Issue 27, December 2010: It’s About Fear

I become a bit introspective at this time of year. Rather than looking at the real estate market as a collection of purchases and sales, I like to look beyond the numbers at factors that influence the market, especially the human ones, something we often overlook in the day-to-day buy and sell frenzy.

We hear and read much about the impact of external factors such as the economy, Wall Street bonuses, mortgage rates and the attraction of New York City.

Yet, it is the human factor that most influences the flow of the market. And what is the primary factor? It’s fear. Many philosophers say the two primary motivating factors in life are fear and love. I take love out of the equation — unless is it someone saying, “I love that apartment” or “I love that neighborhood.” This passion brings an emotion with minor impact that can work against the buyer or seller.

What is the fear? For the seller it is the fear of not obtaining the best price, maybe settling too soon. For the buyer, it’s the fear of overpaying and not getting the most value. Fear often has clients, whether buyers of sellers, ignoring or fighting the recommendations of a broker. Frequently, it is ego driven.

One client was looking for an East Side penthouse and was willing to spend up to $25 million. We found a wonderful home priced at $17.9 million. My client bid $17 million and then fearing the bid was too high, started lowering it and negotiating and eventually someone else bought the penthouse. Today, it is valued upwards of $25 million. Interestingly, the prospective buyer, as are many of my clients, is not from New York and does not fully comprehend the New York market and value here.

Those who can overcome fear and listen to a broker’s guidance based on their experience and past market performance will benefit. When the market first went into paralysis a few years ago, I had a buyer who view an apartment priced at $5 million. He was prepared to buy when no one else was, and as such we placed a low offer and landed up buying the apartment for $3 million. Today, it is worth a lot more.

To overcome fear and the innate distrust of many, the market must have the ability to adjust. Adjusting, in fact, has sparked the resiliency of New York.

Sellers must adjust the price to accommodate the market and acknowledge the current cycle. They need to acknowledge the current market mentality and work with their broker to determine a property’s worth. Many paid a premium during the days when prices were on a vertical climb and no one thought the economy would tumble. These buyers and sellers did not intend on making a mistake. He/She just went along with the market when they bought. Now, they fear another less than perfect deal.

For buyers, the adjustment has been easier, but fear exists of overpaying and not getting value, or prices dropping further. Buyers are paying an adjusted price and in most cases receiving solid value. In today’s market, it is all about price and value with buyers being able to procure larger apartments at lower prices than three years ago.

This creates an interesting phenomenon in today’s market for a seller. Sellers who purchased three to five years ago, when sales transacted with little regard to price sensitivity, were not driven by the same fears of the market today. Their biggest fear was not getting the highest price. This is quite a contradiction to what we are seeing now; fear is effecting decisions to purchase. There is fear on the part of the seller that their sale will not be a valued by the market and the buyer will simply not support their suggested price.

With all that has transpired in this past year, we still may not know where we are headed exactly and a lot may change. However, with fear and love, comes trust. I would not be here today had I not received the support, trust and kindness of many of you who have allowed me to advise you through your real estate needs and for that I am truly appreciative.

Thank you.