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Three Cents Worth: Seller Reality Distortion

[This week, graphicianado Jonathan Miller takes us into the future with a "faux chart" examining what will happen if sellers fail to realize that price appreciation is abating. On the left side of graph below, Miller plots the average list price (blue line) versus the average sales price (red line) from the first quarter of '04 to the third quarter of '05. On the right side, he projects both figures through the fourth quarter of '06. As you can see from the widening gap between list price and sales price, Miller thinks sellers are going to have some trouble adjusting to the reality of a tempering market.]

One of the effects of a moderating market is that sellers are typically behind the curve when it comes to perceptions on pricing their apartments. The Manhattan market shifted gears in the 3rd quarter, which has raised some interesting issues for sellers. The upshot of this market change is that even if the market sees more modest appreciation going forward, sellers will continue to price based on the old model for the next several quarters as they remain in denial about the change.

To illustrate this, we have presented the first of our "faux chart" series showing the spread between list price and sales price after the market shifts in the rate of appreciation. The spread in the discount between list price and sales price grows when sellers operate according to a distorted reality. Up until last quarter, the Manhattan listing discount hovered around 2%, which is basically nominal. The listing discount is calculated as the percentage difference between the last list price and the contract price.

This pricing pattern applies to developers as well as individual sellers. If sellers do not catch on to current market conditions, sales could stall until the the sellers begin to accept far lower prices than they original intended. However, if the sellers adapt to the new pricing levels of the market quickly, they should expect to sell for the market value fairly quickly. Note that this analysis does not require a falling market, only a market in which prices are not rising as fast as they once were.
· Seller Reality Distortion [Miller Samuel]