Manhattan’s Inside Market: A Crystal Ball For Real Estate Success?

Real estate is naturally illiquid. Unlike the stock market, where a company can be divided into hundreds of millions of fungible shares where the value of one sets the value for the others, each home is unique, and its value is derived from what the buyer is willing to pay.

But without a crystal ball, how do buyers and sellers find that magic number: the price that turns “for sale” into “sold”? Enter the concept of the “inside market.”

Understanding the Inside Market

In the fast-paced world of equities, the inside market represents the range between the highest bid and lowest asking price among market makers. A simple glance at a stock’s inside market provides a wealth of information on its immediate liquidity and current valuation.

In any market, prices are set when buyers and sellers agree. In the stock market, the window into the price discovery process is an understanding of the inside market. The inside market reflects the gap between the highest bid – the price buyers are willing to pay – and the lowest asking price – the price at which sellers are willing to sell. It shows how easily a stock can be bought or sold without significantly impacting its price. The inside market also reveals information on market sentiment. A tight spread between the bid and ask suggests high liquidity with consensus on price, while a wide spread could signal uncertainty or volatility.

Of course, the singular nature of real estate means there is no clearly observable inside market. However, looking at listings that tried to sell and failed and were subsequently removed from the market, so-called off-market listings, gives one a sense of buyer range, which can help uncover the invisible lines beyond which demand wanes precipitously.

Hence, off-market listings can be a powerful indicator of where buyers’ and sellers’ perceptions of value diverge. In this sense, they can serve as a proxy to an inside market by helping to define the outside width of the bid-ask spread.

A Decade in Review

Looking at a decade’s worth of listing and sales data for Manhattan’s resale condo market—from 2014 to 2023—sheds light on the dynamics of listing and selling. The gap between what sellers hoped to get and what buyers actually paid narrowed, except for a brief period during the pandemic when uncertainty pulled the rug out from under bids and made sellers settle for less.

By the Numbers

On average, the original asking price was 7% higher than the final sales price. The last asking price before a sale was strikingly closer, averaging a mere 3% gap, as buyers and sellers are on common ground.

Listings that failed to sell and went off-market averaged 18% above the market price, as measured by the median price per square foot, for similar units, suggesting that aspirations only exist in the eyes of sellers.

Lessons for Pricing

This analysis reveals a compelling pattern: homes priced near the market eventually found buyers, while those that aimed too high, hoping for a buyer willing to stretch beyond the norm, often found themselves withdrawing from the market, unsold.

These dynamics hint that understanding the market is key to a successful sales listing. As the chart above illustrates, the farther the asking price is from the market price, the less likelihood of a sale. Sellers often forget that most buyers are quick market experts. With their skin in the game, buyers pass over listings they can sense are overpriced. Oftentimes, these listings do not even make it through the search filters to begin with.

In Manhattan, the point at which most buyers simply ignore the listing is around 15%. For sellers, this means letting go of sky-high aspirations and aligning with the market at its current level. For buyers, it serves as a reminder that value may often be found near or even slightly above the market but not in the outliers.

Indeed, breaking down the inside market by neighborhood shows how different areas of the city have distinct pricing behaviors, so understanding local data and trends is paramount.

Navigating Manhattan’s Real Estate Market with Confidence

Knowing that the inside market for Manhattan real estate is typically within 15% of the market allows sellers to understand the range of acceptable pricing strategies by illustrating the point at which buyer and seller expectations diverge irreparably.

For sellers, this involves pricing homes to match current market conditions. On the other hand, buyers should focus on finding properties priced realistically, reflecting a balance between seller expectations and market valuation. By understanding the inside market, market participants can make faster, smarter decisions, leading to mutually successful transactions.