Impact of a Manhattan Luxury Housing Crash/Decline

We are really interested in seeing what others on this board think. As hopeful buyers that have been touring new development for the last 6 months, we definitely notice that places have been sitting for a year or more and have very high monthly carrying costs as it is. We are tempted to put an offer on a few places at 20% below ask and staying firm. When we talk to brokers about this, they seem dismissive that the market is turning.

Something else to account for: Rents are dropping and there is a lot of new rental inventory hitting the market in BK. We are tempted to just rent it out at least a year or two and wait till the prices come down.

I think the definition in terms of price per sq ft is better benchmark than $3mm. There are >2500 per sq ft properties and there are less than $2000 per sq ft properties. Do not think anything substantial (more than 5%) is happening to condo properties in prime areas priced $1500-1800 per sq f (fully renovated, no special view but good light).

Some point of time, the buyers on the side line will realize this if economy keeps doing fine. For recession, all assets will naturally see a price correction.

Some examples:
Sold in three months. Magic is less than $2k per sq ft in prime area nicely finished in the last 5-10 years.
http://streeteasy.com/sale/1240578
http://streeteasy.com/sale/1255986

http://streeteasy.com/sale/1255986
http://streeteasy.com/sale/1230156

I can keep going.
http://streeteasy.com/sale/1250516

http://streeteasy.com/sale/1245934

I think luxury is typically defined, at least here in NYC, as prices over $10 million

300, my sense is that your sentiments for the market may be very optimistic. I think you are probably right about the sub-$2,000 market staying rather strong in the short-term but I also believe we are probably at the very beginning of a down cycle which almost always starts with excess in new construction inventory, then reduced asking prices, then slower sales absorption and ultimately lower prices.

You are also right that if the economy stays strong, the resi market will settle at a price point not too far from where it is now. But why should we think the economy will stay strong when its soon to become the second-longest expansion in U.S. history going back to 1854 according to Goldman Sachs. Excess inventory of new luxury condos apartments may be the least of our worries.

Pessimists on StreetEasy blogs have notoriously been wrong but its not hard for me to see a recession on the horizon so I think investors should start thinking about reducing their exposure.

The hackneyed term luxury is a bit subjective in our industry, unfortunately. Some consider it $4M and above (http://olshan.com/marketreport.php) while others consider it $6M and above. A definition I can relate to is top 10% of all transactions in the market as per Jonathan Miller. I think PPSF is another fine method. Regardless of the definition, I view the market from an optimistic standpoint as well. $2-$3M has always been a sweet spot for resales. Generally speaking, it usually attracts a more sophisticated and serious buyer given the PPSF is reasonable as related to comps. Higher end properties ($4-$6M and above) have a larger exposure during a market downturn. Case in point - 2016's market. In all, obviously there is no full proof plan to avoid risk nor a crystal ball to predict the future but one can mitigate risk and exposure by staying in the above soft spot.

At some point you are going to see a correction. I can't tell you if that's going to be 6 months from now or 6 years, but in my opinion whenever it does happen it won't be some small amount. Generally in NYC either everyone wants to buy or no one want to buy and very little in between. Once people stop buying, you lose major sections of the market (like if investors stop buying condo because there's a 2% cash on cash return, so they were all buying on the speculation of appreciation. They don't start buying again because of minor price drops making the cash on cash return more palatable because they were not buying based on that in the first place. They are on the sidelines until the market starts going back up again or until prices drop until there is a substantial cash on cash return - i.e. 50% market drop).

To get a lot of people who have been sitting on the sidelines, or will be sitting on the sidelines if the market starts to drop, I think you will need to see a market correction in the 35% to 50% range.

ximon, Recession is a valid view but in this cycle may be much longer as we just have not has the growth. Check how long Australia current growth cycle has existed. Of course, we may have a geo-political crisis triggering global recession. If some one really has a strong view on recession, they should pull out all money from stock market.

30, People want to live in the city and have children. Both husband and wife in high paid professional jobs and they can not afford to spend time commuting. These are the buyers in sub $1800-2000 fully-finished market.

Karan, $ price point is for masses as it gets media attention and makes for nice entertainment. $/psft is the most meaningful and how real buyers think.

Sorry for the typos.

On recession, I wonder how many people are bearish on NYC real estate sub $2k prime and have significant money invested in stock market via 401k and regular accounts. They also have bonds which arguably is a bigger bubble than both stocks and NYC sub $2k prime real estate.

Ximon, If you do not mind sharing, do you still have a lot of stocks?

300, yes I have mutual fund investments which are part of my retirement strategy. No point in liquidating any of it as I can afford to hold them especially since they are not leveraged.

Housing is another matter as the market is far less liquid (therefore riskier) and there are considerably higher carrying costs especially if you use financing.

Every housing cycle I remember ended when public sentiment felt prices had peaked. Today, there is already plenty of evidence of a peak - increasing interest rates, less foreign investment, too much supply (in some sectors), less speculation.

And to your other point, yes, we will always have cycles and one can never be sure when a cycle has peaked. I'm simply saying that most evidence suggest we are a lot closer to the peak than the bottom which should concern any investor. Few people are speculating in residential real estate anymore.

And, yes there will always be demand for housing in Manhattan especially for relocation. But it would be interesting to measure how many New Yorkers are trading up in this market. The smart money should be shorting resi not doubling down.

If your strategy is long-term and your finances are stable, one should not worry too much about the market. But lots of people get caught in a bind when they are forced to sell in a down market for variety of economic and non-economic reasons. That starts the downward spiral.

Thank you for your thoughts Ximon. I have below 25% exposure in stocks and bonds as I prefer real estate exposure - and I know a thing or two about diversification. Best way to short bonds is to find a property you like to live in or at good value and take a mortgage.

"30, People want to live in the city and have children. Both husband and wife in high paid professional jobs and they can not afford to spend time commuting. These are the buyers in sub $1800-2000 fully-finished market. "

And how much are these couples earning? Let's say they are are bring in $250,000 a year (which just puts them in the top 5% of NY incomes). You they want to have kids, so they'll need a 3 BR (or more?). putting down $500,000 (which for a lot of people still isn't doing, but...) how much can they afford? $1.2 million? How much would prices have to come down for such a couple to jump in?

Or if you're talking about couples who are making $500,000 a year, how many of those do think there are? And if rental price keep going down (in terms of real numbers) do you think they will buy a bottom of the barrel 3 bedroom condo rather than renting a high luxury unit if the promise of appreciation disappears? would you put down $1.5 million and spent $25,000 a month to buy this:
http://streeteasy.com/sale/1088240

rather than renting this putting $0 down and spending half that a month for this:
http://streeteasy.com/building/100-11-avenue-new_york/8a

(Note in the above example you need to make about $500,000 a year to afford the rental and about $1,000,000 a year to afford the sale).

30, There are plenty of $500k plus couples and independently wealthy people. At 500k, you will not spend more than 8k on rent or live in a new development which in my opinion are 10-20% overprices. Who do you think bought the links I provided. No one wants to be kicked out every two years from a rental.

This is what a $500k couple could buy and in my opinion could afford. Put 30% down. Get a 5/1 interest only mortgage at sub 3% and have less than $8k payments.

http://streeteasy.com/building/118-east-60-street-new_york/24h

30,
Why is some one paying 10k for this in a must worse location but renovated. $150k will get 118 east 60th to this condition as at the end of day these are rental finishes.
http://www.relatedrentals.com/apartment-rentals/new-york-city/upper-east-side/the-easton/available-apartments/2-bedrooms-2-baths-29524

30, New development price increase?? Is that correct?
http://streeteasy.com/complex/gramercy-square

300, I do not think it will require a "geo-political crisis triggering global recession" to crash the resi market in NYC. In the past, it has taken far less. But one does indeed wonder in what asset classes one should invest. Stocks, bonds, real estate all seem on a bubble. Maybe move to cashand wait? Any other ideas should be appreciated. Personally I am looking at real estate investments overseas. Portugal, Spain, and Ireland seem to be on the upturn. Of course, all bets are off if there is indeed a global crash.

30 yrs, is a 35-50% decline in prices a correction or a crash? I would not want to be over-invested in real estate either way but happy to be on the sidelines and sweep in when the market bottoms out.

That kind of financing or transaction at 118 east 60th will not likely work with the board. Just sayin.

@ximon Agree! All it takes are for investment / speculative buyers to believe that prices will not go up and that property is not worth the risk & transaction cost. When that category of buyer exits the market, you are left with primary residence or cash flow based buyers who, as 300 pointed out, have a much lower price target for a purchase to make sense.

Yes, NY. Add to that issues like capital controls for funds coming out of China and the possibility of a reduction/elimination of the mortgage interest deduction. Still lots of demand in the market but as you say maybe not the kind that will keep prices at current levels.

"30, New development price increase?? Is that correct?
http://streeteasy.com/complex/gramercy-square"

How many units out of 223 have sold in the 1 year that project has been on the market? How many have sold since the price increase?

“This is what a $500k couple could buy and in my opinion could afford. Put 30% down. Get a 5/1 interest only mortgage at sub 3% and have less than $8k payments.
http://streeteasy.com/building/118-east-60-street-new_york/24h“

http://streeteasy.com/talk/discussion/15676-building-at-118-east-60th-street

Would YOU buy in that building?

https://therealdeal.com/2017/08/23/the-biggest-price-cuts-on-luxury-pads-2/
" But last week was particularly slow, with no contracts on pads asking $10 million or more, something that hasn’t happened since the week of Hurricane Sandy in 2012, according to the most recent Olshan report."

30, I had friends in that building and they had no issue with the board approvals while buying or selling.

This is the type of stuff which will go down 20%. 6000 sq ft building. Landmark will never approve 10000 sq ft advertised. Call it 7000 sq f with approvals. Needs everything which will cost $3mm plus a lack of use for 2 years ($1mm?). Jammed in between two big buildings.

http://streeteasy.com/building/471-west-end-avenue-manhattan/house

And this is the stuff which sells fast despite the low ceilings etc.

http://streeteasy.com/talk/discussion/42928-sale-at-255-west-85th-street-9a

But it sold fast at $1,285/SQ FT. when everything else comes in at that number they will sell fast too.

30, While it is prime location, property is certainly sub-prime as you yourself pointed out. I think the price is a little low but we have not seen the closing price. So who knows. I would have thought 1500 per sq ft is the cap for this type of property and 1300 is the floor. 1800 range I mentioned is for prime location nice everything.

I've enjoyed the different views, and hope to hear if/how thinking evolves. I will note that unsurprisingly the transaction volume for Manhattan luxury (as defined by the Olshan report as residential properties with a listing price at $4mm and above) has remained low. I expect that this will remain the case for at least one more week given the upcoming holiday weekend, and then I think we will start a stretch of time for the next three months which will be quite telling with respect to how strong or weak that market is.

Team M, I think it will remain slow till luxury new developments cut their prices and move some inventory. In the meantime, I think there are some deals to be had for buyers like the example I had posted at 225 West 89th. Then all the people at the side lines will come out and buy resale 5% higher. All bets off if the economy tanks as will be the case with other asset classes.

he problem with a lot of new luxury developments, like the 100 eleventh ave linked above, is that they have crappy layouts. much better layouts for families in older more affordable buildings.

1st_timer, I could not agree more. New development do have better light and view.

300 - time will tell. The one you posted at 225 West 89th wouldn't qualify for Luxury under the Olshan definition. I tend to think that more expensive properties are going to take a bigger hit in both the new development and resale. For a long time, these properties have had the high chance of appreciation built into the price - I think that is going to come out of the prices, and I think that in general the expensive properties are going to take a hit relative to expectations. There's just too much supply and expectations are shifting.
I also think that the variability of compensation for many people in NYC means that people will be more conservative in their purchasing decisions due to a fear of a downturn, even before the downturn comes.

TeamM, I agree with your analysis and worry most about seller expectations not being met leading to general negative perception of market leading to lower asking prices (we are already seeing this) and ultimately lower sales prices across the board.

I agree with the last several posts but will add that I think the main thing buoying prices for the last several years has been an "irrational exuberance" not really supported by much else. If you take that away I don't think you end up with prices being flat or a slight downturn, you go to where the numbers start to make sense, and in my eyes they don't make sense until they are significantly lower. And this is historically what has occurred.

I don't know why they lead with "Coming off a Labor Day holiday, you don’t normally expect a banner week in sales" because normally you DO expect that, but the Olshan Luxury report shows "that last week marked the 11th-straight week of sub-20 contracts signed, the weakest stretch since 2012."

I think the interesting question is what this will do to prices. It seems to me that the new developments will have little choice but to drop their prices fairly significantly in order to sell the vacant apartments - I don't know exactly what that cutoff is.

The resale market is more interesting in Manhattan. Some people essentially have to sell because of death, retirement, change in financial situations, etc., but my sense is that in Manhattan a large portion of these owners are very financially secure and could wait a very long time for the market to turn unless they are convinced that a new normal has been set for prices that will persist for a long time, or there is a better use for the cash (which many not be the case for many people given the state of the markets).

30, while I think prices are not exactly bargains, and maybe some "exuberance" I am not sure I agree with the "irrational" part. You have to evaluate NYC real estate relative to the alternatives and from that perspective I think the net yields (2-2.5%) you are seeing are pretty well priced relative to the other asset classes from treasuries to HY bond to stocks.

To be fair, I have adjusted down my expectations on an appropriate future discount rate - in other words, I have accepted that long-term interest rates are down significantly from before. If you asked me five years ago I would have used 5-6% as the appropriate LT risk-free rate. Now I am closer to 4-5%. No doubt that this has been a significant contributor to asset inflation across multiple asset classes including NYC real estate. And the adjustment in NYC real estate prices the last five years can largely be traced to this, IMO.

Is that "irrational" thinking? I don't think so. If you ask some of the most rational guys in the world - I am talking about folks like Warren Buffett and Howard Marks - they will point to the decline in the long-term discount rate as a reason why markets are not in "bubble" territory. It has taken me some time to come around to that sort of thinking but I think I am also there now.

My general view on demand for NYC real estate is that it is as strong as ever. While there may be a significant amount of supply hitting the market, IMO the demand curve is pretty flat. In other words, it won't take a significant price decline to attract marginal demand into NYC real estate. And unlike a decade ago, I think the sources of demand is more robust in that it is driven by high-paying jobs, desire for the premium urban experience etc. instead of passive foreign investors searching for "safe" yield.

Perhaps I am biased by my experience downtown but it is quite apparent how NYC's economy is now a lot more diversified than it was before, particularly with the influx of young entrepreneurs starting businesses. If you go to one of the WeWork or equivalents you'll see that new businesses are not originating solely in NYC's traditional bread-and-butter financial industries but a very wide variety of fields. NYC's economy is as diversified as it has ever been and its ability to attract talented individuals stronger than ever. Families are increasingly looking to stay in the city, trading off space for quality of life (especially as the NYC public schools have improved significantly in the last decade). This is driving a very robust source of demand that I expect to continue.

Certainly there is risk of some downturn but if you have a long-term view (of living in NYC) that really shouldn't matter in the long run. Trying to predict timing of a market correction or decline can be dangerous as well, in the same way that trying to invest with the expectation of speculative increases is dangerous.

Maklo - do you think those jobs being created can afford luxury housing in sufficient numbers to take up the inventory? The numbers continue to show that a very large amount of the luxury housing over the last few years was purchased by investors / foreign money - do you believe that's shifting? While it's very challenging to find reliable numbers on average income and to assess buying power, I don't see a major uptick in numbers that would support this. This is a buying population that needs significant money for a down payment (or to buy in cash) and significant reliable income to pay the mortgage if not bought in cash - that's not typical in start-up companies until an exit.

You mention the improvement of NYC public schools - assuming that's accurate and widely accepted to drive buying behavior, I question whether that's a driving factor in the luxury housing segment, which I believe might be more geared towards private schools.

What you are saying might be applicable to housing overall in Manhattan (although I have doubts as to that holding up too), but I do not see it applying to the luxury segment. Reasonable minds may differ and time will show who is right.

Maklo, Welcome back.

All depends on the definition of luxury. Team M is probably thinking about $ 5mm plus new development at $2500+ per sq ft or townhouses and Maklo is talking about sub 4mm and 1500-2000k per sq ft fully finished real estate.

I think apts priced at 5k per sq ft may come down 20-30 percent in addition what they have come down already. Still leaves them above 3.5k per square ft. Not much room to come down in less than 2k per sq ft fully finished in prime location. These prices keep creeping up but at a slow place.

TeamM,

Yes I think the new jobs being created are creating a more robust and diversified NYC economy.
TAMI jobs pay well, even for small companies. Average TAMI employee makes well over $100k/yr salary. In any sort of management position you are easily making $200k plus. Pair that with a pretty run-of-the-mill finance job and you've got a $500k/yr HH income. There are _tons_ of these types of households and I think they make up the bulk of the $2-3 million real estate market.

And you'd be surprised how many households who can afford $2 million+ apartments are sending their kids to public school if it is a good system. Especially elementary school level in a good district. And even if they are sending their kids to private school, it's not just private school households that go to (and thus attract) places like Trader Joe's and Whole Foods - you need a broad, diversified, relatively affluent community to make that happen.

Now to clarify I am talking about the broad market which I see as the sort of $1-2 psf segment. I don't have any clue about the $5k psf segment. To afford to pay that much for real estate you are almost certainly not relying on salaried income. So I agree with 300 that that ultra high end luxury segment is being driven by different dynamics to what I am talking about.

300, good to be back! Although TBF I wasn't as much away as I just didn't see a lot of interesting message board activity/topics for a while.

I think if you just look at Extell's current projects you can get a feeling for just how much the investor condo purchaser market has already receded. And up until recently that was about 40% of the market - not just ultra-luxury condos but across the board. The slightly over $1 million 1 BRs at 1 Manhattan square aren't selling either.

As far as real returns go, let's take an example:
http://streeteasy.com/building/100-united-nations-plaza-new_york/15d

Rents for about $3,700 and in the current market you can expect at least 1 month vacant and for the owner to pay the broker's fee so you will collect $37,000
annual cc+RET= $25,368

If you bought it for $900,000 that would be a return of about 1.3 percent.

https://therealdeal.com/2017/09/18/23-contracts-signed-at-4m-and-above-olshan-2/

The number of luxury contracts signed last week jumped to above 20 for the first time in nearly three months.

30. Good example. It is not renovated. Probably will trade at $800k. Still 1.5% yield.

Correct that I was not thinking of a $2-3mm as being the luxury segment (as crazy as that sounds - I think that's the case in Manhattan). I do note that buying an apt at that price based upon a HH income of $500k sounds very aggressive to me, and if that's a common occurrence it makes me wonder what happens to that segment of the market if there's an economic downturn.

One of the parts of the Manhattan housing market that's interesting (and hard to predict in my view) is that it seems to be held by generally wealthy folks such that they can wait out economic downturns such that prices don't necessarily have to drop as much in downturns (and sales volumes will instead drop). Perhaps you're identifying an shift in that dynamic.

30,

Thanks for bringing up that example. Rental yields are always going to be low. And that is why investor returns are always going to be more risky.

I tend to focus on NYC real estate from an owner's perspective which I think is a lot more stable and has a much flatter demand curve. And in that scenario, you have to factor in the tax benefits from property taxes and financing for your typical salaried worker. Under this scenario ($800,000 purchase price, 75% LTV mortgage at 3.25% and 55% deductible CC, 40% marginal tax rate), I get to an owner equivalent current yield a little over 7%, almost entirely driven by $14k in tax shields. Not bad especially considering that the yield should index to inflation over the long run. Compare this to a 2-3% dividend yield in the stock market or a 3-4% LT interest rate on non-inflation indexed treasuries. Or a 6% yield on Iraqi government bonds (!).

Yeah I agree $500k HH income buying a $2 million apartment is aggressive. Then again there are a ton of these households of every shape and variety out there. Two decades ago, I think the majority of these households were finance households in NYC but today you see a lot of finance PLUS other another industry household or even non-finance single-earner households making well in excess of that amount. Also folks who have saved up a couple million by their late 30s / early 40s are also fairly common these days.

And people with parent who will put down payment and have fully paid for college.

maklo1421,
You're mixing apples and oranges in that example. You can't talk about an INVESTOR'S return and then run the numbers for an owner's primary residence.

As far as "Rental yields are always going to be low" the richest guy I know started by buying small buildings in Park Slope for 2X RR. Up until 10 years ago anything under 8% return was considered risky. I don't know where this "always" comes from. In fact my point is that as soon as people start expecting historic returns on Real Estate (which has to happen the minute expectations of never ending appreciation disappear) you will have to see a significant price correction in the market before those people start to buy again.

30, Do you have any sources for condo yields/cap rates in Manhattan historically? Long terms rates have come down. To keep the discussion simple if one were to define "risk premium" as cap rates - 30y treasury yield, it would be interesting to see how much "risk premium" has come down. I suspect it has come down by 1-1.5 percent but not more. Just a hunch without any data to support it.

30, The Manhattan doorman rental building cap rate will be a close substitute if you have it historically.

Essentially updated graph E in below.
http://masseyknakal.com/chairman/634043355622750061.pdf

I think the point here is that residential real estate is no longer appropriately priced for the risk. Perhaps this is because many buyers in today's markets have not been through a downturn and only see prices moving in one direction? Or sadly, they listen only to agents whose commissions depend on convincing you to buy. How many luxury buyer brokers are telling their clients that the market is not strong? If you have lived through a housing decline, you know that things can get ugly pretty quickly, not just in terms of prices but in one's ability to afford the carrying costs. There are so many ways you can get crushed. Holding long-term is the now the only sensible strategy, especially if its leveraged, as long as you can continue to carry.

Looking at the StreetEasy Price Index for Midtown, any irrational exuberance in the market was baked in from 1999 to 2005. Appreciation has been very modest since then unless you bought at the bottom of the downcycle in 2010-2011.

Don't want to quibble about which indexes are more accurate but S&P/Case Shuller shows Manhattan condo prices have increased on a compounded basis about 6.5% per year since Feb. 2012, compared to an inflation rate that has averaged less than 2% over the same time period. This seems a case of mild irrational exuberance which does not appear to be sustainable for very long.

ximon/30 years etc..guys u r trying to time the market which is a definite and classic no no. If u r ready to purchase and can afford your desired apt then the time to buy is now. Real estate is like a sloth...slow steady price appreciation. Even in an economic downturn Manhattan real estate is pretty much immune as it showed during the credit crisis(no coop condo boards approving subprime mortgages and half cash transactions). Also many sellers looking to sell during economic uncertainty just pull their listings and wait for that recession/uncertainty to clear up. Your safest surest bet in real estate is Manhattan. so relax purchase and enjoy your residence. Cheers!

Ximon, Believe Shiller index is only single family and does not include condos unless they have a new one.

30, we are talking about price support and if the majority of housing stock and transactions are being supported by owners vs. investors then that it was really matters.

That is certainly how I look at my place when I bought. I considered purchasing my apartment vs. renting and concluded the all-in yield factoring tax benefits and expected future rental increases was very good for the risk I was taking (basically betting that my family would get use out of the apartment for at least ten years).

Investors come and go and certainly can have an effect on short or even medium-term house pricing. But when I referred to a "relatively flat demand curve", I am referring to demand from owners that are driven by a desire to live or work in the city.

My dad bought Coca Cola in the 80s when it was trading at 8x earnings. Now it is trading at >30x earnings. Does that mean it is on the verge of collapse once investor expectations go back to where they were 30 years ago?

P.S. "Rental yields are always going to be low" should have been written "Rental yields are always going to be lowER" (compared to owner yield).

300, S&P/Shiller does indeed have a new index of condos that appears to have started in 2013. I do apologize, however, as it appears to be for all of NYC so does take into account high appreciation in Brooklyn, etc. Like SE, it is based on resales so should not be impacted by new luxury condo development over the time period. Regardless of the index, however, Manhattan prices have clearly risen much higher than the general rate of inflation. Is this sustainable? Probably not, in my judgement.

SteveFR, timing the market is indeed a bad idea but I think it could be a terrible mistake to think Manhattan real estate is immune from recessions or that everyone can or even should ride out a recession by not selling. Slow steady appreciation is what you expect over the long term which is the best reason to buy real estate but that is not the story of short term appreciation/depreciation in New York.

https://ycharts.com/indicators/caseshiller_condominium_price_index_new_york

Thank you Ximon.

SteveFR, you are also discounting the fact that other investment options are available. In my investment portfolio, I can net 8-10% after taxes in multifamily deals outside of NY and spread that risk around the country. $1m spread in 10 areas earning $100k per year, which pays for an $8k per month rental, may be better right now than buying an apartment that would rent for $8k per month (likely much more than $1m and accounting for carrying costs, could be double).

anonbk, 8-10% in multifamily? Where for a new investment? I do not see much above 6-7% nationwide after necessary cap ex, professional management, vacancy etc for a multifamily.

"we are talking about price support and if the majority of housing stock and transactions are being supported by owners vs. investors then that it was really matters."
When you have 40% of transactions coming from investors, if that number drops significantly (which it appears to already have, and seems to be continuing to do so) then it is almost impossible for that one fact alone not to impact prices.

" "Rental yields are always going to be low" should have been written "Rental yields are always going to be lowER" (compared to owner yield)."

That's kind of a tautology, isn't it?

"My dad bought Coca Cola in the 80s when it was trading at 8x earnings. Now it is trading at >30x earnings. Does that mean it is on the verge of collapse once investor expectations go back to where they were 30 years ago?"

IF that happens, then actually yes. However I think the changes of RE investors expecting a historic (or closer to historic) rate of return is VERY much greater,

"That's kind of a tautology, isn't it?" No I think saying they are always going to be "low" (compared to ??) vs. "lower" (compared to owner yield) have two distinct meanings.

"IF that happens, then actually yes. However I think the changes of RE investors expecting a historic (or closer to historic) rate of return is VERY much greater"

Why?

"When you have 40% of transactions coming from investors"

If the real NYC housing demand curve is flat (both ways) then this may not necessarily result in the price crash you are predicting. Might have some liquidity effects, especially in certain segments, but it doesn't necessarily have a large effect on price.

Using the StreetEasy index for Manhattan, if you choose a starting point of February 2012 you get about a 5% annual growth rate. If you choose November 2007 you get 1%.
Does this indicate a modern bubble?
If you go back to 1995 you get a 6% growth rate. A lot has changed in Manhattan since 1995, almost all of it making real estate more valuable. How much of that 6% is due to these factors?

Current NYC RE bubble is neighborhood specific. Investment speculation drove up low price neighborhoods and ignored fully priced neighborhoods (i.e. UWS, UES, Tribeca, etc) that had increased in value during 2000 - 2007 period.

Using the dates you chose for Greenpoint:

10% IRR since Feb 2012
4.5% IRR since Nov 2017
11% IRR since Jan 2000 (earliest available)

https://www.trulia.com/real_estate/Greenpoint-Brooklyn/5125/market-trends/

Usually value-add deals in the southeast and midwest with experienced managers running syndicate deals. Often with refinancing, you can juice those returns as well but that depends on where the market will be when the building is stabilized.

Makes sense if the buildIng is not fully stabilized. 6-7% I mentioned is for stabilized. Thank you.

Three things:

1. Typo and meant "Nov 2007" not "Nov 2017"
2. These areas have undergone structural change in the past fifteen years that has represented a real increased in valuation. Unknown how much or even if valuation has overshot these structural changes
3. If Tr*mp instigates nuclear war, RE in tier 1 cities will drop to zero

Many of the Private Investor LLC's of bundled properties do give better yields; but they are like roach motels. Your money can flow in; but there are tons of restrictions re: getting it out.

Eriegel, You are completely right about locking in the money for a long time but yields are indeed roughly double of what you can get in Manhattan using a similar strategy.

"If the real NYC housing demand curve is flat (both ways) then this may not necessarily result in the price crash you are predicting."

But the demand curve isn't flat and it never has been. It tends to get flatter in booms like we have seen over the last decade, but once the market starts going down you tend to see price inelasticity increase and it takes large price drops to get more demand to kick in.

30 - I'm curious as to what you think will actually happen to prices in the luxury sector? Do you think they'll actually crash across the whole $4mm+ segment? Do you think that re-sales will generally just diminish in volume while new developments will crash? Any thoughts on when?

When is always difficult. As John Maynard Keynes said "“The market can stay irrational longer than you can stay solvent.” As far as resales, take a look at what is happening in the very top end of the Coop market already: every week you see some story about some unit which just came back on the market which had been asking $X, didn't sell, and is now back on the market at 1/2X. Ironically I was JUST talking about this with the guy who owns the office where I keep my desk. We agree that some of it is that the people who used to gauge their prestige by what Coop they could get into now gauge it by buying into whatever the most expensive Condo is. There really has been a sea change in Coops Vs. Condos. It used to be 90+% of the market was Coops and now I think it's close to 50/50. You also have a significant increase in the number of single families from all the conversions back to single family from houses built as single family but divided into multi family over 100 years.

As far as resales vs "new" do you think when someone is looking at a building like ONE57 they care much whether the unit is from Extell or someone reselling? I don't. There is so much product built within the last 10 years where I think there is little difference between units being resold and those from sponsors. I don't see how the "new development" market could tank and not take the resale market with it. Like back in the 1990's when I was selling TON of foreclosures and when I mention a price something sold at someone would reply "but that was a foreclosure". Who cares? When there are enough of them they make the market. similarly if the new developments totally tank, people aren't going to start paying more for resales simply because they aren't new. Why would they? And yes I understand your point is that people just won't sell, but in NY if we have the rental market tank (which there is plenty of evidence pointing to) followed by the sales market, people will start getting foreclosed on and then that will drive prices. The biggest difference is that in the past few years there have been many more all cash deals than there used to be, which would temper the foreclosure rate. What I don't have any figures on is the number of people who bought recently as all cash and then later took out financing.

30 - interesting insight. Thank you.

Good insights, 30 and I agree with most of what you are saying. However, I would say that there is a difference between first offerings and resales due to the fact that many newly constructed units are sold to first-time buyers. So, instead of two sales (selling one unit while at the same time buying another), there is often only one. An oversupply of new construction takes time to be absorbed so a softness is often automatically built into this segment of the market. Once these units are sold, however, I agree they will become just part of the overall luxury segment.

Also, in my experience with foreign buyers, I see a preference for first offerings due to a perception of prestige. In China, many newly constructed units are sold to investors and never occupied so they can still be considered "new". Any unit that has been occupied for any period of time, no matter when built, is considered "second-hand" and therefore less desirable. That is one reason why many developers are doing road shows in Asia. Another reason may be that such offshore buyers may not be very knowledgable about the current market conditions here.

As for all-cash deals, they are common but you and I suspect, there may be some hidden form of debt, either as a later mortgage or some form of offshore borrowing. It is a myth that foreign buyers do not like debt. We just don't always see it. So, another risk to our market may be some kind of financial or banking crisis overseas. Wasn't this part of what happened with the Japanese experience here in the 1980's?

ximon,

I agree with what you are saying, but will also add that it's pretty clear the bloom in off the rose when it comes to Asian buyers. I could point out many examples, but I think the best might be 1 Manhattan Sq where Extell marketed the project explosively in Asia for 6 months before opening a sales office in NY. shortly after opening the office they announced they had 80 units in contract (only 10% of the project), in March announced 100 sales (so it would seem like only 20 more in 4 months) and nothing since.

I disagree about the amount of new development sales being to "first time buyers", but do think that is a moot point because while not first time buyers, they are investors, second home, etc. so the point that there is only one sale remains.

Also, to clarify my meaning - the people who DO care about buying a first offering are disappearing from the market as purchasers (I think this is clear from the slowdown in overall new development purchases) and the people who are left in the market don't. So while you are correct I think it becomes a distinction without a difference.

"but once the market starts going down you tend to see price inelasticity increase and it takes large price drops to get more demand to kick in."

How large though?

My point is that if the real NYC economy is significantly stronger, more diversified and quality of life better than ever, then demand for NYC real estate is buoyed by strong fundamentals. So just because it happened in the past, doesn't mean the future is the same. The NYC economy is very different from how it was ten years ago, much less twenty.

Just to throw another factor in here... Most of the new Luxury Rental inventory is RENT STABILIZED meaning 0-2% annual rent increases for that original couple making $500k a year for the next 25 years+. (With two months of free rent to start). Of course the two months of free rent is so they can get in one 10% increase before having rent gains governed by the guidelines board.

2 months free increase will be equivalent to 16.6% increase. For 10k full rent you are paying $10k12/14 = $8570. In addition, no one will stay in a rental apartment for that long without personalization/ updates (if you are lucky the landlord will paint it for you every 10 years), job changes, life changes etc. In addition, they will try to pass on the cost increase which can be more than 2%.

But it's not necessarily about how strong the economy is, it's about the combination of oversupply and a sea change in demand. Real Estate is the only thing no one wants to buy when it's "on sale". You mark sweaters 50% off at Bloomingdale's and people are ready to slash each others throats to get one. Real Estate goes down by 10% and the buyers totally disappear. It's not a matter of the underlying financials. If it were almost no one would have been buying for the last 4 years already.

"It's not a matter of the underlying financials. If it were almost no one would have been buying for the last 4 years already."

Excellent comment - I wonder if part of the slowdown in the market is precisely because the buyers who are left are mostly rational people who won't buy unless the financials make sense.

The chart below does not show a major imbalance. Naturally, future inventory coming online a concern.
http://www.millersamuel.com/charts/manhattan-co-opcondo-listing-inventory-v-number-of-sales-index-1q01-100/

This one shows sales are strong. Ultra-luxury is where are the oversupply is.

http://www.millersamuel.com/charts/manhattan-co-opcondo-sales-new-development-v-resales/

The amount of supply coming online right now is tremendous. I have lived in NYC my entire life and I have never seen this level of development, maybe before the S&L crisis. Banks are lending and fueling the boom for now.

The level of speculation in the global markets today is just astonishing. Tech unicorn valuations, bitcoin, real estate, etfs & stock market. On what? Virtually stagnant wage growth in the US, industries being displaced by machines (AMZN effect and high paying finance jobs like HF), and little to no corporate revenue growth the past 5 years?

The NYC real estate comments to me is a deja vu to what I heard in 2007 - mid-august 2008. Recall, it only took 2 - 3 months for sentiment and employment to plummet and we all know what happened after.

I don't know when the tide turns or the particular catalyst (could be an exogenous risk or not) and I know fighting the fed has been a widow-maker trade the past 7 years. NYC real estate is incredibly correlated to the S&P 500. But to be buying real estate assets with 1.5 - 2% yield when QE is ending is not asymmetrical risk/reward investment. If you are starting a family and need a 2 bedroom in the UES so you can put him/her in PS 6, then fine. Otherwise there are no bargains to be had on the investment side.

Take a look at NYC commercial real estate. # of transactions have fallen off a cliff in YTD 2017. Foreign (china) buyers of trophy properties have virtually disappeared. Cap rates are off the lows seen in 2014 - 2015 of 3.5% - 4%. Sure, there are deals still being done for higher quality buildings but many are being done at cost basis from 3 - 4 years. Basically little price appreciation and before factoring in transfer costs and interest expense. I also shudder to think about the amount of residential and commercial supply that Hudson Yards will bring.

Having said all this, like many others, I could have made the same argument last year or the year before. No one really knows when the tide will turn, not even the so-called market prognosticators (who all stand to lose a lot of $ if it does, e.g. H. Marks, and others).

I also don't buy the whole long-term view argument when it comes to an investment property. Timing matters. Ask any developer about their business, and they will tell their portfolio is only as good as the price they paid for the land.

NYCRebubble, Nice comment. Timing indeed matters a lot if it is only investment. Commercial Real Estate in NYC is even more oversupplied than ultra-luxury new condos. Significant rise in long term interest rates (more than 1 percent in 10year; 25-50bps do not make much of a difference) is a major factor which will decide the fate of what happens to asset valuations in general.

NYCRebubble, great comment. Adding two new reports that caught my eye recently:

1. Foreclosures are as high as they have been since 2009: https://therealdeal.com/2017/10/06/nyc-foreclosures-at-highest-level-since-2009-report/

2. Luxury market just had its worst week of the year: https://www.mansionglobal.com/articles/75372-manhattan-s-luxury-market-has-worst-week-of-the-year