YoY: Studio -6%, 1BR -11%, 2BR -23%, 4 BR -49 (!!!)%

Question for statisticians: If "The luxury segment is defined as the top ten percent of co-op and condo sales", isn't the percentage YoY decline in the volume of luxury sales (in this case 16%) always exactly equal to the percentage YoY decline in total sales? Or is one volume figure calculated by number of sales and the other by total dollar turnover? That seems to be the only way the percentage declines can diverge.

The latter, or so I read Jonathan Miller. Top 10% of transactions.

i agree, the total dollar amount of sales generated by the top 10% of sales.

While we're being statisticians, note that these are declines in MEDIAN prices. While there certainly is an "apples are cheaper than apples" factor -- probably on the order of down 20-25% from a year ago -- there's also a huge "change in mix" factor as the upper end isn't trading, because there's been NO mortgage money out there.

I've now been waiting an effing month to get a client preapp from HSBC for a lousy million and a half, for heaven's sake.

Few things are moving in the $2mm plus market, and even fewer in the $5mm plus market, because basically the only things that are selling are selling for cash.

ali r.
{downtown broker}

front_porch - You've just identified the elephant in the room for Manhattan real estate values. So long as lenders demure on jumbos, or demand more down on uglier terms, mid-range values will continue to collapse. These lending choices (notwithstanding employment concerns and restricted-stock heavy salary mixes) are wiping out the population of eligible buyers. Long term, sellers may have to capitulate to somewhat artifically depressed values.

Oh I see. Bubble grows bc of cheap money and easy credit hurdles (just Ho hum $1.5mm mortgage - can you earn $1.5mm in 2 years after tax????) no more bubble bc still cheap money and slightly harder credit hurdle. I wonder what happens when no more cheap money and credit bar is raised further ? WTF r u talking about f- porsche?

"While we're being statisticians, note that these are declines in MEDIAN prices. While there certainly is an "apples are cheaper than apples" factor -- probably on the order of down 20-25% from a year ago -- there's also a huge "change in mix" factor as the upper end isn't trading, because there's been NO mortgage money out there."

Of course, the median psf fell as well, so that rationalization isn't going to get you too far....

Such a small room, and so many elephants in it.

Weren't there some predictions here awhile back that the price decline would go in the just opposite direction?

That the biggest percentage drops would be on studios and one-beds because there are so many of them, while bigger places, which are in general scarce supply, would see prices hold up better?

GG, recently, or further back? recently many have noted that the lower end market has been strengthened by the availability of cheap mortgages. i have finally been noticing real movement in the smaller units, but only for about a month or so.

So a "lousy" million and a half sounds like a preposterously low amount to have to wait so long for bank approval on? Take this as kindly as it is meant, fp: read the handwriting on that wall. Read it very carefully.

Low end units are being supported by lots of government support. $8,000 tax credit is meaningful at $400k. Ultra low rates only apply to conforming loans. Lower credit standards likewise apply to conforming loans. lower LTV ratios, etc. etc.

I might have been one of those who speculated that studios would plummet, because they did in the 1990 bust. So much so that lenders wouldn't write mortgages for those under a certain (considerable) size. I believe this was because anybody who could trade up out of a studio did, and there weren't enough junior people to fill the void.

I guess each downturn is a bit different ... or perhaps this one has many more scenes to go before the wrap party.

It was 500 square feet.

well, there is steve's down 50% number...

;-)

it's just the beginning! lol

I love how unreasonable it is for banks to take caution in lending $1.5mm to someone... FP - how much is that client earning annually if you don't mind me asking?

"Long term, sellers may have to capitulate to somewhat artifically depressed values."

Actually it was the peak values that were articifially inflated by absurdly easy lending, and the same leverage drove artificially high earnings per employee at second tier investment banks. Getting a $1.5mm loan is BACK TO NORMAL.

"I might have been one of those who speculated that studios would plummet, because they did in the 1990 bust. So much so that lenders wouldn't write mortgages for those under a certain (considerable) size. I believe this was because anybody who could trade up out of a studio did, and there weren't enough junior people to fill the void.

I guess each downturn is a bit different ... or perhaps this one has many more scenes to go before the wrap party."

I think the reason for this is largely because of what got built in the bubble preceding the bust. In the "421-a is ending, must build now!" construction boom, lots of buildings had studios and 1 brs. In the most current boom, there was a HUGE shift to building larger units. And not only larger units, but during this time, larger units were also selling for higher $PSF numbers than smaller units. I think that as such, there is much more downside pressure on the larger units than last time around. Also, what you had last time was a LOT of larg-ish Coops which were financially at least somewhat troubled, and most of those had lots of studios. Look at pretty much all of Tudor City as an example.

"Few things are moving in the $2mm plus market, and even fewer in the $5mm plus market, because basically the only things that are selling are selling for cash."

I think this is much more true in the Condo market than the Coop market: the above $5 million Coop market has historically been the highest percentage of all cash deals (with the most notable counter example being the extreme bust 1992-1993 studios at $20,000 or so).

"Long term, sellers may have to capitulate to somewhat artifically depressed values."

"Actually it was the peak values that were articifially inflated"

It's always both in any market, especially market which exhibit any "momentum". Things ALWAYS overshoot on the high end and on the low end. Markets always over correct.

The role easy money played in this cycle was unique. Always boom and bust but valuation took new heights in this boom because money had never been easier. Every market made by humans exhibits momentum. I mean when a Harvard grad can call a million and a half a snoozy mortgage clearly even the players closest don't understand what went on. Financing is when price to rents peaked almost twice as high as prior highs. Securitization changed standards. Only time will tell what million and a half mortages being tougher than layups will do.

Is why not is when obviously.

30yrs/Front_porch: Since the luxe coop market has the highest prevalence of all-cash deals, does a different mix of factors explain the low volume and sinking prices there? Tight credit can't be the main problem (although, as 30yrs has mentioned elsewhere, there has always been a certain amount of quiet borrowing in top coops).

Is the all-cash Lux market really the issue here? From entry level to $3mm/3bed apartments you need more cash and higher income to get it done. The rental decline remains roughly in line with the decline in values. How can this be stable?

"Is the all-cash Lux market really the issue here?"

I agree if you are intimating the answer to thaa question is "no". In so many ways that market doesn't spill over into other areas of the total market nearly as much as other submarkets have "cross contamination effects".

Right. The way I see it, fewer high rolling singles will be buying one beds. As that market struggles, the upgrade cash feeding the 2 market struggles....and so on and so on. All this said, I agree with a point you made in the past. If we hold, the buy buy mentality can survive. If fall is a 'push' then it really depends on what people get paid in January out of finance, how many are renters, and how many of those find this "discount" attractive. I can say from personal experience, buying means in some sense locking in a private school decision down the road...something I am much less cozy with today than I might have been in 2007. Further, the idea of buying today and being confident the price is higher in five years (if I want to move out) is also not there...Whereas in 2007 the momentum hadnt broken and rents were still rising.

Curiously, if you look at the following Miller Samuel Chart, the really high end (defined here as 4M+) has not seen that much of drop in total percentage (of a smaller total of sales) than has the $1M to $4M Manhattan properties.

http://www.millersamuel.com/charts/gallery-view.php?ViewNode=1168397931yhNzR&Record=10

Along the lines of if you have to ask how much it costs, you can't afford it, is there a corollary that implies that if you still have to ask how much it costs below $4M, you probably need a mortgage...

Nonetheless, the data implies that $4M+ deals are still getting done, but you're not seeing the extreme outliers in prices that you were, so total dollar volume is way down.

Picking up on Rhino's comments related to the rental versus the purchase markets, the two markets seemed strangely disconnected.

By my calculations residential real estate is trading at about a 3.5% cap rate.

Investors, by contrast, are going for (and getting) about a 7.0% cap rate for multi-family properties.

This makes no sense to me. I really do expect that the residential (ownership) market will move more and more in line with the investor market. A 3.5% cap rate simply makes no sense.

"Not layups"? OMG, you guys have no idea. You think I'm talking "easy credit" of 20% down vs. "tougher credit" or 30% down and a little more documentation. It's W-A-A-Y worse than that.

For one thing, it's about getting buildings approved, and the new regs mean the approvers don't know Park Ave. from Pineapple Street.

You want to know what I did Friday? I spent four hours writing a letter explaining to a lending bank that it was a natural trade-up purchase for a customer who currently lives next to a helipad to want to live next to a park instead. That's not about the borrower's qualifications, that's about a lender frozen by fear.

At this point, "luxury" by Miller's definition is basically anything over $2.5 million. Definitionally we are not saying that Bill Gates and Tom Hanks can't get apartments, we are saying that law partners and cardiovascular surgeons can't get apartments.

ali r.
{downtown broker}

Ali, you and most other brokers have only been around during the times of easy mortgage money, so you get upset at what is a return to normal practice.

When I wanted a a loan on a $1m home I bought 15 years ago, most lenders flat out declined because I was self-employed, despite a provable past income and assets exceeding the loan amount. I ended up with a 35% down loan that still required extensive documentation and appraisal. Most "law partners and cardiovascular surgeons" are in effect also self-employed.

This is just the return to the old days. When lenders lent money expecting to get it back, not flip the loan to some pension plan in Norway. It is not going to get easier so you better get used to it.

I ran into a private banker I know from Wells Fargo (formerly with Citi) today on the street. She says she is doing big loans ($10 million one in the works) but the rule of thumb is now 40% down.

"the rule of thumb is now 40% down"

"residential real estate is trading at about a 3.5% cap rate. Investors, by contrast, are going for (and getting) about a 7.0% cap rate for multi-family properties."

If you look at generic manhattan property trading at $1000 psf, and renting at $45 psf, a 40% haircut (the banks equity demand), values the bank's loan exposure on the generic unit close to the multi-family property cap rate.

Studios may be suffering least because of incentives for first time homebuyers, availability of cheap conforming loans, and because fewer studios were developed in the last building cycle. But I believe there is another reason. If studio buyers are wrong, and prices decline another 40% as the banks fear, the studio buyers only lose a couple hundred thousand a piece, compared with much higher investment exposure for buyers of larger apartments.

$45 psf sounds low to me. But I think you're on to something, PMG.

Banks simply don't want to have to worry about potential future upside down homeowners.

A simple margin of safety. Maybe they're finally taking smart pills.

Oops.

Streeteasy has a nice new feature for rentals - price per square foot.

I did a rental search in my target neighborhood and it came up at an average $47 per square feet.

Interesting.

I'd be willing to lend at 7% on 70% of the current market price of a Manhattan coop. Maybe we should start a private market for jumbos.

First National Bank of Rhino -- too big to fail :)

Too small to matter. I'll put a prospectus together. "Formed for the purpose of lending to the Manhattan residential market. 30% down required. Strict appraisals."

Parking validated...

"But I believe there is another reason. If studio buyers are wrong, and prices decline another 40% as the banks fear, the studio buyers only lose a couple hundred thousand a piece, compared with much higher investment exposure for buyers of larger apartments."

You may be correct, but in general the studio buyer has historically been the guy who is LEAST able to hold onto underwater properties based on net worth, disposable income, etc. in the the studio buyer is almost always (percentage wise - i.e. percentage of transactions) stretching the most to buy, and teh high end buyer the least stretching. now, one of the reasons we're seeing more distress than prior days is because more of the upper end markets is doing this stretching, so things may have changed somewhat, but i would bet that if you could do an analysis, it's still the studio market which has stretched to most: almost by definition: i.e. everyone who can't really afford to buy anything, but buy anyway, buys a studio, because that's the lowest rung on the ladder.

Perhaps the merely rich are having problems of their own.

"Too Rich to Worry? Not in This Downturn"
http://www.nytimes.com/2009/10/03/your-money/03wealth.html?em

sounds like the top is falling on top of the market - and squashing it

30yrs, i agree. many of the buyers of the smaller units have been priced out for a long time, and worry about being priced out forever. they are desperate to get in the game. but many of them may very well be stuck in a few years if they need something larger, and with very few exceptions are not buying something that they would be able to rent out and cover their costs if something were to happen.

the harlem market for larger apartments is similar. families who couldn't afford manhattan stretching to buy what they could, and being able to do so with easy credit.

ar - it sounds like the "easy credit" stretching is universal across class boundaries

modern -- I'll take that as you thinking I'm young -- thanks for the compliment! I'm in my early 40s, so even though I wasn't in the industry at the times of tighter credit, I was writing about them for business publications -- Fortune and others. Prior to that I was on the Street (Donaldson, Lufkin).

The buyer in this case IS 40% down. The problem is getting the building -- an established condo with good financials and no sponsor concentration -- past somebody upstate.

My boss has been in the business for two-and-a-half decades, and he says he's never seen it this bad.

ali r.
{downtown broker}

lowery i agree. but i think it shows up in terms of real estate first in areas where people had been priced out and fell for the "buy now or be priced out forever" line. then you have a next wave of people who "stretched" via credit cards and HELOCs. and the unemployment rate, more so this time than any recent recession, is cutting across class boundaries more than before. while the young and people of color are much more likely to be unemployed, the general un and underemployment rate for the middle and upper-middle class is quite large as well. eventually the effects will hit everywhere, including coops, although not to the same extent in all buildings, obviously.

ali, it's stunning. from overabundance to an arid well in almost no time.

Credit has never been this bad? How about when you needed to pay 12 percent. Your boss is lying or has a really bad memory. Modern has the history straight.

rhino, i think it's the availability of credit. in the dark days of really high interest rates the costs were enormous but often the prices were very cheap and of course banks would give you loans at whatever + percent assuming they could get cheaper money later, which they did, and which most purchasers did as well.

i've been borrowing and buying since 1990, which isn't a huge period of time, but it's not a short one either. i feel that i have less chance of borrowing to get an apartment that is appropriate for our income than at any time since i started, unless i'm willing to put down 30-40%. which has not been normal, except at the very highest levels.

anecdotally, in 2000 when we bought our chelsea condo with 10% down, our mortgage broker confessed to me that he'd even been seeing mortgages for "over a million" that had only 10% down. but then you still needed PMI.

Just for the fun of it I ran the Case-Shiller national numbers from inception to June, 2009 and compared its appreciation to that of Miller Samuel Manhattan coop price per square foot, 1Q, 1989 to 2Q, 2009.

Up until 2001 Manhattan closely tracked national real estate returns but then it went ballistic relative to the national numbers. National peaked in 2006 but Manhattan peaked in 2008.

In order for Manhattan prices to have risen just as fast as the 10-city CS index over the full period, Manhattan coop price per square foot would have to fall to $488.

(Interestingly, that would bring Manhattan residential cap rates in line with current Manhattan investor multi-family cap rates.)

fp - 40 is not old by a long stretch - you may be working in a market sector not worth it - if credit is easier in lower-priced ranges, switch

They need to let interest rates rise a little if they want anyone to lend...and the sellers need to take lower prices to make the loan to values more reasonable.

"the harlem market for larger apartments is similar. families who couldn't afford manhattan stretching to buy what they could, and being able to do so with easy credit."

AR, where did you find info about how leveraged buyers in harlem are? my gut feeling is that the lion share got early on (2000 or before, call them the "locals"), are renters or bought through lotteries. larger apartments you mean 2 bedrooms on? 3+?.

how many are those that bought at market rates during the gentrifying process (btw, i'm not sure if it's still going on)? guess most of them bought on new developments, but those are fairly small apartments in general though.