Impact of a Manhattan Luxury Housing Crash/Decline

any market updates and thoughts now that we are in 2018?

As long as banks are willing to lend, residential and commercial real estate will continue to overbuild. It's the nature of the beast. Of course when the markets crash - sooner or later like death and taxes - everyone will blame only the "greedy" developers.

Resi market appears to have picked up somewhat but maybe due to pent up demand and limited supply as a result of the tax debate. Too early to tell but right now I see no reason to believe 2018 will be much different that 2017, a global cataclysm aside.

I think a lot of it will depend on what happens with mortgage interest rates.

"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"

mm, that's very specific, I suppose the price range makes sense, but midtown east, eew

Tailwind, You and I may not like the area but it is Lenox Hill on the Upper East Side rather than Midtown east. Very desirable for many families.

Are falling rents typically a leading indicator of a fall in housing prices? The rental market feels really soft IMO.

lemayday, this is a fascinating question to me as I believe that the relationship between the rental and sales markets is much closer today than in the past. Although I feel that fundamentally the two markets are not well correlated, perhaps even counter-cyclical, the nature of today's market gives me pause.

I have been searching for a leading indicator for the coop/condo market in NYC so that I plan for my retirement and whether to sell my condo now or wait a few years.

I would love to hear other opinions as I think the case can be made either way.

In the 1987 -1992 market correction, the crash in price of studios was certainly abetted by the fall in rental prices because the amount of studios foreclosed on was greatly accelerated when rents couldn't cover carrying costs.

Carrying cost including mortgage principal payments?

I purchased owned a studio coop in 1988 and when I moved to Boston in 1990, I could not sell my apartment for any price. At this time, there were lots of distressed properties especially in the newly converted coop projects from the 1980's coop conversion boom. Buyers were eventually outgrowing these small coops but since they could not sell without taking a loss, coop boards were waiving their subletting restrictions just so shareholders would not lose their apartments to foreclosure. These were strange times.

30, were rental prices negatively impacted by huge number of coop apartments that entered the market in that period? Coop conversions benefited converters but left the market with a huge glut of bad product that hung over the market for many years.

First, I doubt that you really "couldn't sell at any price". I sold tons of studios in buildings like that at that time. It's just that the sale prices weren't doable for anyone with a mortgage (Like the Tudor City buildings when they were in the midst of their fiscal crisis. I can't even count the number of studios I sold there, but I sold them between $8,000 and $20,000).

Were rental prices negatively impacted by the Coops? It's hard to say. Even though there were a "large" number on the rental market, it was still a small fraction of the total number of rental units available. The economy and market in general saw studio rental prices drop from around $1,200 a month to around $800 a month. For a lot of Coop owners, that's what made the difference between being able to cover the monthly costs or a small loss with a sublet, to losing enough that they decided to walk away. It also snowballed because once a critical mass of studios were foreclosed on, the stigma of being foreclosed on lessened to the point where people were much more willing to let go (sort of like getting divorced in the 1950's vs. now).

30, I do not think I get your divorce analogy (divorces are more accepted today?) but I do agree with your thoughts.

When I say I could not sell my 350 sf walk-up studio coop with only 25-30% sold, I meant that the market for my type of unit was basically completely dead. No bank would finance it period. Not like today where a personal banker would do it for a good high net worth client. I admit that I did not try to offer it to the lowest bidder nor did I feel like giving it back to my bank as I had a good job and was willing to ride out the recession.

I suspect that more people back then were willing to walk from their investments than would today as I think today's owners have more of their net worth tied up in their homes. I guess that's a good thing.

I do not see people in coops walking away as they are not that expensive relative to a rents. However, we have seen a foreclosure in 157 West 57th. Ultra-luxury in name of LLC with 25% down is probably where the foreclosures will take place as the owners realize that they can buy something else 35% cheaper. Or there may be building foreclosure by the lenders to the developers like some of the stuff we have seen in commercial real estate.

True, 300. Also, as you know, coops often have strict subletting rules so that's not always an option. But I wonder if that encourages or discourages keeping the apt. if one suffers severe economic hardship in a distressed housing market.

I'm talking about the social stigma aspect. 50 years ago, very few people thought about declaring bankruptcy. Then it became so socially acceptable that they changed the bankruptcy laws because "everyone" was doing it. With foreclosures, once people hear that "everyone" is getting foreclosed on, it greatly increases the likelihood of others being willing to walk away.

Interesting 30. You are absolutely correct. When I lived In China, my friends were appalled that anyone would walk away from a contractual obligation. Of course, that was 8 years ago and I am pretty sure that stigma is also disappearing.

15% year-on-year drop in luxury contract 4 first quarter.
https://therealdeal.com/2018/03/30/no-bonus-bump-luxury-contracts-down-despite-uptick-in-wall-street-payouts/

Beware of a deficiency judgement.

https://therealdeal.com/2018/04/02/manhattans-luxury-market-recorded-26-contracts-last-week-olshan-2/

Manhattan’s luxury rental market recorded 26 contracts at $4 million and above last week, according to Olshan Realty’s weekly market report. That was the second-best total on record for an Easter Week since Olshan began keeping track in 2006.

https://therealdeal.com/2018/04/05/buying-a-luxury-home-is-getting-pricier-thanks-to-mortgage-rate-increases/

So if 282 luxury contracts were signed in Q1 2018, and that was 15% off the pace of Q1 2017, then an Easter Week of 26 contracts still doesn't get us where we need to go, does it?

My read of putting these two stories together is "rich people are jittery," which would have been my read just from looking at the equity markets...

I think "rich are indeed jittery" as they keep on looking at ultra-luxury supply. With rich for this comment being min net-worth of $10mm or reasonable expectation to get there within a few years.

@300, min net-worth of $10 mm (or approaching it) describes many of my clients. For the most part, they come to NYC to work here, but they also don't need to own in NYC. If they want exposure to the real estate markets but don't want to be long NYC they often do focus instead on owning a property in SF/Seattle/LA/Boston and/or a prime vacation spot such as the Hamptons, Martha's Vineyard etc.

Ali,
What's your take on affluent clients reaction to interest rates rising or do they seem to be immune to it because at the end of the day they aren't buying the most they can afford to?

@30, my clients are generally not "Wall Street Types" (not that I don't love those) but tend instead to be in law, entertainment, tech -- professionals who have found a niche that somehow makes them market superstars. They are generally to a man/woman workaholics, and live in fear that they will never work again, but IMHO they "underspend" relative to their portfolios (certainly compared to more standard UMC households, who are "overinvested" in real estate). As a result, you nailed it with your second phrase -- a one-point move in interest rates doesn't really hurt them all that much because they have such large buffers.

A sign of a wearing townhouse market? The David Rockefeller townhouse originally listed last year for $32.5M just sold for $20M. That's almost a 40% haircut.
https://streeteasy.com/sale/1281093?semAdgid=17921355015&semMaTy=b&semAdid=200508449039&semKwid=dsa-187965234735&k_clickid=420c3788-fc2c-4ad0-8fcd-608ff3ba8cb3&gclid=Cj0KCQjwzcbWBRDmARIsAM6uChVBNRpMXKU7KPQaDFp7j4hd49ODHOkNBupG9850PnW6h8UuJ3Fx1VoaAugOEALw_wcB

30, Good example. While I tend to ignore the discount from original listing price, $2000 per sq ft for a 40 foot wide townhouse of fame, needing updates, is indeed a bit lower than I would have expected.

Anyone want to guess at what the contract price is?
https://streeteasy.com/building/one57-condominium/sale/1343313

42C sold at about 15% discount to list.
It will be interesting to see if 40C is less or more discount:
https://streeteasy.com/building/432-park-avenue-new_york/40c

As we know, the 79th floor of One57 sold in Nov. 2017 through a foreclosure sale for $36 million, a 30% haircut from original sale in 2014, but the 85th Floor sold 3 months ago for $54 million which seems high as original 2014 sale was $55.6.

I will guess $41 million.

77 is a dual listing between Compass and DE. Does than mean seller pays more than standard commission? What is standard commission on a $40 million price?

Less if its a US buyer and more if its a foreign buyer.

With the One57 listings don't forget to add in the renovations on each unit.
As far as commissions on units with dual exclusive agents, as far as I know there is no "standard." It can be anywhere from each one gets half the selling side commission no matter who sells it to winner take all.

Yes, add the renovation cost to the basis and also subtract the sellers closing costs which I think may be included in many sales prices which are not rounded numbers.

Yes, add the renovation cost to the basis and also subtract the sellers closing costs which I think may be included in many sales prices which are not rounded numbers.