Decoupling of Equity market and Real Estate Market

Keith, I think high-end supply is the issue for Manhattan for that hypothesis. I think properties around $1500 per sq ft adjusted for location and condition may do what you are saying. If I were to pick a side, I would say flattish market with new development supply continuing to be absorbed slowly.

While I would not call the equity markets and the residential markets counter-cyclical, I would call them complimentary as together they can create some diversity in a family's finances.

I have been a strong proponent of such diversity as I believe that too many families are seriously over-weighted in their homes and other forms of residential property. Equities have the advantage of being far more liquid than resi and can be liquidated without too much disruption to one's life. It also appears proven (see Case-Schuller) that stocks out-perform houses over any long-term period (i.e. 10+ years). Both are good inflation hedges. Stocks are more risky.

What will happen to the equities and residential markets seems uncertain to me at least but here are a few possibilities:
1) as you suggest, the resi market will catch fire just as equities have
2) the equities market will become more bearish to equate more to the resi market, or
3) both the equities market and the resi market are or will soon become fully priced and will soon enter recession.

Tax is a huge issue.
Personally, and speaking to other friends.. we all have the same cloudy view.
Expect taxes are going up (2-3% of income) probably.. but possible to go down (maybe 1-2% of income) maybe. So that's a 5% band of uncertainty.
None of the online estimators take good account of AMT, for example.
Plus whatever stunts the state/city pull to get around the 10k SALT cap (and fed response).

I work in finance and our own HR department sent a mail expressing the ambiguity in 2018 taxes with a bunch of "until further guidance from IRS" caveats.

Discussed with a friend @ lunch, and both feel we won't really know until we file in April 2019.

Uncertainty is really really bad for asset prices and especially real estate.

Uncertainty can sometimes be trumped by forgetfulness (or irrational exuberance). Look at the threads from 2009-2010. Few saw this bull rally in NYC coming, including myself. it's been nothing short of spectacular. It appears markets can also be very unpredictable.

I totally agree on your thoughts about house versus other investments that a person or family holds. I can tell you the clients we work with are very well diversified and are not biting off more than they can chew regarding housing or housing debt, relative to their other Holdings. But I think that's the nature of most buyers of New York City real estate.

Keith Burkhardt
TBG

Keith, well I did notice that as soon as the tax bill was signed by President Trump within a week 4 sub1m condos that I was tracking, which sat for 3 months, were suddenly in contract. It seems that all people were talking about one month ago was the tax situation now no one even brings it up. As far as the equity/real estate markets correlation I think there is a lag involved. When equity does well usually within the following year we see the after effects in real estate so your early Spring speculation may be correct.

I bought in 2009 (and I was pounding the table for others to do so) but I'm relatively bearish now. I'll be able to sell the listings I have (because I live in Lake Wobegon, where all my children are special) but I think high-flying equities are going to do no better than support my market (which is generally small to medium-sized, let's say 2-BR, co-ops). And what happens when the recession comes, as recessions do? I think it's still fine to buy now for quality of life, but I don't know that I'd be out there investing in NYC real estate at this time.

Keith, good points especially about debt although I think only the rich can really limit their debt and still buy the homes and second homes they want.

Few can predict either rallies or slumps. But based on my experience, the pattern is typically: exuberance leading to irrational exuberance leading to uncertainty leading to irrational uncertainty leading to decline. Just not sure where in this cycle we currently find ourselves but I do not believe in soft landings so I am preparing for a bit of a bumpy ride in the not too distant future. I may miss out on a better yield but so be it.

I would like to see a study detailing just how diversified investors are especially for New Yorkers who often equate work with life and think Manhattan is the center of the world.

Hey all, been a long time since I've posted but good to see some old names here.

This decoupling has been going on a long time, kinda like I predicted, and not at all unusual in my eyes. The ~20% in the past year is nothing, this has been going on for a decade basically.

Streeteasy's index has Manhattan up 22% since Jan 2009 and 36% since mid-2009. The former annualizes to 2.2% (inflation, basically) and the latter to 3.6% (rather lackluster for hitting the bottom).

Meanwhile, S&P 500 is up an astounding 210% since Jan 2009 and 310% since the March 2009 bottom. That annualizes to 13.3% and 17.8%. With dividends, those each kick up a couple percent.

That basically lines up with my old predictions for the upcoming decade -- I had Manhattan at inflation-ish and stocks (w/ dividends) in the low teens. I those on the other side of our spirited debates had Manhattan at ~4% and stocks (w/ dividends) at ~5%. So an unexpected decoupling to some, but an anticipated decoupling to others.

Oh boy, look who's back

I absolutely agree with ximon's last post.

Nada, Welcome back to the board. Equities have been a clear winner over the time period you mention. In the last two years, NYC real estate has not done much but SPX is up a lot.

I thought I'd step away for a few years to let you boys catch up on the number of posts ;).

nada!!!

No doubt there was a decoupling. A huge decoupling. I wonder how many people were a part of this recent 8+ yr equity move though. Many people I talk to didnt believe in 5 years ago, 3 years ago, 1 year ago, and still don't believe it. Thats probably why its still going.

Manhattan real estate seems to be at the tail end of a down cycle that started in 2015 - more like late 2014 for the high end sector. But what I find different this time around is the price point specific nature of this marketplace's down cycle. More specifically, I would describe it like this:

Low End (lets call it 2m and under) - peaked in mid 2015, likely bottomed sometime last year. Price action down 3-5% or so, depending on the product's attributes. This sector remained resilient.

Mid End (lets call it 2-4m) - peaked earlier in 2015, likely bottomed sometime last year. Normalizing and trying to rebound. Price action down like 5-15% depending on attributes of the property.

High End (lets call it 4m+) - peaked late 2014/very early 2015. The worst hit of all sectors. The higher the price you go, the more severe the down cycle and the more leverage shifted to buy side. Price action is easily down 10-15%+ with pockets of 20% here and there. This market is so segmented its hard to isolate exact figures here, even with the price point filters available in www.urbandigs.com charts.

In the field, it feels slow in general. November & December were slow months compared to previous years. Probably due to the psychological effect of upcoming tax changes. I dont expect that sentiment to hinder the market's active season though. One thing is for sure, the down cycle already happened and prices are down from peak levels hit in 2014-2015. Lagging new dev closings did mute this down cycle a bit, as sales from new units signed years ago finally closed and counted in reports.

I guess the question is where do we go from here? Another down shift? A rebound to a new peak? Or are we stuck in this new, lower level for a while? Ill go with the last one for now.

Yep NADA is all about the math! And that is why he'll probably never own a home in New York City (: it's too difficult to make it work with rational analysis. And that's where I think we differ a bit. A home to me is primarily an emotional purchase, a place where you're going to spend some of that hard-earned money to create memories, raise your family and otherwise enjoy. To me it's a much different mentality than investing in stocks or bonds. That said I've done well both emotionally and financially with my real estate purchases. And when I buy real estate I initially have no plans to ever sell it.

So buy a home responsibly, make sure you still have a nice cushion left over (which co-ops will enforce in New York City). And then continue putting money into an S&P 500 etf!

We have a short time on this planet, so responsibly enjoy yourself. Even if that means spending some of your money on a financially inefficient home purchase if that's going to make you happy!(: the emotional currency received will be worth it!

My aunt used to like to say (in a thick New Jersey Italian American accent) "why you gonna pay some other assh**** mortgage".

Ciao,

Keith Burkhardt
Tbg

https://www.wsj.com/articles/that-new-york-condo-just-got-a-lot-more-expensive-1516017600?mod=WSJ_NY_LEFTTopStories&tesla=y

“I think it is all psychological". Duh. Anyone who had read a little of behavioural finance knows that the mantra of efficient and rational markets was a myth drummed up by Nobel Prize wannabes who thought that economics was a science.

Thanks for the article although the title is a little deceiving, no? Whether condos are more expensive will depend on what people are willing to pay which is another psychological concept. Once we get last this pause in the market, we may know what direction the residential market is headed.

I am pessimistic in part because I don't like market disruptions, the uncertainty of market pauses and bad press. The resi markets in NYC and elsewhere may limp forward along with our national economy and peek (or crash) around the same time. The stock market does what it does but at some point, people need money to invest in either which is why they are always somewhat connected.

Nada! Welcome Back!

I adhere to a formula my father would tell me as his father told him. ( Kind of an old sephardic wisdom.) The formula is "a third, a third, a third."

A third of your assets in real estate (equity not the mortgage part :) ), a third of your assets in stocks or your own business ( or a blend of the two) , and a third liquid cash. Liquid cash can be subject to loose interpretations for example, because of today's interest rates, I consider a 2 year CD still liquid cash as the only real penalty you endure by cashing early is the lost interest.

You can adjust and "play the field" from one pool to another but shouldnt stray by more than 10%. This helps you endure any sector's cataclysm, and gives you resources to cash in on opportunities during corrections.

What does give me concern and I find troublesome is today everything is too linked to each other, and we got a taste of that from the Lehman crash when AIG could have taken everything else down.

As I bought my apt in early 2011, that money did far better the first 4 years, but it probably would have been better off in the stock market the last 3. Fortunately Im in both the whole time as per the formula.
I realize not everyone has assets to have in all 3, my point is, you shouldnt own your home if its your lion's share of assets. Invest a potion in a REIT instead.

What I find remarkable over the last 3 years is the size of disparity in condo vs co-op in price per square foot. Its too big a gap. Gravity will have to bring them closer to each other.

truth, basically agree with the gist of your argument although price of a decent home in NYC makes it hard to keep it to a third of one's assets.

But why would you exclude mortgage debt from the calculation? Borrower is on the hook personally for the entire purchase price so you can't just walk away unless you intend to file for bk.

Truth’s dad was probably adjusting for relative volatility of real estate and equities before the quantitative finance became famous. I think the suggestion is a reasonable one in general. Naturally, if may not apply to all ages.

It may not apply to all ages.

Ximon
I was just formulating how one should diversify their assets.
A mortgage is not an asset, just the equity in the property is. If a third of your assets are liquid, your not really at risk of bankruptcy from your property liability. It keeps the bank away until you can unload your toxic or underwater property if you end up in that situation.

And agreed, price of a decent home in nyc makes it hard to keep to a third of one's assets.
Thats why I rented for nearly 12 years before I bought. Instead of pouring all my assets in a home, I spread into stocks and partnerships of business properties. Those 15 years also educated in me in what type of apartment I wanted or didnt want. I didnt lose out on stock or real estate booms because I was diversified in both sectors, just not with HOME ownership. It also allowed me to pounce when the market was ripe.

300mercer
Not so much quantitative finance but the commingling and one stop shopping ( or ownership) of super companies leaving no safe havens.
And Dodd Frank was crap, Ive yelled since Lehman that Glass Steagall must be restored. Give the banks as long as 5 years to break off their parts.

The internet is also creating this kind of hybrid communist capitalism and destroying "competition" as we know it. The first industry and perfect case in point is the airline industry. For those first 5 years, it was the wild west, finding all these great deals, anything to get you to buy online, eventually rooting out and destroying the travel agency business. Now just about every airline going to the same place costs the same amount.
Car industry? Who on earth pays more than $500 to $1000 over dealer cost today? Of course excluding specialty situations.

Amazon will be the death of commerce as we know it.
I think of that scene from that brilliant movie Idiocracy where everything you buy including going to law school at Costco.

truth, interesting points especially about technology. I have a theory that although access to market data is much better e.g. StreetEasy, it may result in over-confidence and therefore poor investment choices.

Funny how the equity market and the real estate market operate so differently. The perception is that one is complicated and requires professional assistance, the other is simple enough to forego such advice. Everyone thinks they are a real estate expert when it comes to their own homes.

"Yep NADA is all about the math! And that is why he'll probably never own a home in New York City (: it's too difficult to make it work with rational analysis. "

For 4 to 6 years following every market crash it has always made sense to buy based on the numbers.

Quick update relating to this thread... Market activity has picked up significantly. We have 5 offers out all but one have wound up in calls for best and highest/multiple bids across all segments. We're a pretty busy group but I don't think this is limited to us.

4 weeks ago all anyone could talk about was the new tax law and its negative effects on their income and possibly real estate. We had two clients cancel deals that were accepted based on possible tax implications. I haven't heard a whisper about any of this in the last two weeks.

This has been a typical January pattern for the last several years. Very quiet from just after Thanksgiving through the first two weeks of January. Then out of nowhere buyers come out in strength.

We'll see if this continues.

Keith Burkhardt
The Burkhardt Group

Keith, What price point in total $ and $ per sq ft?

$500-$1400 a f2. One is a townhouse in Bed-Stuy.

Keith
TBG

UD/burk,

I know you're big dogs, but where do you see the "resilient" low-end going? ...say under $1mm under 96th Manhattan?

Last I heard (about a year ago) I heard of bidding wars in this "pauvre" category.. is it still the case and do you see it continue into this summer/fall, or is any price plateau/flatness currently present, portending further price chops in this "pauvre" category this coming year?

I just came back from CA and their sales are FIREEE compared here; probly due to China's closer proximity & exit strategy due to gov't clampdowns (see Vancouver insane price jumps), tougher building rules (or lazier developers compared to here ala Hudson Yards?) and dumber buyers (more emo purchases by actors vs #'s run by financiers here), danke!