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.
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