Hoboken R.E. Valuation Benchmark

Now that we've established some measurement sticks, it's time to estimate the point from which we can use these tools. In other words, if we know what unit costs are relative to each other, how do we establish what the current market conditions should reflect onto current unit costs.

The best method to circumvent the rosy and misrepresentative data you will hear from realtors, is to use an index for comparable sales over a long period of time. The Case-Shiller index provides such data for major metropolitan cities throughout the country. Our closest proxy for Hoboken real estate would be the data for New York City.

As goes NYC, so goes Hoboken - with a growing premium or spread in NYC's favor over the past few years. That might surprise you but on a relative basis, stable or lower property taxes in NYC have been the impetus for more rapid price increases, depending on the part of NYC.

Case-Shiller has already accurately pointed to a decline in NYC real estate and further erosion of pricing in the foreseeable future. Those who have refused to remove their rose-colored glasses about the "Gold Coast" will quote ridiculous data which implies that Hoboken has "held up" or continues to "attract interest" - none of which gives any meaningful data about what's going on. If asking prices in Hoboken were about 5% above closing prices over this recent period, can you imagine what current reality dictates? Let me help with that.

Using the NYC data from Case-Shiller, one can extrapolate the point in time where current prices have returned to, in historical terms. For NYC, that period is March 2005! And consider that Manhattan (compared to other boroughs) has skewed this outcome considerably until this past year.

Given that the current pricing environment is "objectively" estimated to equal March 2005 levels and the irrational exuberance of 1025MP (the poster child) buyers in 2006, I give Toll Brothers plenty of marketing credit in determining a premium, rather than a discount, to their pre-construction quotes in 2005.

In other words, the units that were resold at similar or lower prices were actually reflective of what NYC was experiencing on a comparable basis for the "average home" and the "average buyer." While many will argue that 1025MP is above average in Hoboken RE terms, the point to draw from this is that the TIMEFRAME is the important inflection point for all properties, regardless of profile. Hence, our normalization of all data within the 1025 building itself.

Now, Toll can list those units at whatever price they wish until buyers are blue in the face. But that's what distinguishes the emotional buyer from the objective buyer. Toll has enough cash to sit the situation out at the cost of current MP owners. Those points and my about-face on TOL stock were explained in an earlier post.

We now have the data to benchmark and backtest the March 2005 valuations in Hoboken. As the poster child, I am choosing 1025MP as a best-case scenario compared to other properties in the city. That conservative approach suggests that this buyer's market will be offered for several more years - not months - as some would have you believe. More importantly, MP prices will likely fall harder than others given the initial marketing pump. In stock markets, the role of "pump 'n dump" is played by the floor specialist. See the analogy?

My next discussion will point to some examples of 1025MP units up for resale. That will serve another reality check as the disparities will only serve to depress future valuations here. I have mentioned the viscious circle before: that (re)sellers are taking their cues fromeach other, Toll and brokers, rather than the market. Slowly, they are realizing that they are looking in a mirror rather than out a window. Unfortunately, that only depletes their monthly cashflow and maintains the marketing machine for the builders and marketers. The psychology behind their purchase will not allow them to take a loss.

When owners discuss their properties in tax deduction terms instead of cash flow, they are sailing down a river called de-nial...