The sponsors of those strawbidders could go to jail.
But I read GLS to be saying that the auction was well run to exploit known psychological triggers to cause irrational responses–ie higher bidding. This is completely kosher and not really any different from what all advertising tries to do.
hmmm odd Gary Benson, I would have thought things like income and rent parity and a stabilized economy would have signalled that the market had stopped going down, silly me
The current real-estate market is the equivalent of a poker game of you playing against 4 professionals that are fiends and are out to screw you.
Know one in the industry will tell you the truth because they know how bad things are and they are trying to save themselves and get out hoping to leave someone else holding the bag. Even if it leads the person to financial ruin. Every building you walk into in Chicago is almost sold out but that same sign has been on the building for 1-2+ years. Even the janitor or the door man will tell you people are moving in every other day it’s been real busy here. But according to this blog only 56 units sold in Q3. Oh wait that auction sold more condos in a day then all of Chicago in 3 months. I wonder how may straw buyers were there, I am sure public record will show a lot of LLC’s as the new owners if they transfer title.
South Loop is toast over capacity and no Olympics it will be 10+ years before it achieves even close to its expectations. Not to mention the lots that aren’t going to be developed now and the surrounding areas not that great actually still spotty wouldn’t want a significant other walking around there every night.
Do you really think home appreciation is going to be that great with rising interest rates and no tax credits with strict lending standards? Honestly how many potential buyers from a few years ago have been removed from the market and are now renters. And who is going to purchase mortgages at the same rate as the Fed. Rent vs. Buy who says rents are going to hold up with oversupply of properties for rental people are negotiating a little more now rents go down equation changes.
Eventually all of this has to be absorbed in the system the questions is what price and how long and if developers keep trying to set false prices, banks stay tight on allowing short sales and the government puts moratoriums on foreclosures its going to take a lot longer then we think to work through the mess. In the meantime renting and staying safe is probably the best solutions until you come across something that is just to good of a deal to pass up on.
It’s not a sellers market and let’s not pretend that it is. In a market like this condos are a commodity nothing more and there is no scarcity out there even if everyone is trying to pretend there is and create a false sense of short supply, who really knows how many people would sell their condos in a heart beat if they could but can’t afford to pay up to the bank and what type of inventory banks are really going to be looking at.
Maybe its time for the real-estate market to finish going through its pain and realize that its time to stop lying to people, for most it is the biggest purchase of their lives and not something to be toyed with.
By the way it is illegal to hold an auction with the appearance of it being a free market when it really isn’t without fair disclosures to the participants. That’s the reason that they have with reserve and without reserve to set a floor on the price for the seller. But unless they start doing it every weekend and really start sticking it to a lot of people nothing will happen. Know one did anything on the way up did they.
bwb you might want to learn the difference betwenn the word “know” and “no” before you go on about prognostications on the economy, because you “know”, you might sound like an idiot.
I wonder if M Garrison gets grief from others in the industry for going on these shows and not being more optimistic.
“Help me out here, Gary. I thought you are on record here of already calling the bottom?”
I am and I still am. I was simply saying that these AUCTION RESULTS don’t signal a bottom. To me the bottom is signaled by the fact that we are below trend line on prices, the Case Shiller has turned up, inventories are down, and market times are down.
Seems to be a lot of bitterness here today.
Gary is right, the market is what it is. Right now, the FMV of these buildings is apparently 27%-45% off previous asks.
Market down 27-45% is totally believable, so why the conspiracy theories?
“I am and I still am.”
So, as prices continue to go lower, that will be a new bottom?
“G on November 17th, 2009 at 8:47 am
Precisely, Matt. It explains why the Vetro hasn’t sold out at auction prices since April. ”
One note – Vetro hasn’t really priced their units at auction prices, since the auction, no matter what their marketing paraphenalia might have you believe.
Each unit I looked into after the auction was priced significantly higher PSF than units on HIGHER floors that sold at auction.
“So, as prices continue to go lower, that will be a new bottom?”
Well as he said, the season adjusted indexes have been up the last 4 months so technically he is right
“So, as prices continue to go lower, that will be a new bottom?”
If that happens then I’m wrong and I’ll admit it. But I’m taking the position that the bottom was April at 122.3.
Let me ask you this. What value would the index have to be at in order for you to call a bottom?
“What value would the index have to be at in order for you to call a bottom?”
Two years of year over year price stability after the government exits the market. Then I’ll be able to confidently call a bottom in the rearview mirror.
“Two years of year over year price stability after the government exits the market”
Including the GSE’s and the mortgage interest deduction? Because I can confidently say “ain’t gonna happen” to that.
Gary,
do you believe in two bottoms, one in volume and one in prices?
Bob,
While that might be an airtight definition it’s not very useful is it? One needs to be able to make a decision on whether or not a market has bottomed very soon after it has bottomed. If you only invested in the stock market looking in the rear view mirror you would be screwed – not that I’m equating the stock market with the housing market.
“bwb you might want to learn the difference betwenn the word “know” and “no” before you go on about prognostications on the economy”
How about learning to spell before attacking others for their grammar, Sonies? It’s “between”, not “betwenn”.
“do you believe in two bottoms, one in volume and one in prices?”
I think you’re asking if the bottoms have to coincide. Hadn’t really focused on volume. I think volume has been especially influenced by the kcash 4 shacks program. But I’m not one to believe that you have to have high volume to confirm pricing – only sufficient volume.
“One needs to be able to make a decision on whether or not a market has bottomed very soon after it has bottomed.”
No I’m sorry I don’t believe in the “buy at the bottom NOW or be priced out forever”. Given government interventions in the market, the shadow inventory of foreclosures and the broader economic backdrop I seriously doubt we’re at the bottom. I also don’t believe the housing recovery will be V-shaped.
I’m going to wait for: 1) Fed stops quantitative easing keeping interest rates artificially low (3/31/10), 2) End of mortgage tax credit (6/30/2009), 3) FHA blows up, needs government bailout (likely 2011), 4) Two years of price stability year over year.
In other words Gary I believe there is significantly more risk on the downside than the upside due to our government putting an artificial floor on prices and the banks playing games with their foreclosures.
I saw M Garrison’s interview on CNBC and share his sentiments.
“Including the GSE’s and the mortgage interest deduction? Because I can confidently say “ain’t gonna happen” to that.”
No I meant new government interventions. I agree these two aren’t going away.
“How about learning to spell before attacking others for their grammar, Sonies? It’s “between”, not “betwenn”.”
How about learning the difference between a typo and a spelling error? Oh snaps you fail!
“What value would the index have to be at in order for you to call a bottom?”
If you believe CS is the definitive bottom call, I’d agee with Bob.
I believe the bottom is in when prices for equivalent housing cease falling in price. I asked you this before: show me some property types in CC hoods that sell for more today than April? If you can’t, calling the bottom in April is nonsense, for all practical purposes.
“not that I’m equating the stock market with the housing market”
But, you just did Gary. That’s about as honest as heralding April as the bottom based on CS when it has no application to the hoods you sell in. You might as well be quoting median prices.
Hey Gary,
sorry not sure I was clear enough 🙂
I meant, we could be seeing a return to a normal volume of sales, while prcies are still in decline. The idea that there is a certain volume of housing that will need to change hands. Do you think it is likely that we’ve seen the bottom for new home sales and starts, but not for prices?
“No I’m sorry I don’t believe in the “buy at the bottom NOW or be priced out forever”. Given government interventions in the market, the shadow inventory of foreclosures and the broader economic backdrop I seriously doubt we’re at the bottom. I also don’t believe the housing recovery will be V-shaped.”
I don’t believe that either. Never have. Never will. So I think you are saying that there is little risk in waiting until you’re certain the bottom has hit and I can’t disagree with that.
However, while I believe that the government’s programs have supported the market and I’m not a fan of government support I also believe that we’re at a reasonable level now. In other words, without the government support we might have overshot the bottom by a lot. It certainly happens in the financial markets a lot. I made a lot of money in the financial markets buying stuff up in the fall and winter when things were out of whack.
“I asked you this before: show me some property types in CC hoods that sell for more today than April? If you can’t, calling the bottom in April is nonsense, for all practical purposes.”
Well, I can’t do it because I don’t know how/have enough time to develop a quality index that would serve this purpose. On the flip side can you show me that stuff is selling for less? And the sample size has to be large enough to be meaningful.
Let’s not forget that CS is also dependent on the mix of sales in the period. Not to the extent of a median price index, but it does exist. Sales volume certainly hasn’t recovered in CC hoods this summer/fall, so the practical application of CS here is suspect.
“Do you think it is likely that we’ve seen the bottom for new home sales and starts, but not for prices?”
I think we’ve seen the bottom for prices so the answer to your question is no. Independently I suspect volume will fall off temporarily after the tax credit expires but after 3 months or so it will get back to recent levels.
“On the flip side can you show me that stuff is selling for less?”
How about every bldg in the SL? You don’t think that 1400 S Mich auction units sold for more, do you?
“Sales volume certainly hasn’t recovered in CC hoods this summer/fall, so the practical application of CS here is suspect.”
Actually, in many cases it has. Look at what’s happening to inventory levels and market times in these neighborhoods: http://chicagohousingstats.com check out the neighborhood links at the bottom. I just updated this data. Now, it is true that people are pulling their places off the market also and in some cases renting them out but sales volume has picked up.
“One note – Vetro hasn’t really priced their units at auction prices, since the auction, no matter what their marketing paraphenalia might have you believe.
Each unit I looked into after the auction was priced significantly higher PSF than units on HIGHER floors that sold at auction.”
Bradford,
You must be comparing tiers that were not offered at auction (7, 8)to those that were (1-6, 9, 10.) Apples and oranges.
Either that, or you had your red socks on and they saw a mark.
Some examples:
2203 AUCTION $412,000 w/pkg
2303 AUCTION $419,000 w/pkg
2403 AUCTION $420,000 w/pkg
1903 7/10/09 $420,000 w/pkg
1503 10/20/09 $385,000 w/2 pkg
2504 AUCTION $266,000 w/pkg
2604 AUCTION $257,000 w/pkg
2704 AUCTION $269,000 w/pkg
1804 5/18/09 $261,000 w/pkg
2605 AUCTION $278,000 w/pkg
2705 AUCTION $300,000 w/pkg
2905 5/6/09 $310,000 w/pkg
2206 AUCTION $323,000 w/pkg
2306 AUCTION $322,000 w/pkg
2606 AUCTION $322,000 w/pkg
2706 AUCTION $320,000 w/pkg
2506 4/22/09 $322,000 w/pkg
2806 7/30/09 $322,000 w/pkg
The 7 tier appears to have the most units still available, and they have been selling for roughly 15% off old closing prices prior to the auction, which IS much less than the discounts to other tiers.
No, I was comparing like-floorplans on varying floors.
Look at units 1903 and 1804. They’re inferior (lower floors) but priced the same or above some of the same floorplans that sold at auction.
They didn’t see a mark because I wasn’t there in person after the auction (and I don’t own red socks!). I viewed the properties during the preview to the auction, and the auction prices were too high to cashflow anyway.
I think the units left are around $232-245/sf. In line with auction but perhaps slightly above auction PPSF numbers with negotiating room baked into them.
I agree with bradford’s premise that they aren’t interested in selling the remaining units as they are keeping them off the general MLS and you can only find them on Redfin as “contingent”, yet they are also doing open houses every Saturday for these “contingent” properties.
“How about every bldg in the SL? You don’t think that 1400 S Mich auction units sold for more, do you?”
Without a doubt the south loop is in a world of it’s own. It’s the only neighborhood (near south to be exact) where market times have not come down. They are still at 700 days – probably mostly developers sitting on units forever. And 1400 S Michigan clearly sold for less at auction than they did when they were sold the usual way.
Lincoln Park condo/TH October closings:
1988 78
1989 82
1990 78
1991 78
1992 85
1993 108
1994 92
1995 87
1996 94
1997 112
1998 76
1999 104
2000 94
2001 91
2002 97
2003 112
2004 131
2005 154
2006 98
2007 84
2008 62
2009 61
Everyone knows that inventory is down because of the shadow inventory. The sheer number of properties in mortgage purgatory is stupefying. There are a number of stages for properties to be in prior to MLS listed REO and they’re building up like water builds up to a damn. There’s pre-foreclosure, default, loan mod, moratorium, forbearance, redemption/reinstatement period, pre-possession, cash for keys stage; again, I cannot stress how many vacant properties are out there just rotting or being trashed by their current homeowners. Just today I learned of a property: stopped paying mortgage during the spring for three months, then nearly caught up, then a trial loan mod, then one payment on the loan mod, then stopped paying the loan mod. No lis pendens, no foreclosure, nothing. They’ve made only a handful of payments since MARCH and even if the foreclosure were filed today the homeowner could live there until the end of next summer without any fear of a sheriff’s eviction. In fact they’ll probably get paid $1,000 to move out and not trash the place. These people are your neighbors, your relatives, your friends, your co-workers, it’s not just the southside/westside sub-prime anymore. It’s everywhere.
Bradford, now you say:
“priced the same or above some of the same floorplans that sold at auction.”
It seems you have changed your story:
“Each unit I looked into after the auction was priced significantly higher PSF than units on HIGHER floors that sold at auction.”
I should have known better than to trust a comml lender. I can only imagine what those doctored pro formas look like.
I fail to see how anything cash flows in a period of declining rents. Buy today at cash flow and it won’t cash flow tomorrow.
I am by no means a behavioral expert.
I am merely referring to the fact that the auction clearly takes advantage of psychological biases like anchoring. The seller is cleverly anchoring investors to a “discount” to the list when that metric is irrelvant. Everyone should be looking at the comparable market transactions but it is _EASY_ to make the incorrect evaluation.
There are a number of other ways an auction could affect behavior. Group dynamics are definitely different than individual dynamics. Do I think buyers are more likely to be “caught up” in an auction and or sees other people’s decisions as “confirming” their own? Absolutely.
These and other reasons are why I believe auctions are clearly to the benefit of the developer.
“Without a doubt the south loop is in a world of it’s own.”
No different than any other new construction areas, or areas that saw bubble appreciation. Sellers and agents finally realize that many underwater props can’t be sold since they don’t have the cash to bring to closing. “Extend and pretend” is going on big time on an individual basis. Relying on something like inevtory in this environment is a huge mistake.
G –
I erroneously included PSF in my statement, but my point otherwise stands. They are currently listing same-floorplan units on an inferior floor at a higher price than those that sold at auction.
“I fail to see how anything cash flows in a period of declining rents. Buy today at cash flow and it won’t cash flow tomorrow.”
Two very simple statements. I don’t even think I’ll touch them.
“I am by no means a behavioral expert. [good understanding of human behavior]”
Close enough!
After the loan mod debacle has come and gone, those departments will be converted into short sale departments, facilitating the ease at which transactions will occur. The banks will take the losses and will be papered over with money from the treasury, keeping the so called status quo.
Didn’t IL just climb into 3rd place in the number of foreclosure filings after a number of measures designed to slow foreclosure have expired?? We are nowhere near bottom, sorry. There still are a huge number of foreclosures to kill off, “investment” properties waiting for a market to return, and now skyrocketing foreclosures and unemployment. In addition, I would expect many novice real-estate moguls have lost their taste for investing.
Here’s an open question…When will Museum Park auction some of their unsold properties? They alone have months of South Loop inventory. Granted they are on the high end but there are not enough high end buyers to fill those buildings in the short term. Any thoughts?
1600 Museum Park filed dozens and dozens of lawsuits against buyers who tried to cancel contracts. 1600 Museum Park wants to keep buyers’ down payments. IIRC the developer required a 10% or higher deposit to pre-sign a contract – and when 2/2’s averaged $500k and higher we’re not talking chump change here. They advertised these units as great investments; I’ve seen a promo flyer from ’07 or so that clearly stated that no unit in any of their other developers had ever lost money on resale and it listed unit by unit, building by building, the sale and resale prices. I don’t think that’s true anymore but at the time I’m sure it was.
https://w3.courtlink.lexisnexis.com/cookcounty/FindDock.asp?NCase=&SearchType=2&Database=3&case_no=&Year=&div=&caseno=&PLtype=1&sname=1600&CDate=