New York City
Northern New Jersey
Search Better With
Shop for a Broker
Open House Planner
Saved Listings & Folders
Stats and Figures
Manhattan Condo Market Index
quick question, as we are on the fence of whether to buy or not..we are in the 2 plus bedroom market, so my concern is, if there is a slow down in buying, people will still have to live some where and will rent, thus making the rental market sky rocket. for a decent 2 bedroom on average it will cost you between 5500-6000 to rent. i havent seen much change in purchasing pricing when it comes to the larger apts, specially the ones zoned in good school districts. so my question is if we buy a 1.2 mil apt the monthy costs of mortgage, cc and tax will be arounf $8500 and with the tax break we would get as we are in very high brackets say 1500 a month back, wouldn't it make since to buy ? and also because statstically 66 % of people in NYC are owners, 25 % are rentals and the rest is vacant, I just fear that the price of rentals will get very high if as some are mentioning dooms day is coming and we dont have the luxury of living in a rent control apt.
by the way since some seem to be very passinote on this board, i dont understand a lot about real estate or wall street...it seems to me just common since if buying is really down rentals will be up.
mrsblogs..because of the schools in manhattan and the amount of activites and available amenties for children here, this will always be a good place for families. people with children look always for schools and amenties. We moved from san francisco and although it's a beautiful and amazing city, it doesn't offer alot for children. in fact it has the lowest % of children for a major city in the world. manhattan on the other hand has a large amount of kids as far as i recall around 28 % and with 60 % of people in ny being married, unless they all move out, i think families will keep on growing. downtown alone in the financial district there are two new public schools being build, so it will make it more and more attractive for families. wouldn't the slow down hit hard first the boroughs, specially brooklyn which has been also over priced ?
sfo - I lived in a luxury rental on the East Side from when it was built until this winter, when I broke my lease. Since it had always been 100% occupied and nothing stayed empty more than two weeks during the 4.5 years I had lived there, I thought I would be safe in breaking my lease. Six weeks later, that apartment is still vacant, and the building manager told me how many units are currently available...... many. Also said he now needed to "adjust" the rents. My last renewal was Aug 07, at which time a comparable unit in the building rented as soon as it went on the market, for 21.6% more than my "old" rent had been, and for 13.9% more than my "new" rent. I suspect we are finally looking at a situation where both rents and purchase prices move down at the same time. To be clear, I am not a real estate professional. But I would not lie about this fact, I am on the hook for a lease on a prime Manhattan rental apartment which is moving slow as molasses. A broker will tell you that when sales are down rents go up. This was true until now. Last summer I believe the reasons rents spiked was that sales were slowing up. A broker will tell you that rising rents will make the sales more attractive. Absolutely true. What no one can assure us of is that rents will necessarily rise at the same time that the market for purchasing apartments languishes. I won't go so far as to say we are entering into a perfect real estate storm, but ....... the weather is acting in a manner consistent with the beginnings of a perfect storm. How's that?
they say that wall st. is like 30% of the total compensation in NYC and for each wall st. professional, there are three other people employed in the service sector. when wall streeters make less money, everyone feels it. if people are not making the $$ to command the high rents (or sales prices) both sales and rents could decline. the job growth which is what brings people to NYC that is now declining also does not help NYC rents. all the kids that are about to graduate from college - do you think they are even getting jobs? if they get NYC jobs you think they will make enough to pay high rents? i don't. it may be temporary, but it seems as though we are heading for a decline.
The psychological component of both rental and sales markets is the same, negative. I started a thread recently on what appeared to me to be cooling overall in my neighborhood, the East Village. No one responded, unfortunately, but it does seem that there is less heat in both markets. One example: in the very expensive East Village Portfolio of buildings that Magnum Realty (Ben Shaoul) purchased from Extell, many vacant RS units were renovated and deregulated. From what friends in two of the buildings tell me, they are moving very slowly and always negotiating discounts off ask.
Before a storm, the seas sometimes act very odd with strange tides and currents at the shore, uncharacteristic winds and temperatures...it can be very confusing. Lower recent sales, yet unremarkable inventory levels, tightening credit but relatively low rates, prices stagnant or moving just a tad--is it all the calm before a storm?
Fact: 6,855 listings on this site today.
Fact: According to Miller Samuel, there were 5,113 listings on December 31, 2007.
Fact: A 34% increase in 3 months.
Fact: Not all available properties are listed on this website.
Fact: Only 10,000 properties per year are sold in Manhattan.
Fact: That's at least an 8.2 month supply of properties on the market.
Fact: Buyers' market = more than 6 month supply of properties on the market.
Fact: More BS from bulls. Not unexpected.
I'm not bullish, but I don't think a Dec-Mar comparison is nearly as informative as year-to-year comparisons for the same month since RE is very cyclical during the course of a year. It's the same reason why same store sales in retail are generally discussed in terms of year to year comparisons: comparing December sales figures to January sales figures hardly tells you if a store is doing well.
Lowery, thanks for your thoughtful post. I did think that your previous post was a balanced one. I wasn't taking issue w/ it per se, but the line I quoted was useful as a launching pad in the, uh, conversation I was having at the time. While interest rates are indeed still historically low, and people who bought in double-digit-rate times will still be amazed, the blazing fast rise seemed to take off when people could get them even significantly lower. While unemployment is still not a problem overall, the particlualr concentration of current layoffs and income drops (Wall St) does have an amplified effect on the local economy, as notsure described above. Using your definition of overbuilding, "to build more housing than there are people to live in it," I think there are parts of the outer boroughs that qualify. We do seem to be in basic agreement, and I appreciate additional perspectives.
iMom, thanks. I've been enjoying your posts as well.
Eric Cartman, do you wear your mirrored shades with the reflected mountains when you most? It might help readers to respect your authorita.
kylewest, you're absolutely right, but December is usually the highest inventory point in the season.
lowery: "A broker will tell you that when sales are down rents go up." "A broker will tell you that rising rents will make the sales more attractive."
A broker can tell you anything. The truth is that there is nearly perfect correlation between sale prices and rental prices over time. Sale prices are 12x market rent because rentals and sales are almost interchangeable goods, and rents are limited to 40x your income, owner carrying costs to 28% of annual income.
What happens to each when the relative prices change depends on what the relative prices were at the time. If sale prices go above 12x market rent, then they will fall and rent will rise, until eventually they reach that equilibrium again. If sale prices are below 12x market rent, then they will rise and rents will fall, until they eventually reach that equilibrium again.
Right now, on average, in Manhattan, sale prices are 24x rental prices, and rental prices are in fact falling precipitously. Caveat emptor.
Eric Cartman: "when you most" should have been "when you post." authorita, of course, was not a typo.
No numbers in my post, just some experience in buying in Manhattan.
I'll be the first to admit: I never thought Manhattan was cheap, never heard that it was cheap from anyone who lives here and, particularly, from anyone just visiting. The constant through my decades in this city is that people actually want to be here, in good times and in bad. I won't hazard guessing at how crippling the impact will be of a Bear getting absorbed by a JPM (hey, at least, it's an old American firm) nor will I forecast who the real winners are in this never-ending debate: renters/buyers vs owners/sellers. I've just seen enough hardship in this city (I think we all have), either precipiated by foreign elements, or because of financial turmoil that has been a part of our economic cycle; all throughout, people have bought and sold their homes - and prices have increased. Perhaps, not right away, but they have.
Yes, I bought when it was relatively cheaper than where the prices are today. Did I think at the time that I was spending too much? Yes. Were salaries out of whack with the cost of a coop/condo back then? Would it be Manhattan if that wasn't the case? My point is that even if I consoled myself into thinking that I didn't overpay, there was always someone at the ready to tell me the contrary. I don't know how many times I got the typical "you know what your money could've bought you in ?") from friends, family, strangers alike. Believe it or not, I still here this but they live elsewhere these days, so I don't have to hear it as much anymore. Did I have cold sweats from thinking that I could've bargained more and shaved off that extra $50,000 for my bathroom renovation? Absolutely.
All told, I am still happy with my home, and my purchase, and the appreciating asset that it has become, and survived those initial months of worrying that I'd bought at the wrong time/in the wrong building/could've-should've lowballed more. I don't downplay how 20%-100% of any property price tag these days can be pricey and how it takes up a significant amount of one's cash. But, if you're a serious buyer, you'll do it. Many people found great safety, imagine the irony, in buying Manhattan real estate in early '02, following a huge city fallout from both the dot-com bust and the hell that the 'other' foreigners who didn't want to buy in Manhattan created.
coopownr98, I don't think that most of the bears on this board would argue that Manhattan RE isn't a good long term investment. Nor do they think it won't always seem overpriced relative to whatever. With the title of the thread being "Whats going to happen to RE market in NY?," I think the bigger point is, how much better of a position will a buyer be in later this year or next year than he or she is right now (or has been for the last two years)?
If RE bears believe that Manhattan RE is a good long term investment then why get troubled (is it worth the agitation?) with shorter-term fluctuations? I think we all believe in the strength of the market and that (along with your post-purchase cushion) should carry you through the dips.
Why get "troubled" if I can save a significant amount of money and lower the stress of carrying my eventual purchase just by waiting 6-18 months in a market that's in decline? Is that a serious question? Not to mention that living in a rental for that time isn't exactly trouble, and shopping smartly and diligently for the most important purchase of my life seems wise, no?
One could ask, why would an owner bother posting on this site, or this thread in particular, when they are perfectly content with their purchase decision and have no concern of their own for short-term fluctuations?
I would also add, when you talk about the time prices will take coming down, the time staying down, and the time it takes to rise back up, we may be talking mid-term, not short term.
tenemental, agreed. coopownr98, the problem is that often in real estate the downturns are long-lived, such as 1987-1998. If the air deflates slowly, you're stuck with an illiquid asset which if you're forced to sell it could wipe out most of your savings.
I've said it before, I won't wait till prices reach 12x earnings to buy since I'm a long-term buyer. But at 24x, seeing all the commotion on Wall Street and more promised, and the precipitous drop in market rentals in the past 6 weeks, indicates that prudence is warranted. In income-adjusted real terms prices will have to fall 50% from their current levels to equal market rent. At $1 million plus a pop, that's more than I'm willing to get stuck with.
tenemental, will you have the guts to buy in a down market? Awfully hard to do, the psyche always says, “you can get a little more”.
Sheesh, tenemental, so now I can't post without my intentions getting scrutinized, just because I'm an owner? I was just hoping to provide an opinion from an empirical standpoint. No need to get defensive about being a renter either. I'd think that the whole buying option and decision-making process applies to both existing owners and renters alike.
Good luck to all of the serious buyers. This is a great city.
Hey, JuiceMan. Absolutely. I don't expect to pick the perfect bottom quarter, and I know very well what I'm looking for in terms of space, neighborhood and price. And as much as I enjoy posting here and reading the postings of others, I'm really looking forward to taking my living situation up a notch or three, and putting my time towards other interests. As a psychological cushion, if I buy and prices continue to fall I've got those who bought at the top and the bullets I've dodged ("it could've been worse"). I will also have a very long timeline. Seriously, I may retire in the place I eventually buy. I'm looking forward to paying off the mortgage in 20 years and living with a super-low monthly nut in my 50s. Of course life always offers up the unexpected, but that's the plan as I see it now.
Hope you enjoyed your trip.
Trying to pick or call the bottom of a market is tough to do and should not be part of any long-term strategy.
That said....you've got to be either crazy or reckless if after examining the current economic landscape in front of us (in case you haven't heard, its bad), you decide to buy at this exact moment (this assumes you have the ability to wait and are not in a situation where you are forced to buy).
No one is saying that NYC is not a desirable location. The problem is that property values have run up so dramatically over the last few years that anyone looking at the market with any objectivity can safely foresee prices coming down. Sellers/developers/brokers/owners will of course put a rosy spin on the market and will resist lowering their prices as long as possible, but that's simply ignoring reality.
Who knows, maybe everything will play out in 6, 9, maybe 18 months or longer. Nobody knows. But what is indisputable is that as of right now, there is a greater likelihood of further price declines than price increases. I'm not trying to pick the bottom of the market, I'm just trying not to catch a falling knife.
I wish you luck, you’ll find what you are looking for. When you find it though, don't leave the blog. I think people really benefit from your advice.
Trip was good thanks for mentioning. Had some business in London and then my wife and some friends met me in Bordeaux. It was a bit chilly, but that’s what red wine is for.
coopownr98: Thank you for your perspective. You seem to have a handle on the big picture of things. Here's to not thinking in a small minded way. I can tell you are a true New Yorker with a true love for this great city!
afmarino, in 1987 it took 10 year for the market to recover. Prices have gone up 700% in 10 years.
Re coopownr98's comment: "I think we all believe in the strength of the market and that (along with your post-purchase cushion) should carry you through the dips."
Why should we believe in the "strength of the market" that doesn't appear to be strong at all - market rents are collapsing - and what is a "post-purchase cushion"? A dip is one thing, but 1929 wasn't a dip.
tenemental -- people who are buying in this market are not buying in order to pay off their mortgage. That's why it's a scarey market. You have the right reasons. Dips in the market are not short-lived. Stevejhx is correct about the last downturn, but I would argue it was even worse than he says it was. I bought in Qns in Feb '88. In mid 2001 I began to think about selling. The most recent comp in my building was a unit in my line on a lower floor, which had sold in 2000 or 2001 for 69.76% of what I had paid 13 years earlier. I sold it in Sept 2001 for 30% higher than I had paid 13.5 years earlier. At the low, four years after I bought, a similar unit next to mine sold for less than half what I paid. The market rents in that area only reached equilibrium with what I had paid in '88 in around 2000 or 2001. Since late 2001 sale prices in the building have nearly tripled, and rents are 50% higher than in 2001. So people with a short memory can look at dizzying price appreciations and think they're going back a long ways. Had I held that property until the peak (perfect timing) the property I had owned would have increased 360% in 20 years. I do not think that is anything to write home about. The Dow in Feb '88 was somewhere in the 2,000 range, and now people are whining about the DJI being around 12,200. The Dow outperformed Queens real estate.
Oh, I know, I know. "But that's QUEENS! EUWWW!"
No, that is not Queens. That is the New York City coop and condo market. The bubble popped at the same time in all the boroughs. It recovered at different times and at different paces, but over time it has all pretty much leveled out in differences.
The differences between then and now that one side of this argument will point out are: (a) changes in tax codes for deductibility of rental losses on "holders of unsold shares" in nonevict coops in NYC which made the entire coop market crash; (b) too many cheap conversions from RS to nonevict coops in all five boroughs, partly motivated by the pre-(a) frenzy; (c) badly financed coop conversions and flimsy standards for accepting buyers; (d) historically high mortgages then as opposed to historically low mortgages now.
All true. Now, here are the differences between and now viewed from the other side of the coin: there are none. Wall Street financial firms laid off employees. The white shoe law firms who serviced them laid off employees. The x that serviced y laid off people.
Crashes happen in Manhattan just like they do everywhere else. You can't time the bottom of a falling market, but you could time your own personal circumstances. In my case, I turned down two opportunities during my "underwater" period, a job in South Africa and a job for the UN in Tanzania. I could not make my payments back in Queens on the pay in Africa, even with Africa's lower cost of living. You need to look at where you will retire and live on a super-low nut. Manhattan is a great place to be a senior citizen, but only if you can afford it on your fixed income. What about property taxes going up? What about the cost of other services, and of food? I think a one-brm condo in a prime building right now might run $1,600 and up in cc/taxes. What will that be in 2030? They're lower in outer boroughs.
The longer you wait this year and next and the more cash you save, it seems to me you will have more and more cards on your table. Those notorious coop boards are known to come down off their standards when the lines of qualified buyers stop knocking on the entrance door. Forget the new condos with tax abatements. You have NO idea what the R/E taxes will be.
To be perfectly balanced, I decided in my own case not to wait this out and wait for the bottom. The recent price runup of 700% priced me out so thoroughly that a 50% drop in prices would not do me much good. I bought in the outer boroughs again, and if prices drop, the equity I'll lose will be denominated in much smaller bills than were I to have bought in a prime area. I'll renovate for the next 5-10 years and have a pretty decent apartment by the time I pay off my mortgage. Oh, forgot to mention..... I'm like you, and plan to pay down my (tiny) mortgage. In 10 years.
Lowery, great post. Thanks.
Lowery, Great addition to the dialogue on this board. It is important that we see the homeowner perpective you present and related risks The the real estate investors will try to argue with you.
But no matter what you preent that there risks in this market. Potential homeowners evaluate them differently from investors.
lowery, excellent post, that's exactly how things were, but not only here. I lived in London 1989-1992, and there was the "Nigel Lawson Boom," named after the then-chancellor of the exchequer, who loosened money supplies to grease the wheels of Margaret Thatcher's Conservative government's reelection.
You'd walk down the streets, there were for-sale signs everywhere, but this time because people were BUYING. The housing stock was old, a lot of single-occupancy weekly rentals with shared bathrooms were being reconverted into mansions or luxury flats, one to a floor. People where literally paying 100,000 pounds for what was, essentially, a closet. Or cupboard should I say.
Then, it burst. Retrenchment everywhere, including at Price Waterhouse, where I worked. I got a 40% raise in one year, and a 5% raise in the next. Sound familiar?
Just before the bulls post more bulls*it, just as lowery said, that boom and bust is not identical to this, though it was also fueled by excess liquidity. This time, here in Manhattan, we have conditions that have never existed before: most importantly, the prevalence of free-market rentals, either through a) pure rental buildings; or b) investment condos. Pure rental buildings are extremely sensitive to demand, they know that leaving a unit vacant even one month costs them top- and bottom-line, they can slash rents when need be, offer free months of rent, and other incentives. Investment condos don't usually have that much flexibility, but if you own an investment property and your choice is to keep it vacant for a few months trying to get your rent, or rent it and break even, or make less, or take a lower loss, what are you going to do?
Unlike all the (and I have to say naive at best, stupid at worst, with "liar" somewhere in between) property bulls discount the strong effect of rents on property prices. In the old controlled or stabilized market - 1987-1998 - they truly didn't have much of an effect. And co-ops also constrained the rental market. But there are literally thousands of market rental buildings now, and thousands of condominiums. The rules are different.
The bulls will say that rental properties are not as luxurious as properties for sale. That is usually (though not always) true, and it is likewise (usually) true that the tend to be somewhat smaller. The question is: what price luxury? Watch House Hunters: renovate your kitchen and bath and put in hardwood floors, and you'll at best break even. Luxury is a nice thing to have, but the price....
There is another important factor in play here, and that's new developments. Developers can slash prices and still make money, or offload apartments that don't sell at cost, or most likely, depending on the cash-flow, just convert them to rentals. The latter is what usually happens; they cover their costs and wait for a better market. They know markets are cyclical.
One other thing has changed hugely, as well: market information. There was no Internet in 1987-1998. The NY Times was the sole source of information on properties to buy; the Village Voice was for rentals. Now you can go ANYWHERE to get market information. Here for purchasing, nybits for free-market no-fee rentals. ACRIS is now open to all, and you can finally just enter the property address rather than knowing its plat plan address. Co-op sales are finally recorded and public, which they've never been before. Real-estate agents no longer control the flow of market information: all you need to do is click a button.
That is a sea change.
I've heard the bulls*it from the bulls before, and it's probably true that there aren't that many "flippers" in Manhattan, but we don't know for sure. Certainly there were some in condominiums. You can still flip a co-op, though it's a little harder. But we have something that nowhere else in the country had, and that's Wall Street bonuses. Look above at what happened by my salary at PW in London: 40% one year, 5% the next. Retrenchment everywhere. That's what's going on now, and none of those people feels safe.
Those bonuses helped drive property prices higher, unquestionably: the average Wall Street salary last year was something like $337,000. Not evenly spread, but even secretaries at Goldman are millionaires. (Or were.) Those bonuses were driven by M&A and packaging exotic mortgage products, all of which were predicated on loose lending standards and cheap money, which are a thing of the past and will remain that way forever. Hell, even the Bush Administration is proposing re-regulation of the financial industry. That that will happen is not questioned.
Banks are now writing off all the securities that those bonuses were paid on in the past. It's a completely different environment - and worse than the dot.com boom - because of another factor, as well: leverage. Prices were driven up by excess leverage: the difference between 20% down and 10% down is leverage of 4x versus (20:80) leverage of 9x (10:90). HUGE. No money down is infinite leverage. ARM's, which disconnect the useful life of the asset from the financing of that asset, means that no one with an ARM has any clear idea what interest he'll be paying in the future. That risk is potentially huge.
Never before in the history of mankind has there been so much leverage invested in a single asset class. From 9x to infinite leverage at the retail level, to 100x leverage at the wholesale level. During the dot.com boom there wasn't even that much leverage, because SEC and market regulations prevent it, and the lenders weren't at risk because it's a liquid market and they could make a margin call if prices fell too low, which if not met gave them the right to liquidate assets. They could even change their margin requirements.
They can't do that with housing. They need to repossess it and sell it. They are in for potentially more losses.
That's why things went up so high so fast, and why they will fall. Exactly how it will play out is currently unknown. But I wouldn't want to catch a falling knife.
MARKET RENTS DO NOT LIE. Again, the Westminster, 6 months ago 1 bedrooms 1 bath units were listed at $4,600 a month; now they're down to $4,095. They wanted $5,600 for a junior-2 6 months ago, now there's one for $4,695.00. They have 2 units available immediately, one available as of Tuesday. That means that they haven't been able to rent them for at least 30 days. 30 days of lost income.
MARKET RENTS DO NOT LIE. Which is why I've been watching them closely for years.
And an editing problem: "Unlike all the (and I have to say naive at best, stupid at worst, with "liar" somewhere in between) property bulls discount the strong effect of rents on property prices."
It should say "Unlike what all the property bulls say [...] you can't discount the strong effects of rents on property prices."
The last few years of incresase in the property values throughout the "WHOLE COUNRTY" were artifically fueled by people that never should have been getting loans. Yes even in NYC and the "IT Nieghborhoods". People were being allowed to get get 95-110% financing. This was a disaster waiting to happen. To get an idea how this will effect the NYC and "it areas" going forward all you need to do is eliminate all the loans that were give with 10% or less down. This will give you a good idea of much NYC is just like the rest of the counrty. The game changed overnite. NOOOOO bank will give of financing with less that 20% down. Even with 20% on $1M property you will have a very tough time getting $800,000 loan. The bank are still know that that property values are still on the way down and every loan they make the poperty value drops. Less qualified buyer, layoffs and decreasing wealth feeling by individuals over all will decrease the NYC market by at least 20%. Perhaps even move if we see other financial institution ion the brink.
dco, banks are now requiring PMI for less than 25% down. One more never-before. Some won't finance co-ops again, because of the increased risk. New proposed regs won't let you get an ARM if you can't current afford the highest reset possible.
The game is over. Banks aren't going to take on any more risk than they currently have. They'd rather have homeowners trying to sell lose money, than take the risk that a new borrower will default, or lending too much money on something whose value won't hold up. There was a caller on Suze Orman a few weeks ago who said that the bank had put a universal default clause in a fixed-rate mortgage. First, that by definition means it's not a fixed-rate mortgage, and second, one late payment on your credit card and your mortgage rate doubles. Imagine that.
All these starry-eyed "Gee it has marble countertops" people are crazy. Either they're trying to convince people of things that aren't true - great time to buy now! - so they can dump what they have, or they invested in an illiquid asset that they don't know how it works.
stevejhx- You seem to have many of the same opinions I do. I feel at these prices the rent ratio is afar better deal. I mean I can rent a similiar apartment as one which I was looking to by and save about $1500-2000 a month. Not to mention in this market my better return for my downpayment is better spent in a market that has seen 10-15 corrections already. This is why these prices are nuts give the potential of a NYC real estate collapse. Yes I believe that the NYC real estate will see at least 20% in the next 12 months and over 30% 3 years from now. I base this on my above statement and that banks have literally eliminated an risk on all levels for the next 10 years. The federal gov't is going to get in to the business to passing legislation that will hold banks and employees personally responsible in the future. This will eliminate even more potential buyers years from now. I know people will oh dco you think the world is coimg to an end. My answer is no, however this economy is on the brink of something it has never seen in the history of this country. That's not to say it won't survive, its just that their is no historical model for this crisis. People are trying to compare it to various times and I don't see an comparison to this mess that's what is troubling to me.
Guys, Get with it. This is not Cleveland, Ohio nor is it Miami, Florida or Las Vegas. The difference between 1987 and now is that the city is so safe and the quality of life is so good that there is high demand to live here. Do you remember the Dinkins years? That, coupled with the limited amount of supply will keep prices relatively stable. Also, there is an ego element. As long as Manhattan is good, everyone with some savings wants a piece of it.
dco (and everyone else), see my post on Why isn't this selling??? An apartment is for sale for $1,550,000 that the rental competition (the Helena, for instance) prices at $500,000.
The math is there, it doesn't lie. It's more than a 30% decline on average. I think, an income-adjusted real decline of 50%.
After 1929 we had the Glass-Steigal, which separated insurance and investment and commercial banks, to prevent runs. Sandy Weill of Citigroup managed to get that repealed, but somebody forgot to tell them that when they did, investment banks were no longer regulated.
Well guess what. They took on too much risk and leverage again. Who worst? Citigroup.
Honestly, though, I'm not a doom-and-gloomer on the economy. The banks can raise more capital, one or more may fail or be taken over (WaMu, horrible institution that it is, comes to mind.) Real estate is an illiquid asset and people aren't forced to liquidate quickly as in stocks, nor can they. There will be a decrease in the wealth effect but
afmarino, please! "Limited amount of supply"? Have you seen?
See my post on "Why isn't this selling" for the answer why not.
The housing market is so bad right now that there are buildings - Archstone Brooklyn, in Brooklyn Heights - that DON'T EVEN WANT A SECURITY DEPOSIT if you have good credit.
Where have you ever, ever seen that?
stevejhx- read your post re: 10 west end ave. Although I haven't run the numbers, your analysis seems sound with the exception of the significant tax benefits associated with mortgage interest and real estate taxes. Depending upon tax bracket etc., the benefit could be in excess of 30% thereby significantly decreasing the spread between renting and buying. Thoughts?
afmarino, already discussed. See my caveat emptor thread: those benefits are illusions. All economists agree that the only benefit anyone gets from buying a property is the right not to pay rent on the same property. That is called "imputed rent."
If you think about it, it is true. You get all those benefits, right? Well, so does the landlord. In fact, he has more, but I won't get into them all. And he has all the same costs. Therefore, all the costs and expenses that you're talking about - including future increases or decreases in property values - are already calculated in a market rent. That's the beauty of the free market. The only thing that the landlord gets that you don't get is the profit, right? That's what makes it so valuable to own: you don't have to pay the landlord's profit. Right?
Wrong. When you rent, you put very little money into where you rent. When you own, you (usually) put a lot down, and invest a lot in its upkeep, right? Right. But as Robert Schiller so brilliantly proved, over 350 years, the real - inflation-adjusted - increase in residential real estate was a mere 0.4%.
Why so low? Because you don't make any money on it. It's a wash. But if you invested all that money in another asset - stocks, for instance - you would get a much higher yield, around 7%. Why? Because they produce income.
Over time all investment assets yield the same rate. That is true. Residential property is not an investment asset because it doesn't yield income. It therefore increases in value at a much lower rate. The landlord's profit is PRECISELY the amount that you would have earned had you invested your money in an asset other than residential property.
People here argue with me, but there's no argument: imputed rent = market rent is a definition. This is an accounting equation that works in the the macroeconomy. Sure there are microeconomic differences between one property and another, and one neighborhood and another, but in the economy as a whole that is how it works.
Rents are constrained by incomes; property prices are influenced by leverage. If you passed a law today that everyone had to buy all property 100% in cash, prices would collapse. We're undergoing a similar, though not so drastic, process right now. The easy money from 2000-2007 is gone. Banks are returning to prudent lending standards. Since that means that credit is drying up, housing prices will have to fall to the point where the monthly carrying costs equal rent.
It's a definition and an equation. Debts must equal credits. There is no way around it.
Your theories are correct, but this is not a discussion of economic theory. In the real world, you are comparing 2 properties, one to purchase and one to rent. If you are looking at the costs of residing in each place you cannot ignore the tax benefits of owning.
Historically NYC residential property has not demonstrated a 0.4% real return, its historical return has been a lot closer to the S&P than you're willing to admit. Additionally, more than making up for any shortfall in return is the benefit of leverage. Yes, you can utilize margin to enjoy levered returns, but most people are not going to be able to lever up their investments to the level they could (4x -9x) with home ownership.
afmarino, this is in fact a discussion of economic theory, and the benefits are already factored in. By definition. But if you don't believe me, say you put up a $250,000 down payment on a $1,250,000 apartment, with a $1 million mortgage. You would pay $75,000 in interest in the first year. If your gross tax rate is 30% (which even in NYC it won't be that high), you would save $22,500 in tax.
Put that $250,000 in a stock that earns 8% per year, you will earn $20,000 the first year alone. The value of your tax deduction goes down over time - it amortizes - whereas your investment accretes - compounds. Over time those two numbers wipe each other out, especially because you have to invest more and more money into a property you own, the more expensive it gets.
And NYC residential property has not demonstrated anywhere near the historical real return that you say. From March 28, 1958 through March 28, 2008, the S&P 500 rose from 42.4 to 1,315 (down from its historical high). That is an annual compounded nominal return of approximately 12.5% per year every year for 50 years. For your $1.25 million dollar house to have increased in value 12.5% per year every year for 50 years, it would have cost in 1958....
I know for a fact that in 1958, no luxury apartment in NYC sold for $3,500. Maybe $35,000, but not $3,500.
And, sophisticated investor, leverage works on the downside as strongly as it does on the upside. The more leveraged you are, the more you lose when things get bad.
There is no escaping this reality.
And so you know, if wages increase annually at 3.5% compounded, it will take about 20 years for them to double. Property currently costs about twice as much to buy as to sell. Rental prices increase in line with wages: you know 40x earnings. Therefore, if property prices stay the same it will take 20 years for wages and rents to catch up with them. And rents are currently falling because they're too high for incomes.
So do you REALLY think that being 20 years ahead of incomes is where properties should be priced? Who can wait 20 years to sell their property?
I do not think anyone is contending that over the medium to long term NYC real estate is going to decline in value, so your leverage works on the downside argument is irrelevant.
Also, even using numbers that you presented above over a 5 year time horizon you'd be better off purchasing the hypothetical $1.25MM apartment after the effect of leverage. $250,000 invested for 5 years in the S&P at a 12.5% annual return, which certainly seems high given current outlook, would leave you with approx $450,000. If your $1.25MM apt appreciated at 3.5% (the annual wage increase) in 5 years would appreciate a total of 18.77% to approximately $1.485MM. Leaving you equity of $485,000.
I feel you are drastically underemphasizing the benefits of leverage, nominal returns become rather dramatic when levered.
afmarino: I'm not taking sides here and I really don't even want to get involved, but in your example above, you forgot to take account the mortgage interest you would have to pay on the apartment. Whereas investing in the S&P wouldn't require any additional expenditure. You can't compare owning live-in real estate to owning stocks. That's like saying an SUV is better than a coupe because it has more cargo room. The metrics by which they are judged don't accurately translate to the other.
iMOm: I'm not sure what you are referring to. My example assumes mortgage, maintenance, and real estate taxes equal monthly rent for a similar apartment.
afmarino: Here's what I'm talking about:
1) Invest $250,000 in stocks, assume a 12.5% annual return (which is really high; historically has been 7-8%) for 5 years, end up with $450,508, a gain of $200,508. Simple.
2) Use $250,000 as a 20% down payment towards an apartment with a purchase price of $1,250,000. This means you've taken out a mortgage of $1,000,000 (let's assume 30-year fixed at 7.5%, the current jumbo rate). If the apartment appreciates 3.5% per year for 5 years, at the end it will be worth $1,484,608, a gain of $234,608. Fine. But, you would have had to spend approximately $62,500 in closing costs at time of purchase (assuming 5% of sale price) AND you would have had to pay $365,703 in interest alone on the mortgage needed to purchase the home. Not to mention the negative affect of the apartment's value as any tax abatement rolls off (assuming a new construction development).
This simple calculation doesn't even take into account taxes, present value or other transaction costs. My point is not to argue numbers. My point is that you really can't compare the 2 scenarios because the mechanics are so vastly different.
afmarino, what does this mean: "I do not think anyone is contending that over the medium to long term NYC real estate is going to decline in value, so your leverage works on the downside argument is irrelevant."
Of course it does. If you take out a $1,000,000 mortgage with a 20%, or $250,000, down payment, and prices drop 20%, then you lose your entire down payment, for a 100% loss. If, on the other hand, you put down 40%, or $500,000, and prices drop 20%, you only lose half of your down payment. That's how leverage works.
iMom, you are absolutely correct. afmarino - like all the bulls here - conveniently forget to factor in things they don't like, such as interest costs. And the fact that if you truly want to, you can use leverage on the stock market, and leverage of 100x on the currency market. The more leverage you have the higher the risk; risk works both ways.
However, those returns on the S&P are correct. The 7% to 8% are the real, inflation-adjusted, returns. Although you can change the results by picking and choosing your start and stop dates, I deliberately chose exactly 50 years. If you go back to 1948 or 1940, the gains are even greater because growth was high during those times.
afmarino, as discussed many times, that leverage is already factored into market rents by definition. Just that the landlord uses it, not the owner-occupier. If you do the calculation your way, then real-estate would always be the best investment around, because it would ALWAYS return a higher yield than all other assets when, in fact, investment real estate (not residential) always earns over time the same yield as all other assets. Otherwise, if the yield were higher more people would do it, increasing the supply, and driving the prices down again.
iMom, I have also noticed people leave out the interest and taxes from the minus side when comparing returns on investments R/E v. stocks. I became acutely aware of this when I was "underwater" and instead of sheep, I would count dollars at night. The market rate for my "underwater" coop at the time was $725 at max (yes, I had nearby brokers come in and take a look). My gross outlay was over $1,000. Ahhhhh.... but there's a WRITEOFF! That provided a few more sheep to watch bouncing over my (not very comfy or expensive) futon.... It never came out even, market rent to my outlay, even giving myself credit for that WRITEOFF. Eventually it did, though. It's just that if one were to keep counting sheep and looking at the coop purely as an investment, this noneconomist could see while he was "underwater" that I needed to carry forward that net loss (market rent being break-even point). I am adding this here to bring up another non-economic factor which has been touched upon in previous posts, market psychology. When you're sleeping on a futon wondering why the hell you ever got yourself into this mess, as I was, you count every single lamb, past and future. When the market is zooming, people make overbids, mortgages are flowing, and everyone has a quick profit story, people are not counting sheep; they're enjoying their life. I think it's called "the wealth effect." In fact, people who have "flipped" or just bought at the bottom and sold at the top, still have all the same debits they ought to be ticking off on their balance sheet to give a fair return on their investment. The closing costs should be subtracted. The carrying costs. On and on. It has also been said in this thread and others that people buy for emotional, irrational reasons. Very true. And when all seems to be going well, this becomes more so. Every nurse's aide can buy a three-family house with a no-doc loan. Terrific. Don't look at that high sticker price on this condo; you LOVE it! Buy what you LOVE. Somewhere between that goony, naive psychology of, say, 2004, and a cold dollars and cents approach, counting nothing but the pennies, we each have to find our own comfort zone. I have been in NYC since 1979. There have been lots of opportunities in the real estate market for people to leverage themselves into huge chunks of money. But it doesn't work that way necessarily. If one wants to buy real estate as a way to profit financially, they should step back and look at the whole picture from a distance. Why not start a small business instead? If I had taken a rent stabilized apartment in Manhattan in 1979, guess what my rent would be now? Leverage is great, but you can also buy stocks on margin. Boo, hiss! Everyone KNOW that's how people get wiped out in a hot New York flash, right? Very true. Well, it happens in New York real estate as well.
Hey, what's everyone's guess on how to profit in the upcoming storm (assuming it does happen)?
Here's my favorite scenario: the new construction condos in Central Harlem. In the next 25 years, Harlem will be a solid upper-middle-class "prime" area, safe, picturesque (well, it already is beautiful), somewhat more tranquil than further downtown, and with easy access to great hospitals nearby, to say nothing of mass transit to Lincoln Center, etc. Something tells me there will be lots of distressed sellers in that market in the shorter term, but that the area is going to come back with a vengeance. Any wagers?
Let me add one thing about leverage, as also explained in caveat emptor. What drove housing prices up so high was NEW leverage. Previously, you could only get a fixed 30-year mortgage with 20% down, for 2-3 times your income, depending on the rate. That made monthly owners carrying costs equal to market rents on a cash-flow basis, as they should be.
Then came all the new leverage. At first, it let people buy something they could otherwise not afford. But the market quickly reacted, bidding the price of the asset up to take the new leverage into account. That returned the market to normal: monthly owners carrying costs equal to market rents on a cash-flow basis.
But then the leverage dried up. Rates reset. Banks and mortgage lenders failed. The secondary market for securitized loans collapsed. Leverage could not continue to increase forever to chase what had become a backwards market: prices were being bid up on the expectation of endless future price increases.
The first thing that happens: the market chokes. Sellers have this expectation that they'll continue to see past increases in the future. They refuse to realize that not only won't they get those increases, but prices - as a function of market rents - will actually have to fall to become affordable again. But potential buyers have options: they can always rent. But they can't rent for more than 40x their income, and since incomes are falling - thank you, Wall Street - so will rents. And so will property prices.
There is no fault in this logic. Prices will fall to where they equal rents on a cash-flow basis, which is where they should be. That means they must drop by 50%, or to 2004 levels.
It's not a tragedy: most of the losses will be on paper, since real-estate is an illiquid asset, and most people don't need to sell. And anybody who does need to sell will be fine if they purchased before 2004. It's just that - since this is a Ponzi scheme - the people left at the top will take all the losses.
Steve. For how long do you think people will be able to purchase at 2004 prices? In other words, and what point does real estate go up in value. Will I still be able to pay 2004 prices in say 2010.? And even in your 2004 example, while I know you believe the increased prices are out of whack, but do you think real estate appreciated at all since 2004?
Prices in Manhattan real esate fell around 7.5% from 2001-03. That means if you bought in 03. you paid the same in nominnal value as someone who bought aronnd 01. Steve, you are predicting what abounts to a 50% decline in price. Has that ever happened in the history of Manhattan in the last, say, 40 years. Over what period of time will this adjustment take place. If it is not complete until say, 2011, qon't that be like 60% plus adjusted for inflation.
mh23, I don't know how long it will take. I suspect a lot quicker than people imagine, since credit has all but dried up. As I said, if all of a sudden they passed a law saying that you could only buy real estate in cash (which is the norm elsewhere), property prices would fall until people had enough cash to buy them.
That's sort of what's happening here: banks are demanding more cash down, won't finance riskier co-ops (because they don't have to), are demanding PMI, and have severely limited ARM's. That, plus with the Wall Street meltdown incomes in NYC are falling - ask Paterson or Bloomberg.
However long it takes, I'm just waiting for them to get in line with market rents. I know for a fact that real estate doubled here since 2004 - on caveat emptor I published the price progression for a virtually identical apartments in the same building since 1998. And the same apartment in 2004 and 2008. And have calculated rent to purchasing prices for tons of apartments and compared them to 2004, and the result is always the same.
If you want to live in Harlem, lowery, I'd choose by Columbia University's new campus. Between the existing campus and the health campus, City College right there, easy access to parks and the subway, it will develop much faster than anywhere else in that area, except perhaps on 110th itself.
Upper Morningside Heights North, they'll be calling it.
mh23, when in the history of Manhattan did prices decline 50%? 1988-1992. Okay, I may be off a few basis points. Maybe it was a 40% decline. Stevejhx, I have done similar calculations to what you are doing, and have been doing so since around 2002/2003. My jaw has dropped more and more as the situation has gone beyond incredible. When people say, look, Manhattan has always been expensive, they are not talking dollars and cents. Manhattan actually was not anyplace most people would want to live in, say, 1976. One thing since 1976 that has changed is the gentrification of one neighborhood after another, till all of Manhattan below 437th Street became .... not economical. I have said many times to people who say "Manhattan is always expensive," yes, but what if you put a small studio apartment in a basement on the market and asked for $10,321 per month rent? That would be.... too much.
I am still not understanding today's NYC market. 45 Park Avenue had a large one-brm apt (800+ sq ft) for rent last fall for $4,000/mo. I assume that's an investor's unit being rented, since 45 Park is 100% sold. I think the list price for those units was somewhere around $1.2 million? Or was it only one million? The only way an investor could be covering their cc & taxes and expenses with $4,000 a month rent is if they paid cash. So assume a European investor saw this as a huge discount, with the Euro at $1.40 last summer. I'm afraid I don't see much return there. On a cash flow basis that may work out to only 2% or so per year. Hold it for 20 years and sell it? When you're only getting 2% on your money?
stevejhx, I think your 50% drop in prices has to be modified if mortgage rates go up to, say 7.5% or 8.5%. And although I agree with everything you say, I was astonished during the past decade by how much cold cash fund managers were able to raise. I saw young kids leave big Wall Street firms with their rolodexes and start funds of billions of dollars, which they then called small and insignificant sums of money. So my nightmare scenario in NYC r/e has always been that when the prices fall to a certain unknown point, all-cash vulture sales will take place, and investment pools picking up the bag. If that unknown point is, say, 30% below summer '07's nominal prices, if the transactions are all cash, I would say those funds (I don't know that any exist; I'm just speculating) could make handsome returns on their money. The question will be how much cash there is. We've discussed the leveraging of this market, but vulture cash may become a factor. After the dotcom crash the news media was full of stories of people wiped out. What they didn't say was that thousands of cash gazillionaires emerged unscathed from it all. About buying in Harlem, I'm thinking more for those posters who are thinking of getting into this market. My thinking is..... Harlem is going to have some discounts before prime areas will, more significant discounts, and it's going to end up being worth the buyers' money.
lowery, if vulture investors come in and snap up properties and are happy to rent them out at a significant loss, fine by me, I'll take it! Nothing better than living in luxury for the price of a hovel.
But vulture investors would only buy whole buildings, for the most part. And who would buy a whole building if your rent roll was less than expenses on Day 1? Only an extremely wealthy investor with very long-term aims, such as Tischman Speyers and Stuyvestant Town. And their plan is to kick people out as fast as they can, turn them all into market-rent apartments.
stevejhx- you and people like you will sit on your hands and wait for a 50% drop in the NYC real estate market citing inefficiencies and knocking anyone who has the gall to take a chance and invest in the City, yet 10 years from now prices will again have doubled and any short term downward blips will have more than worked themselves out. As I stated earlier as long as NY is a safe and desirable place to raise a family and couples are not running for the suburbs as soon as they hit 30, New York real estate will not see the kind of drops you are anticipating.
You keep citing theories, but in reality real estate is not as efficient of a market as you'd hope. There are emotional factors involved with home ownership, combine that with the fact that homes are not liquid assets and it is impossible (or nearly impossible) to short the real estate market and exploit such inefficiencies and you'll see that such inefficiencies can remain in place.
afmarino, you can do whatever you want - buy now, I'll take it off your hands in 2 years' time. In fact, real-estate is a very stable and efficient market over long terms, and that has been proven statistically by Robert Schiller since 1904 in the US, and over 350 years in Holland.
I do recall that you claimed that real-estate appreciated over time at nearly the rate of the S&P 500, and I proved that an apartment that costs $1.25 million today would have had to cost $3,500 in 1958 for that to be true.
"the gall to take a chance": you mean the gall to lose your shirt?
How do you know that properties will double again in 10 years? History proves that that is not so. The only way they can rise if is incomes go up, and they're currently going down.
"it is impossible (or nearly impossible) to short the real estate market and exploit such inefficiencies."
Just don't buy. No one who needs to sell can hold on forever. And if there's no credit, no one can buy. A stalemate can exist in the short-term, but prices have gone down in the past and they will in the future, every time they exceed people's capacity to buy them.
I'm sorry you're mad at me, but just wait. And if you make a claim, back it up with something. Why is property falling in value everywhere in the country but here? Is this the only nice place to live?
First off, I said your levered return could match and exceed the S&P, not the % appreciation you see.
My point is not that this is an ideal buying situation, you can and probably will see some short term declines. It is not the time to buy a $2,000 per square foot apartment in the W-downtown (or even a $1,500 per square foot apartment in the FInancial District). I am simply saying this is not necessarily the time to sit on the sidelines completely.
New/nice, reasonably priced condos (~$1,000 per square foot) in nice, established, non-fringe neighborhoods are available and as long as the City is a desirable place to live these will appreciate over time.
steve, although it's a far cry from the luxury Manhattan market, I do know of a group of all-cash investors who bought up coops in Western Queens at the bottom of the last trough, and it was not whole buildings. They did find packages of three or four apartments in one particular coop (sorry to say I know this.....) but in some buildings, it was a coop here, a coop there. That's where I got the idea. In their case, their timing was perfect, and that's why I brought up this potential. It wasn't their timing that got them their discounts; it was their 100% cash offers. In the case of the package deal I think they relieved of the burden a former group of investors, who had purchased a group of coops in that building, WITH financing, at the peak of the market, though at a then-discount. When this group of all-cash investors entered the picture, they paid below what was then the market value. It made a vivid impression on me and other investors in that building, and I saw one of these investors with my own eyes on two occasions, their spokesperson. I think that group had the right idea. Why shouldn't someone use their business model in Manhattan? One person could be the hands-on guy who goes to meetings, does bookkeeping, negotiates deals, and the others, presumably his friends and business associates, would have no involvement other than having parked their cash with him. It's easier to do in little bits and pieces than to buy a building. The profit margins are astronomical.
Yes you said leveraged return but you forgot to include the cost of the leverage and everything else. And if you're going to include the leveraged return on a home loan, you need to compare it to the leveraged return on a stock transaction. Otherwise, it's like comparing the average speed on 5th Avenue and the average speed in I-95. Cars go faster on I-95. Duh!
"New/nice, reasonably priced condos (~$1,000 per square foot) in nice, established, non-fringe neighborhoods are available." Show me where. The East Village. The median price for all downtown listed on this website today (not in contract) is $1,308. They factor out the trophy properties (they say so) so the median is actually higher than that. In SoHo it's $1,550. It is $724 - in Little Italy.
If what you were saying were true, I'd almost be on your side. Rental prices give a psf of $800.
lowery, that could happen, but prices would have to undershoot the equilibrium for it to occur. You'd need a major depression for that to happen, which I don't think will happen.
I think what you saw was investors bailing out the original shareholder (the sponsor) to save the co-op. That's not really an issue now since new construction is almost exclusively condominiums, which don't have an underlying mortgage.
It amazes me how poorly understood leverage is. There is no asset - never has been, never will be - that can be safely invested in using leverage to gain exposure above your means. This is especially true for illiquid assets. Bear Stearns (and others) used leverage to enhance returns on the safest of all assets - AAA bonds. They went bust in the blink of an eye. The same is happening before our eyes in real estate but in slow motion.
Buyers of NYC real estate have been using incredible amounts of leverage to buy illiquid assets, with poor cash-flow generating capability (low rents). Further, in NYC incomes are positively correlated with the liquidity environment such that as the credit markets fall apart incomes fall simultaneously. I am not a doomsday type guy but this sounds like the script for a downward spiral of epic proportion. Falling incomes + tigher credit + poor cash flow + illiquid assets + blind optimism on par with Ineternet stocks in 1999 = an absolute disaster in the making.
We are so far from the bottom that buying at the bottom shouldn't even be on anyone's mind yet.
mbz, regarding the future of real estate, I'd agree. But much of the loss will be on paper for homeowners since they don't have to liquidate, and eventually banks will be able to re-mark their securities to market.
Better said than I've been able to say it: "as the credit markets fall apart incomes fall simultaneously. "
That's why rents are currently falling, and why property prices are right behind.
Leverage is dried up, now to the point that it's even tough to get a 30-year mortgage. And it's going to stay that way for some time to come.
Leverage is great if you know how to use it, but like anything else, you need to know the downside, which unfortunately afmarino doesn't.
Oh yeah: AAA-rated bonds backed by subprime mortgages, by definition made to people with bad credit? I see some lawsuits in the offing against the rating agencies. Who would've ever thunk up that one?
steve, the investors I mentioned didn't bail out the sponsor. That particular coop was in a truly sad state -- the original sponsor went bankrupt. He converted lots of buildings on the UWS, in Bklyn and Qns. There was a second generation of investors on unsold shares and I was never sure of the relationship. By the time this third generation investor I mentioned came on the scene no one could even remember the name of the sponsor, and I believe they also bought "vacant" apartments from the assignee of the sponsor as well. They could not have gotten resales for the same price, but it was close. What IS similar to the situation NYC is facing now is..... liquidity, leverage, cash. In 1988 lots of nodoc coop loans were available. Remember opening up the papers and seeing The Dime's column after column of foreclosure auctions advertised? That was around '90 or so. What followed was the nightmare scenario you are predicting for condos: banks stopped lending to coops. Period. No go. Forget it. They started again in bldgs in Manhattan, but before they did, certain coop corporations went bankrupt. The shareholders lots their ownership, but still owed mortgages on their individual shares. In Queens there were bldgs that did not go bankrupt and where the figures were nowhere near as dire, but nonetheless, the banks were not hearing of it. Next phase of catastrophe: shareholders like me moved out, not because the building was bad or we didn't like our apartments, but because they were underwater, so selling or refinancing was not an option. To be balanced here, this eventually worked in my favor, because ARMs reset down, down, down, down, down, and I ended up with a 4% mortgage. But it took me a long time to be in a profitable situation with my investment. The problem with the nominal value of the asset was exactly the Titanic scenario you have been predicting: because of the credit drying up, the lack of liquidity, no one could buy for more than about $15,000 to $25,000. Now, when the credit situation changed, and then when the rents skyrocketed, this all changed. In my case, I'm glad I was "trapped." I like getting my dividend check every month. But yes, this liquidity meltdown has an absolutely nuclear impact on asset values. I have to confess I am absolutely stunned that people do not know that this all has happened right in the five boroughs within the past two decades. I don't know whether it's a generational thing. I still cannot predict, though, that this liquidity meltdown will be the same, worse, or milder than the last one. If we go through an interest rate spike, we will not see values sink by 50%. You will instead see New York turn into something a lot worse than Stockton, CA. I don't believe it will happen. I think interest rates will not go up that high again, and I think the liquidity crisis will not get that bad, and I think there is still mindboggling amounts of cash out there in the hands of a class of newly wealthy investors and entrepreneurs. That being said, Manhattan being a great place everyone wants to live in will do nothing to prevent prices from going down. It's like saying "They aren't making land anymore!" No, they're not. In fact, we're losing coast line. Next............ oh, did I forget to mention they're not making land in Tokyo, Osaka or Hong Kong either? This perfect storm in the credit markets is something I clucked about with a fellow laid-off employee of a white shoe law firm in around '90. We had done grunt work for people involved in the massive projects of "collateralization." Ah, how fondly I remember facetiously asking the lawyers to explain to me "just how to do you turn a debt into an asset." The irony is, people like me thoght that "collateralizing" unsecured credit card debt was folly, but in fact credit card has been so accuratey priced to its risk that it's doing a lot better than CMO paper. And then there's the whole notion of dividing it all up into itty-bitty little pieces and packaging it with other itty-bitty little pieces of "collateralized" debt into funds that are sod to funds which sell them to funds. Kind of reinsurance. Which is great, until something like asbestos litigation comes along and wipes everyone out. I don't think mortgages are that hard to get. I got one recently no sweat. But I based the amount on my WORST year's income, after subtracting my cost of healthcare insurance, and borrowed a principal amount well under the liquidation value of my other assets. I think there are lots of people who could do the same thing. It's just that, as you rightly say, prices must adjust back to that level!
Wow, lowery, you post as long as I do. But I use paragraphs. :)
I agree with all of it, especially the failed "reinsurance" model because reinsurers know exactly what they're getting in automatic (it's calculated actuarily), and facultative goes through a lot of negotiations. That's the problem today: they can't forecast how those bonds will act in the future because a) no one knows what's in them; and b) there are no historical data for foreclosures based on these mortgage products.
I could get a mortgage no problem. But with it I couldn't afford to live as nicely as I currently do. So I'll wait. But seeing some of the newer rental buildings out there, last night I came to the emotional decision that if I never own again, I'm cool with that.
This is how I see things playing out.. this is just my opinion... nothing more, nothing less..
April-July 2008 -- Buyers and sellers wary.. a lot of price flatness and sitting on the sidelines.. inventories grow
August-October -- Sellers start to drop prices, 5-10%, depending on location, etc.
September-November Buyers start buying again, inventory drops back
December-January 2009 -- Seasonal lull, slight increase in inventory, slight additional drop in prices (1-3%)
Feb-April 2009 -- Economy recovers, Wall Streeters with (perhaps diminished) bonuses feel more confidence in spending bonuses.. inventory drops more.. prices start gradual climb
Maybe I'm nuts but I think that's the way it is going to play out. So my thinking is, no great risk in buying now, but sit tight for some modest short term depreciation.
i feel some abuse coming on...hold tight Will!
Just my opinion I posted on the LIC site- Just a little lazy at repeating the same rants FYI-
I was fortunate to estimate the beginning of the market problems back in Oct. I looked at a series of indicators that many people on real estate blogs claim could never happen to NYC and applied them to the economy's markets. FYI- the exact date of my moves was Oct. 16, 2007. I'm in no way saying that I made a ton of money. I just didn't lose any and made a little. I see many of the same problem that could result in major declines in the whole NYC real estate market. I'm not predicting the end of the world. What I'm saying is for me to go ahead and buy at these prices would mean that I ignore a ton of research that has saved me money in the past. I do think that forums like this prove one point. That is that their are different opinions and all should be heard. We all might just learn things that we didn't know yesterday. I have a saying "Some student may become teachers, All teachers were once students and Great teachers will always be students.
Will, what leads you to anticipate increased 2009 spending from Wall Streeters when their bonuses will be based on what the financial markets are experiencing now, which is, well, really bad?
It seems like two years with no bonus bounce will have a direct negative impact on prices (less demand) as well as an indirect negative impact (the loss of one of the biggest claims as to why NYC RE is indestructible - demand from Wall Streeters).
khd, I do my best to keep it sweet - usually.
2009 is going to be ABYSMAL. I work in I Banking and can tell you that all of my peers' expectations are that they're working for their salaries this year.
It's that bad. Wall Street has been paralyzed so far this year with no end in sight and M&A backlog is extremely light. Bonuses, if any, will be absolutely atrocious.
Not to mention, let's see what Paulson has up his sleeve and how that may affect compensation going forward.
Thanks Khd. I always brace myself when I post here.
Tenemental, as I stated, these are my projections, predictions, gut feelings, opinions. You can find data to go every which way and I am appreciative of that. Also, I share the view of Urbandigs and others that the national macro-economy and what's happening on Wall Street can't help but have a negative impact on the Manhattan real estate market. I think where we may part company is in terms of how deep and how long.
I think these Wall Streeters have a lot of money, but there's a crisis of confidence that may keep them on the sidelines until the clouds clear, which I think will be early to mid-2009. And as many here have mentioned, there are other industries in NYC that produce money and demand for real estate in addition to the IBs. Then there are the oft-cited "Manhattan is different" reasons. (foreign investment, center of the world, limited to 22 sq. miles, etc.)
But I'll tell you what really makes me think things won't go down much: September 11, 2001. I had just moved to NYC and frankly, I expected the RE market to crash. Two planes crashing into the center of the world's financial system were a pretty big shock. I recall companies abandoning Manhattan in droves, moving out to NJ, Connecticut and even Kansas (not to mention India and China).
Yeah, I wouldn't have touched a property with a ten foot pole. I was skittish about buying for years. But the market recovered, was resilient and accelerated in appreciation.
So I mention all this to (1) make the general point about how resilient this market is, and (2) to make the point that Sept. 11 may have been a major reason the market did not appreciate even more -- potential buyers like me stayed on the sidelines for longer, maybe not smart but I think understandable. I have seen data that shows that Manhattan costs are far less than other international cities. And I think the mortifying attacks of Sept. 11 had a lot to do with that. I think we moved past that around 2004-05, but now we have a new crisis of confidence, and my projection is that it will lift in early to mid-2009, with some, but not a lot of median price depreciation.
Finally, I think it is still a good market for a longer term purchase since prices are soft and there's a lot of negotiating room. You might see a few points of depreciation in the next year, but you may not have to wait to long for brighter days.
Our best days are ahead of us.
Oh wow, now even poorishlady is going to attack me for quoting "him" again. :-)
M&A Bankers Suffer 35% Drop in Fees as Deals Dry Up From Record
By Ambereen Choudhury
March 31 (Bloomberg) -- Mergers and acquisitions bankers suffered a 35 percent drop in fees during the first quarter, just weeks after cashing bonuses from a record year.
This says it all:
New York City Real Estate Market Slows as Wall Street Cuts Jobs
By Sharon L. Lynch
March 31 (Bloomberg) -- New York City's residential real estate market is showing the first signs of fallout as U.S. banks and securities firms cut the most jobs in seven years.
Manhattan apartment sales fell in January and February from a year earlier and new properties came to the market at the fastest pace since at least 2000, according to data from New York-based real estate appraiser Miller Samuel Inc. Transactions slid 6.4 percent to 3,250, while the number of condominiums, co- operatives and townhouses for sale at the end of last month climbed to 6,225, 15 percent more than at the start of the year.
Sorry for the duplicate posts.. not sure why that happened.
Steve, thanks for the Bloomberg article. I agree with the general trend, but it is interesting that the report notes that prices are still going up.
Guy/Gals it's not just the wallstreet bonuses that are going to drive the market down. Credit as we know it has change for this generation. The market was fueled in the past years by people who should of never been able to get loans. And yes I even mean people in NYC. Have we forgotten how many people were allowed to lie about their incomes and put 5% down and get interest only loans. I think that people are ignoring the fundamentals. You are talking about a market that has been artificially inflated throughout the world by people who should of never been given billions of dollars in the first place. Going forward the demand will be significantly less. Its the lack of credit that will drive the NYC real estate market down. The average price of a condo in Manhattan is $1.3M. That means your 20% down is $260,000. You need to quafify for a loan just over $1M. Its these loan that doen't exists any more without an income that supports that monthly payment.At 6% that $6,000 month and if add the CC could be as much as $7500-8000 a month. Thats just to have a roof over your head. Now factor all your other bills and you see why the banks have just about closed the books. At $8,000 a month you are looking at $98,000 a year and you haven't even eaten yet. You have to undestand the psychie of the bank CEO's. They have just about all been replaced by new guys and the last thing they are going to do is loan money. This is what's going to drive the real estate market down. Don't ignore the signs and think that this is just going to blow over. Remember waiting means nothing. Buying now could mean the lose of hundreds of thousands in the next few months. Just my analysis. Sorry if it not what you want to hear but it's the truth.
This article on the weaking NYC real estate market made Bloomberg top stories today.
It always starts slow and snow balls from there. This is just alittle tase of what's to come. Hold on it going to get rough.
Kids, there are lots of GREAT new rental bldgs in prime areas these days. Rent the place you LOVE, and take the difference between the (sinking) rent and the whopping mortgage interest, real estate taxes, common charges and closing costs, and save it. If the ride to the bottom is long and painful, cash is king. If there's a short, light blip, cash is still king. It's a safer bet than jumping into this condo/coop market at the crest of a wave you can't see the other side of. And if you decide to move to a different home, it's much easier than selling property in a market that is going to be either choppy, soft, "uncertain" or just plain bad.
lowery-Amen- My arguement is exactly the same. Greater risk to the downside than up........
Will said: "I think these Wall Streeters have a lot of money, but there's a crisis of confidence that may keep them on the sidelines until the clouds clear, which I think will be early to mid-2009."
My point on the subject of Wall Streeters boosting NYC real estate is very simple. Even if the clouds do clear in early to mid-2009 (which sounds like a very-best-case scenario) it won't be reflected in their bonuses until 2010.
Unless, Will, your theory is that most Wall Streeters are hoarding a lot of money and will be willing to spend it on RE in 09 despite two consecutive years of weak bonuses. I realize this thread is open to opinions, gut instincts, etc., so I will just respectfully offer that on that last theory I strongly disagree.
Not that wallstreet individuals are hoarding money, the banks themselves are not lending it in order to boast the cash reserves.Individual wallstreeters alsway love above their means just like most people. The uncertainty of the market is awake up call to all those who still have jobs.
As someone pointed out a few months ago, even if someone has enough money to move on up, they may have to sell the studio or one bedroom to the newish financial type to progress to the next unit. There may not be many newish ones with the wherewithal or inclination to buy those units.
We also have a lot of baby boomers retiring soon. Many of them bought at very low prices, and many will want/need to sell at retirement. They will obviously want to get the most for their apartments, but given the prices in retirement areas, even the Bay Area and Seattle (no state income taxes, ala Florida), they may feel comfortable undercutting the market to get the sale.
Plus, as I have said before, this city has seriously overbuilt the family-sized apartment. Retiring baby boomers will soon be releasing their nearly-empty 2-3 bedrooms, and the building is just crazy. Still (trying to catch that 421-a abatement). We don't have enough schools, not in the neighborhoods with the highest prices. Bloomberg did negotiate for a few, but not nearly enough, and now there's NO money to build more.
Sorry, this thread must die, just like the real-estate market in Manhattan. See the thread on the Bloomberg article: the worst is yet to come.
oh my god, I didn't realize that SteveF has been painfully wrong for seventeen months now!
Oh my lord, he's been claiming the same story for a year and a half!
Didn't read the thread, but my opinion is one more step down. If prices are 15-20% off-peak now, they'll drop another 10-15% at least.
Sellers are riding high on the surge in spring activity, but fall will cool their jets when they realize that all the eager-beaver buyers already bought. There's just no pool of money big and broad enough to re-light the fire under NYC real estate. Bottom is at least another 1-2 years away.
It's interesting to look back at the quarterly Miller Samuel Manhattan real estate prices from 1Q, 1989 to about 1Q, 1997. The decline generally continued for some time and then bounced around quite a lot on a quarterly basis until a tipping point around 1997.
I think we will see another 20% decline by the end of 2010 after which Manhattan real estate largely flatlines for a good number of years.
Huge shadow inventory hangs over the market while NYC unemployment flirts with 10%. Price-to-rent ratios need to get much closer to 12X (for a "gross" capitalization rate of ~8%). Commerical apartment buildings have already corrected dramatically but owner-occupied residential still has a good ways further to correct.
Could someone please explain the "price-to-rent ratios?" For example, if the apartment I'm renting costs $4900. per month, and the equivalent apartment to purchase would be somewhere between $1.5 and $1.75 million in the current market, how do I figure the ratio? Just wondering, though it seems right now that renting is a much better deal.
Well, princess, you first have to anualize your rent by multiplying it by 12.
Then take your apartment market price and divide by the annual rent.
In your example the price-to-rent ratio would be very high.
This thread is painful to read after having forgotten it.
I do remember on another thread saying that, well, this isn't a crash yet, because I don't see stalled construction projects who've run out of financing and haven't sold enough unbuilt units, and I'm not seeing new condos converted to rentals.
Of course, that is exactly what is going on now. So it's 17 months later..... rents are declining, purchase prices have come down, but ads don't reflect the reality because landlords and sellers are still asking for more than they're getting. Unemployment is as high as it was in the last RE crash, but - stop the presses - 'THE RECESSION IS OVER!' My prediction is that whatever prediction I will make will come true at the wrong time for it to be of any value, and that one way or another everyone will live happily ever after, and that Steve H. will look at 2-brms in Chelsea for $700,000 but they won't be what he wants. Rents are not going up within the next 10 months, but who knows? Maybe fall 2010 will bring another influx.
If you stick to the same argument at some point even opposing views will each have their turn to be right.
lowery so true. some of the old threads are painful, but some of the new ones are also. i'm starting to come around to UD's conclusion that they will be successful at keeping everything from collapsing a bit longer. the attempts are kind of awesome, really, considering they have nothing with which to finance them. wait, they do. debt and our future.
aboutready, the debt thing is no joke - does anyone remember Warren Buffett's parable of two neighboring islands, one of them peopled by a tribe called the Sprendthrifts and the other one occupied by ..... whatever? I have this creepy feeling that now we've reached a point of no return, that we're creating more debt to cure the problem of too much debt, etc., etc.
i believe in stimulus, and i just can't stomach this. i want to retch, almost literally. stimulus just to keep a broken system from being fixed is horrifying to me. clunkers, refrigerators, jr.'s 401k, off sheet this, off sheet that, MBS, CMBS. it's all just a load of BS.
i got a call from the DNC the other day, asking for money so that they could promote the health care plan. i'm afraid i shared some of my views with her. and nationalized health care is one of my main causes. if you can't get me to donate money for it, you're in trouble.
"cash for clunkers" sets a new low - don't know how much lower we can go than this
the husband and i had a nice brunch (daughter is at one of those 10-room duplexes. i really like the parents). he can be very amusing. he said his industry is down 15-20% generally, he thinks the administration should start loans for lawyers. upgrade your attorney and a portion of the fee will be paid.
or the 401k initiative? how about bills for beth israel. pick the hospital you wish, and the administration will start paying them now, just to ensure that they are alive when you need to remain alive.
Well, I've heard hairdressers' business is off. Why not grants to pay for people to have their hair cut and dyed and trimmed, and their toenails trimmed, on a more regular basis? The Take A Haircut On Us Program By Uncle Same?
Well I'm glad that's over.
Back to gett'in rich buying residential real estate!
Interesting thing is how difficult prediction is, especially when it's about the future. Some people sold, only to buy back in, others saw collapse, but failed to see take into account the government's ability to kick the can down the road at the expense of future growth, and I don't see that anybody predicted the seemingly tight supply we are seeing now or that people would continue to buy in a market that is seemingly expensive on a buy to rent ratio or that Rich foreigners would wish to take money out of Russia, China or Europe to buy that Manhattan condo.
Funny. There is wealthy destruction happening around the world including the us and you still think RE is going up. Lol too funny