James Yoakum

This article from Realtor Magazine gives a good example of why many sellers are slowly coming around and selling for less in today's market - and it's not just because they're sick of chasing squirrels out of the attic (although that is funny). The old adage "a penny saved is a penny earned" comes into play here because the faster a vacant home is sold the more the seller saves on maintenance, marketing, and carrying costs.

In the scenario described in the article the homeowner spends over $2,000 per month on the home for every month that it doesn't sell. If the average time to sell in his market is currently six months, he could save $8,000 by lowering the price enough to sell in two months. In some markets a $8,000 drop in the list price really is enough to move a house that much more quickly.

This is just another example of a way in which sellers in today's market have to be more conscious of all the costs and benefits of the sales process and not just the final price.

In a follow up to a recent article about the Murano condo auction that proved a large pool of buyers are still actively looking for luxury living options in Center City, this Inquirer article points out that while those buyers are out there they aren't paying the inflated prices developers have been shooting for.

Any armchair economist can tell you that the price at which any commodity (including luxury condos) will trade is the price where buyers and sellers each see value in the transaction. Over the past few years Philadelphia condo developers (the sellers in this scenario) have been able to convince buyers to agree to higher and higher prices - mainly by telling them that condo values would keep rising to their benefit, justifying paying more now in order to 'catch the wave' of rising prices. The current downturn has proven the 'always rising prices theory' to be false and so condo buyers have begun basing their valuations on more solid fundamentals such as buy-vs-rent comparisons, valuation of condo units on an investment cash-flow basis, and actual prices of recently closed comparable transactions. These metrics usually lead buyers to a much lower assessment of condo values.

The Murano auction was a great example of a developer saying "I'll sell my units at a price supported by today's realistic market fundamentals." Until more condo developers (and sellers in general) take this approach to unloading their inventory, sales will continue to be sluggish and buyers will continue to wait until the fundamentals support a decision to purchase.

I'm seeing many sellers of lower-end properties come to reality and start to accept today's pricing. Owners of higher-end properties may on average be in a better financial position to ride out this market in hopes of recovery, but for those who truly want or need to sell now they should start taking a cue from the Murano auction and accepting the prices that the market offers.

One of my clients introduced me to a great website that allows both tenants and landlords to get extremely localized data on the going rental rates in their area. The site is http://www.rentometer.com. It collects data directly from real landlords and tenants and plots the results on a map allowing you to see just what tenants are paying and landlords are charging on a block-by-block basis. It even color codes the results to show you which properties earn higher rents than yours and which earn lower. Combining this website with http://www.housingmaps.com should make searching for rentals or correctly pricing your rental property a much simpler task.

The results are in from this weekend's auction of 42 condo units at Center City's Murano building. And the results speak for themselves, all forty units put up for auction sold, plus two others (not sure about the circumstances behind the sale of the additional two units) at prices averaging only a 25% discount to previous asking prices. While a 25% discount may sound steep, you have to remember that it's 25% off the developer's asking price which presumably had some fluff built in anyway, and when selling so many units at once (the auction lasted under two hours) you expect to see some pretty serious bulk discounting.

The fact that all the units on offer sold proves that there is still a very active market for Center City condominium (and other) properties at the right price, and buyers will still pull the trigger when they feel they are really getting a good bargain. A few things to keep an eye on after this auction are:

1. How many of the units actually close - will all the people who put down deposits yesterday actually be able to get financing and close a sale?

2. How will pricing for the remaining unsold units in the Murano be affected? Will even better deals be available in a few months as the closed transactions for the units sold at auction set a new (lower) level of comps? How will these sales affect values in other buildings throughout the city?

3. Did everyone in the market for a Center City condo get one at this auction? We'll see if condo sales unexpectedly drop off a cliff over the next few months.

4. How will 'early-in' residents of Murano who paid higher prices months ago react to their new bargain-buyer neighbors? It might make for a good reality show - "Survivor Murano: The Original Overpayers vs. the Bargain Buyer Newcomers".

Should be fun to watch...

According to the Philadelphia Business Journal Pennsylvania's unemployment rate climbed from 7.8% in April to 8.2% in May - an uncomfortably high number to be sure, but significantly below the national average unemployment rate of 9.4%. Another way to look at it is in the year from May 2008 to May 2009 the number of jobs in Pennsylvania shrank by 3.2% compared to 3.9% nationally. One bright spot for Philadelphia is that the healthcare and education sectors, major anchors in Philadelphia's economy, are doing very well relative to other sectors of the economy.

An often-discussed benefit of rising unemployment is an increase in new small businesses and entrepreneurship as laid-off workers decide to become their own bosses. I believe Philadelphia is an entrepreneur's paradise thanks to it's low cost of living, concentration of creative-class professionals, and easy access to a dense and diverse customer base both locally and within the greater Mid-Atlantic/Northeast region. I know numerous artists and entrepreneurs who are able to live very well in Philadelphia but would barely be able to scrape by in more expensive cities such as N.Y., D.C., or L.A. (perhaps two-letter abbreviated cities are just more expensive by default?)

So, what does the Philadelphia region's relatively healthy employment picture and potential to attract new small businesses and entrepreneurs mean for real estate investors? Three of my thoughts to get us started:

1. Local residential rents and vacancies may get through this recession without being severly affected - while unemployment has increased, 91.8% of Pennsylvanians who want jobs still have them and should continue paying their rent. Additionally any laid-off New Yorkers or Washingtonians attracted to Philadelphia's lower cost of living will likely help to pick up any slack in the rental market and they're more than happy to pay top-dollar Philadelphia rents that look like a bargain compared to other Northeast cities.

2. While national retailer bankruptcies are pushing up vacancies for larger, big-box retail properties, the local retail market in Philly is relatively healthy and new boutiques, galleries, coffee shops, bars, and restaurants continue to open regularly in many neighborhoods. Any new entrepreneurs created by this recession will fill in smaller retail spaces in the established and emerging neighborhoods and should eventually push up the values of these properties even as retail property values for larger shopping centers fall along with the fortunes of their national tenants.

3. This recession proves that Philadelphia's claim to have a diversified economy based on recession-resistent 'eds-and-meds' industries is at least partially true. This claim has often sounded more like savvy marketing than fact, but we've seen in this recession that these industries really are fairly stable and do make up a healthy chunk of Philadelphia's employer base.