Has The Residential Market Bottomed Out....???

Yet another example of unintended consequences of government intervention......

Basically in the future, all things being equal, it will take a wealthier brand of buyer or a lower price to clear this market. Further, Williamsburg seems built around the idea that some Wall Street bachelors will prefer 1400 sqft in Williamsburg to 750 sqft in Soho for the same dollar price. Will there be as many Wall Street bachelors making $X....Will Williamsburg have as many train lines running to it? The whole place is too horrifying to consider because you even get to the abatement thing. Crap markets are a momentum play in the late innings of an upcycle. They are not a value play when you are trying to pick a bottom.

fayek, that nytimes article was yet another infomercial for the real estate industry. it was also quite lame and rather frightening. they didn't "fall in love," they decided to buy a house together before he was ready to commit to marriage, because there might never be a better time to buy. she wasn't happy, but has put on an understanding face regarding his desire to buy being so great but his desire to wed not being equally so. this is perhaps one of the least romantic stories i've read.

can you say cluster?

Buying together ahead of marriage is one of the stupider things people do. And considering this an incredible buying opportunity is absurd.

I think the blond was lying about her age, but I doubt if she was dumb enough to lie on the mortgage application.

i know a couple that bought together w/o marriage and when they broke up, it was the war of the roses. every cent of 5 years of equity in a boom market went to the lawyers and then some. insane idea.

down boy..down boy....

hsf -- i thought you got a new batch of pills at the start of each month....

jim - medicaid cuts?

Yeah, that NYTimes realt-whore section and that piece referenced above make me upchuck. Those poor suckers! They bought while prices are steadily sliding downward; that Fairfield house was no bargain whatsoever .......
I'm watching the lower Fairfield Co market and it's sliding down, down, down ........ Unbelievable numbers of new listings thrown on the market over the holidays --------

do you think the blond was lying about her age, claiming 28 i think?

Faye, I have no problem with you thinking you know more than the average person about NYC RE. I simply asked if you have recently or will soon be buying, and if not, why not. It's a simple question which you have not answered, which I don't understand. There are dozens of good reasons why someone may not buy despite it being a "good" time.

Riversider, what is your basis for thinking rents will double in the next 7-10 years, i.e. 7-10% annual increases?

No idea. But if I have to vote, I say another 10-15% down in 2010 and possibly another 5-10% in 2011. Only because I'm so skeptical about unemployment numbers. I'm only talking about NYC/Manhattan market, though.

10-15% drop is hardly a crash. It's reasonable. I know stock markets are better, but if you have no job to pay for a mortgage, how can people buy a home and make payments? And if bonuses are more tied down as stocks, not cash, and comes with clawback...

2 Wars to finance with no end in sight, ballooning federal deficit/debt, etc. I know some think the foreigners will buy condos and stabilize the market, and that may be partly true, but enough to overcome macro fundamentals? Hard to believe.

Youngfamily I continue to see parents buying homes for their children. Parents who are also relatively immune to the local economy.

Inonada, My 7-10% annual increase is a shoot from the hip thought based on the following
1) We've already come down on rents, so this is not a peak to peak forecast
2) Government will inflate, so this is a nominal not real increase
3) More demand(shift from buyer to renter mentality
4) Increased costs of running building eventually get passed along to renters

7-10% is probably the high side, but I certainly would not base my planning on less than 5-7%

yep. brilliant as usual.

1. we've come down so no doubt we'll have to come up.
2. government will inflate ---- because i continue to say so.
3. more demand--as people sell or don't buy (which I, riversider continue to maintain isn't actually happening) this will magically drive up rents even though new supply is clearly measured in the thousands except that the new supply will be bought not rented...whoops.
4. my costs are going up so of course i'll be able to pass them on because i feel like it---tell us about how many businesses you've run.

Youngfamily, there's been a very large increase in hiring in the financial sector. Seems to have taken off around September/October. BAML, CITI and a slew of hedge funds have all started hiring again.

really? where did you hear this? how many people were hired?

Riversider, I wouldn't call these numbers "taken off". The small positive numbers were probably due to 'year end" related seasonal jobs.

From NYS dept of labor:

August - September 2009
professional and business services (-11,500)
financial activities (-5,000),

September - October 2009
professional and business services (+1,200)
financial activities (-1,900)

October - November 2009
professional and business services (+2,500)
financial activities (-1,100)

so...net is down 15,800 since august. and +700 since september. wow. that's a turnaround for damn sure. brilliant, riversider. simply brilliant.

Around 28K construction jobs were lost in the same period, but to be fair it was probably partially due to seasonality as well.

Sunday, Nobody is arguing that we're at higher employment levels than a year ago, and nationally we'll be screwed for some time. I am hearing that finance jobs have made a come-back of sorts.

riversider says: "there's been a very large increase in hiring in the financial sector. Seems to have taken off around September/October."

truth is: From NYS dept of labor:

August - September 2009
professional and business services (-11,500)
financial activities (-5,000),

September - October 2009
professional and business services (+1,200)
financial activities (-1,900)

October - November 2009
professional and business services (+2,500)
financial activities (-1,100)

riversider responds:

" I am hearing that finance jobs have made a come-back of sorts."

you're hearing it? where? in the shower? in the park? inside your head? where have you heard it?

I work in fixed income cash and derivatives and Im getting calls from head hunters again. I think there is some hiring again, but not like 1998-2000. alot of ops jobs have gone away too

Riversider, the numbers posted above are 2009 month to month numbers, not year over year. Year to year numbers are a lot worse.

Financial services are in bad situation, since it isn't just the banks. Most company provide services to the banks and everyone is cutting costs. More layoffs in January, since the budgets for 2010 were settled.

Sunday, things are definitely not great. Finance has for the time being stabilized and some new ventures have been set up. It could be worse.. we could be London.

some new ventures have been set up? like what? more ringing in your head?

and best of all: "things are definitely not great." another brilliant insight.

i know finance people who have lost their jobs in the last two months

When company A buy/merge with company B, many jobs are often lost. A large number are lost in the first half a year, but more are lost up to two years later as the two companies are integrated into one. As darkbird reminded us, many companies that provide services to Company A and Company B will also have to cut back because of lesser demand and probably lower rates. With businesses typically trying to avoid laying off people in December because of the holidays, January and February will not look pretty. Let's hope unemployment rate will peak by March or April.

RS, I follow your "prediction is not from the peak" point. I think we had a 20% drop simply from moving out of the sub-1% vacancy rate regime. Will NYC return to that regime again, or are we never going back? I go back-and-forth on this, and I tend to think it will be cyclical: in the next few years, vacancy rates may go even lower, but I'd guess that we'll see sub-1% vacancy rates again in the next 20 years sometime.

On the other parts of what you are saying, I think that's just delusional. Inflation expectations for the next decade are just 2%, and rents have very close ties to inflation. First, they make up a third of CPI, and it's hard to imagine the Fed not clamping down on, say, 7% inflation nationwide. Second, rents cannot outpace incomes, and again the Fed will clamp down on wage inflation. I can certainly appreciate the argument that NYC rent inflation can outpace the rest of the country's and wages in general, but here were talking about is a 22% increase over a decade vs a doubling.

Let's put it another way. You can find a nice 1BR these days for $3000 with a $120K job. You're saying that in 2020, it'll cost $6000. Will that same job be paying $240K, or will the "average job" in NYC just pay more?

Inonada, I'm clearly of the opinion that inflation will come in above expectations. We've spent a great deal of money to prop up the economy and unlike the rest of the world, the U.S. has the luxury of being the world's reserve currency. My feeling is that it's too difficult to raise taxes or cut spending, so this leaves debasing the dollar and higher inflation. Fed has already said they are no longer targeting zero inflation...Just my prediction, I know it is not consensus.

lets develop this theory of yours. so...will the gov't just lie about inflation? or, if reported honestly, will the gov't just shrug if inflation increases and not increase interest rates? how could this possibly play out?

I don't think the Fed was ever targeting zero inflation; more like 2%, and they have been quite successful. I appreciate your debasing argument, but just realize that is a very common viewpoint and is taken into account with the 2% inflation exoectations.

Given this viewpoint, are you long inflation through any efficient mechanism? It seems to me that RE pays only if inflation exceeds 5% anually for the next few decades, but other ways of playing inflation directly will pay out if inflation exceeds 2.5%.

BTW, to put your 7% inflation expectation in perspective, even in 1982 at the height of US inflation, 10-year inflation expectations were only 6-7% according to tradeable markets. Right now, they are 2%.

7% inflation? Not sure I ever said that, but clearly more than now and certainly above 3-4%.
The thing about inflation is once it is out of the bottle, very difficult to put back. But your points are well taken, fair enough.

perhaps when you said it?

"Inonada, My 7-10% annual increase is a shoot from the hip thought based on the following
1) We've already come down on rents, so this is not a peak to peak forecast
2) Government will inflate, so this is a nominal not real increase
3) More demand(shift from buyer to renter mentality
4) Increased costs of running building eventually get passed along to renters"

In order for the price of a good to double over 10 years, you need 7% annual inflation. Rents make up a third of the basket of goods the Fed most closely monitors for inflation.

BTW, if you think inflation is going to exceed 2.5% over the next decade, there are CPI-linked instruments that will pay off handsomely if it does. No need to even have a belief of above 3-4%. Have you looked into them?

Not a big fan of the CPI as a metric of inflation but the rent cpt is interesting.
Stuck with fixed rate AA/AAA munis (short duration) and some minor commodity exposure.

inonada,,,what cpi linked instruments are you referring to?..TIPS?

Tips yields are like less than one percent or so going out ten years, which is not a very good real yield , especially when you factor in that you pay taxes on the nominal yield. Also, some argue cpi not a very good measure of real inflation and/or that if all hell ever breaks loose the govt will manipulate the cpi to keep entitlements programs from swallowing the country. My basic point is that usually in recent time tips yields have sucked except for a while during the crisis when people feared a depression deflation). Not trying to be argumentative..but it's not so easy to hedge inflation, other than stay short on regular bonds and reinvest when yields rise or stay short term and roll along at higher rates. Im not a bond guy...but this is my impression.

So if I expect inflation to way exceed 3%, tips protect me from downside, and are way better than long dated nominal bonds, but I dont think it is correct to call them a handsome payoff if all you really do is keep pace with inflation plus 1.1 percent on the ten year

Inonada....Interesting. I never considered CPI index in that way. I have not been a fan of the CPI as an inflation metric due to how its computed, but clearly considering the weight given to rent your idea has merit.

so...did you or did you not say 7% per year?

Sorry for the belated reply.

I do agree that the government has incentive to manipulate CPI, but I think the most politically viable way to manipulate is slowly over time. I.e., it's much easier to fake 3% inflation into 2% over 10 years rather than fake 10% into 5% for 2 years. The former will go unnoticed while the latter will have the AARP up in arms. Thus, I think the "faking" is best to be pre-built into the index. So if you think "true" inflation is 1% higher than CPI, then you can simply view it as an offset.

In terms of setting up CPI-linked trades, I am certainly no expert. One way I can imagine is going long TIPS and going short treasuries. Say TIPS yield CPI plus 1.0% and treasuries yield 3.5%. If CPI exceeds 2.5%, you're up, and if not, you're down. That 2.5% difference is usually higher than the actual inflation expectation: the person taking the short inflation side of the trade expects to collect a premium from you for taking on the inflation risk. According to some Cleveland Fed web report I recently browsed, this premium has typically been 0.5%, but I'm not sure how it was measured. In any case, two things you need to worry about with the long TIPS / short treasuries position is borrowing (so you can short treasuries) and margin.

Another option are probably inflation swaps, which simply pay out based on CPI. You'll no doubt have margin still, and although the borrow issue will be obviated, you'll be left with a counterparty risk you may want to hedge.

In short, not for the faint of heart.

Interesting..
The cost of carry probably works on account of the CPI cpt being added back to the TIPS as principal....
And yea, these strategies are not my cup of tea.

Just reading some of this thread, so this is a response to an old comment. Somebody said "the commercial real estate market risk is overblown. The banks will just renegotiate the loans with the borrowers." (I am paraphrasing what was said). The term "renegotiate" is a euphemism for "write off". Banks renegotiate by reducing principal, extending, lowering rates, etc. All of these things create a loss for the lender while not getting the asset off the books. And in most cases, they are renegotiating with the hope that, at some point down the road, the 40% to 60% decline in Commercial Real Estate will magically reverse itself. It simply allows them to not sell at this point with the hopes that things will turn around. They mainly renegotiate because there is so much out there in trouble that the last thing they want is to take possession. In better times, banks would NEVER "renegotiate". But now they know that if they take possession, they will have to own, operate and try to sell a building. None of those jobs are remotely appealing to a bank in this market and they know that the current owners (who presumably 'know" the building) will do a better job of managing the asset in the meantime.

yes---that was the brilliant analyst--riversider.

and my question back to her:

"the banks aren't stupid and will renegotiate loans instead of taking a loss." what the hell does this mean? if a property is underwater, how do you renegotiate and not take a loss?

Too simplistic clt89. Extension of credit is not the same as writedown.

how long can they extend credit once it is non performing?

Here is a bit of bright NEWS....!

Manhattan Real Estate Now ‘Reasonable,’ Whatever That Means - Developments - WSJ
blogs.wsj.com

and this from the NYT:

Sales Spur Optimism in Manhattan Real Estate - NYTimes.com
www.nytimes.com

> Has The Residential Market Bottomed Out

well, i guess that question got answered pretty clearly.

Nope.

No it has not. do not worry to miss the bottom, beacuse it will be at the bottom for a looong time when it arrives.....

"Manhattan Real Estate Now ‘Reasonable,’ Whatever That Means - Developments - WSJ "

Well, finally somebody admitting that the continued falling prices are a GOOD thing.
Yes, the "investors" get screwed, but f 'em. Affordable housing is NOT a bad thing.

Just catching up on this thread again. Riversider says it is too simplistic to say credit extension is the same as a "writedown".
That is ridiculous to say that unless you also believe that closing your eyes and covering your ears will allow you to pretend that something hasn't lost value. You say that a bank that has a loan underwater and "extends the credit" is not a writedown. You might be right from an accounting perspective, but that isn't reality. Take that same loan and assume that the borrower actually pays it back. Then asks the bank to refinance the building under new documenation. Do you actually think that bank would cut the same deal and give the borrower the same proceeds with the same terms. Again, if you hear the word "restructure" then that simply means a loss.