If this is a buyer's market...

We shall see. My view is that affordable segment $1100-1500 per square ft has limited downside as there is limited supply. Top end > $4k per sq ft still has 10-20 percent to go on top of 20 percent it has already corrected.

30, you are probably right about the 4% figure and its really the trend that seems most relevant. Either way, such declining yields will undoubtedly drive investors from the market, if it has not done so already, and incentivise those few buyers who do seriously consider rent vs. buy to chose to rent. Good for the rental market and ultimately good for rental yields if sales demand continues to decline while rental demand increases. But that is probably is a discussion for the next cycle.

Wish we had more data on investor activity. Noah?

I do not confuse commercial real estate with individual residences. Rich buyer calculus has only some element of buy vs rent. Many rich pay for custom suits and they pay a premium for owning vs renting for customization and freedom of not having to move.

What percent of the market below $3 million is made up of "rich buyers"?

Any one who buys in Manhattan is rich.

Ultra rich are the $20mm plus buyers.

If you are not rich, you should be buying in Queens or inwood etc.

Of course, there are plenty of people who make $500k per year and say they are barely getting by. They assume private school for their child is a must, a Hampton rental for a couple of weeks per year is a basic necessity.

"If you are not rich, you should be buying in Queens or inwood etc."

Do you really think this is sustainable? Manhattan is not Beverly Hills. Or is it?

Very interesting perspectives. I would be interested in hearing some speculation as to where things are headed (and when).

Ximon, It is indeed sustainable. There are plenty of two income working rich people working in Manhattan who do not want to commute. In fact, there is a huge spillover into Brooklyn. I do not see large companies moving to suburbs. In fact, the trend is for companies to move to larger cities to attract talent. But that is away from my main point which is sky is not falling for the affordable Manhattan segment of $1100-$1500 per sq ft.

400, you are probably right. I believe that “global cities” like NY will outpace less strategic secondary cities. Is the sky falling? My guess is no, that this is just a correction. But it could be a protracted one which is why I am looking to reduce my exposure.

400, you are probably right. I believe that “global cities” like NY will outpace less strategic secondary cities. Is the sky falling? My guess is no, that this is just a correction. But it could be a protracted one which is why I am looking to reduce my exposure. And I can’t help but wonder what Manhattan will be like in another 50 years.

TeamM, I think the shoet term outlook is negative, the medium term is positive and the very long is highly questionable. I would listen to long term social scientists about their outlook for cities taking into account demographics and global trends. Personally, I hope to be long gone from NYC within the next 5-10 years.

30: Those Miller Samuel charts are really interesting. If interest rates keep going up, those rental yields aren't going to make much sense - 4% may have been fine when the Fed had rates close to zero, but when they are approaching 3%? Seems like a lot of risk to take on for very little potential return.

"I would be interested in hearing some speculation as to where things are headed"

As I have said before, I'm calling for prices 35% to 50% down from what they were at peak.

Thoth,
And as ximon pointed out earlier, they aren't even really 4% - that's gross yearly rent at ask; after you factor in expenses it's probably under 2%. These numbers only work when you are *assuming* appreciation as your return. The market doesn't even have to go down at all for the scheme to fall appart, just stop wildly appreciating. I know I have mentioned this before, but it's what happened with MJ Raynes with the MacArthur Portfolio (if I remember correctly the largest real estate purchase ever in New York at the time). They didn't go bankrupt on it because prices fell, they did because they assumed prices would continue going up 25% in the time it took to convert the buildings to coops (it didn't help the tax law changed shortly after the purchase disallowing passive losses on Rent Stabilized occupied units and killing the market for them).
So, since we can argue about how much the market is down or is likely to continue to go down, in my mind it's pretty impossible to make a cogent argument as to how/why the market is going to take off again and that is what it will take to get people buying again at anything less than a couple / few hundred basis points return over mortgage rates.

30/Keith - totally! I was using a webcam. I'll look for equipment today to get to replace. Any suggestions for specific product to use???

ximon - yeah thought about it, but hard to get a consistent pool of people to provide data over time. REBNY does it with their Confidence index..I guess we just went a diff route with our company, and only now do I have more time to put towards content. I registered www.talkingmanhattan.com, so Ill start this concept and see if it works. Need to upgrade the AV as some here mentioned, Ill work on that. But Im getting tons of interview requests and Ive only done 2 of these so far. So makes me wonder

Should I go with a USB plug in Blue Yeti or similar condenser mic? or will that not capture unless your right near it?

Noah, I wasn't aware of the REBNY Confidence Index until you mentioned it. It's very interesting. What do you think of it? Are there biases to be concerned about? Maybe a buyer confidence survey would give some balance to potential broker biases a bit although buyer remorse is sometimes a hard thing to admit.

it prob would, I would just prefer if someone else did it. SE should do it. They got the buyers!

But yeah, would love to see smtg like that out there.

Q4 2014 that index was 8.85 (out of 10)
Q2 2018 (latest) it's 4.63.
That's a YUGE difference.

Noah and Keith, could you characterize how much affordability is a concern for buyers now vs. ten years ago at the last market peak?

The monthly carry for an affordable apartment today is about the same as back then* but I imagine salaries are significantly higher for the average buyer.

* Based on a 20% down payment on a purchase price of 1,200,000 in 2008 vs 1,500,000 today factoring in interest rate decreases and tax and maintenance increases.

@Chasing - well, back then mortgage rates were in the mid 6s if I recall in 2007. So there is that. Today, low 4s.

Add in maint/ccs + RE TAXES are notably higher today vs 2007, so there is that too.

Add in the removal of SALT deductions, there is that.

Add in LTVs are tighter today than 2007, there is that.

So many variables influencing this question.

The main problem tho is your comparing todays market, which has been in a down cycle for 3 years now and prob at the worst of it now, versus a period in 2007 peak when markets were complacent/euphoric. So there is that mentality diff for buyers. I dont think buyers in 2007 were overly concered with affordability at the time leading up to peak. Usually buyers bid out of animalistic emotions when prices are rising, supply is tight, and demand is through the roof.

There are many variables, but for a 30-50% correction there aren't so many. In my opinion it would only happen from the market collapsing under it's own weight, or a black swan.

Is the market collapsing under it's own weight? Rents increased 10% while monthly carry stayed flat. I just don't see it if we compare the current market to the last ten or fifteen years.

Rationality is not the friend of overheated markets. As Noah has noted several times, one of the things buyers have been wishing for for more than a couple of years now is just a one-on-one negotiation. I think one of the reasons you still saw prices going up after it no longer made sense was that after someone loses 2 or 3 apartments which they wanted and put bids on they have a tendency to "learn the game" and pay the top price simply so that they don't have to deal with their apartment search any longer - independent of any actual valuation done (or not done) of the property. As a result when all you do is return to one on one negotiations prices can recede even if there is NO other causation (and we have plenty of that as well).

ChasingWamus,
How much do you think prices are up since the bottom in 2009?
And when you say "monthly carry stayed flat" you certainly are not talking about maintenance / CC+RET.

30,
I'm looking at apartments in my building which I consider a good example of "affordable" Manhattan.

In this case, prices are up around 50% off the lowest of bottom, and about 25% over 2008. Taxes and maintenance are up about 30% over 2008, which combined with an interest rate decrease from ~6% to 4.5% ends up with a flat carry over 2008 after a 20% down payment.

The StreetEasy condo index for Manhattan shows a 14% increase over the 2008 zenith and a 35% increase over the 2009 nadir.

So what happens if interest rates go up over 6%?

Could the interest rates go down over time to Eurozone levels?

300: If US interest rates go down to Eurozone levels, I suspect there will be much larger problems to worry about than NYRE.

Thank you for taking the bait. The point is that interest rates from here will not just go up significantly in a vacuum. Economy will have to get much stronger.

Not sure I understand your post, 300. Interest are almost certainly going up, with the Fed prepared to increase at least 4 times over the next year. They won't skyrocket, but mortgages will be getting pricier (and further depress housing values, of course).

Is your point that the rise is insignificant? Or am I just missing the boat entirely? lol.

10y rates are already pricing in Fed increases with unwind of QE also priced into some extent. 5y rates are also similarly pricing in future Fed rate increases. Could Fed stop after raising twice? There are certainly some people in that camp.

Look at how the fed estimate of neutral rate has come down over time in the graph and how we are much closer to neutral already. Also note Clarida’s concern about Fed ability to raise rates given low interest rates elsewhere in the world.
https://www.google.com/amp/s/www.wsj.com/amp/articles/the-tricky-part-of-the-feds-next-rate-increase-1536831001

I remember when mortgage rates were >150 basis points lower than today and people were making the same arguments about rates not going up.

PS As the US has decided to vastly increase borrowing to cover the increased deficit it's going to be harder to sell T-bills without paying higher yeilds.

What was the annual high on 2011 and 2014?

What was the annual high in 2011 and 2014?

People have been calling 6-7 percent rates since 2011 and the current levels are not far from 2011.
http://www.freddiemac.com/pmms/pmms30.html

Have we ever been in a cycle where prices are declining while interest rates are near all-time lows? This seems one of the biggest risks of the current climate. Traditional DSCR and other underwriting criteria do not take into account potential changes, perhaps dramatic changes in these measuring instruments.

What we are seeing now is all in the absence of an unforseen socioeconomic event. So if the market is teetering now, what will happen if such an event occurs?

Again, I think we are unchartered territory with regards to the current local climate. In spite of the strong national economic climate, many risks in the local market are being ignored.

Are rents teetering as well?

300: I don't understand your point. Interest rates are a factor in pricing, but arguing that interest rates can go down or at least not increase from here does not mean real estate markets can remain strong.

You are saying that interest rates going down will be a function of bad economy which will hurt real estate? Will the interest rates going up not be a function of better economy which can help real estate?

"Are rents teetering as well?"

When landlords are giving incentives of up to 3 months free rent plus paying the broker's fee (and the percentage of such deals is increasing) I would say worse than teetering.

Bad economy, low inventory, interest rates falling - NY Real Estate prices go up:
https://olshan.com/marketreport.php?id=8

Good economy, too much inventory, interest rates rising - NY Real Estate prices do what?

Manhattan Builders’ 5-Year Plan: 33,000 New Rentals and Condos

https://www.bloomberg.com/news/articles/2018-09-27/manhattan-builders-5-year-plan-33-000-new-rentals-and-condos

Hey guys, did another episode of my new concept Talking Manhattan. This time with Russ Putterman of KWNYC. The guy does tons of deals, has great insights on conditions in realtime and tells it like it is.

https://medium.com/@noahrosenblatt/talking-manhattan-russ-putterman-of-kwnyc-9e2655100e53

NOTE - this was done with same av equipment, but since, we did 4 more interviews with updated audio mics, so this one will still be same quality as last. Starting next week the released videos should be better. Still very much in development of this

Noah,
If I'm reading your numbers correctly you are showing 7,200 inventory (up 24% YOY) even with a staggering 4,399 off market (up 44.7% YOY). An comment?

I guess what I am interested in is:
What is the ratio of listings leaving "supply" due to going into contract vs being pulled and how does it compare to what we know was a healthy market (say 2014)?

Hey 30, well, in down cycles or slow markets, off market will rise as sellers choose to take an active listing off the market if they are not getting their price. It signals a rising disconnect between bid and ask. It validates leverage shifting to buy side. That kind of thing. I love that metric actually

Great: so what was it in 2014 and what is it now using your data?

2014 -1918
2018 - 4399

For the same time periods (I don't know how far you go back for the "off market" figures - is it 6 months? YTD?) how many went into contract?

Nov 10 2014, and yesterday

300: Sorry for the delayed response. I care less about interest rates themselves in isolation vs. in context to other factors such as valuations, hence why I found the comparison against cap rates interesting. The other factor to keep in mind is that high interest rates do not always indicate an economy that is doing well. Brazil had 40%+ real interest rates last year and its GDP barely grew. You can have both high interest rates and a poor economy.

30yr: The article you provided helps illustrate that. It wasn't just low interest rates. it was the fact that RE was viewed as a safe harbor type of investment + low inventory + low interest rates. But I think the real killer variable that the article doesn't mention is low valuation.

thoth,
I don't disagree, but in my eyes the switch in valuation is just more downward pressure on the current market. Especially when you add in how much new inventory is coming on the market. However I think an awful lot of the *current* delta in valuation is directly caused by the change in interest rates. Cap rates falling below mortgage rates is always a big stressor on any market. So talking about both interest rates AND cap rates may be double counting - I don't know, because generally when markets flip from rapidly appreciating to flat or down, the cap rate changes because the part of it which is a risk premium of zero goes to some number greater than zero / the *assumption* of appreciation goes to zero.
The market I think this will hit the hardest is small multi-family in "emerging" areas. These were buildings I was selling back in the day for 4X rent roll, but lately have been trading at a 4% cap rate (and similar buildings in Manhattan have traded at close to 0% cap rate).

But I will also add that I don't think most buyers who intend to be owner occupants do any valuation other than comparing the unit they are looking at to recent sales/on market.

One thing we are hearing fro a lot from brokers is that there are still sellers looking at the last sale in their building and saying "I want that plus 5%" and the brokers have to explain to them why they won't get it. What I don't think they (brokers) realize is that we are at the very beginning of this down cycle and when people start hearing from their friends that the got a unit for 10% less than the last sale in the building they are likely to be saying "My friend bought a unit that he went into contract 6 months ago and he got a 10% discount off of the last sale in the building, and the market has continued to go down, so I want a 15% discount off of the last sale in the building." (NB I'm not saying that is a correct analysis: I'm saying I've been through enough down markets to know what to expect in buyer behavior). This is exactly the behavior which drives markets down further once they turn AT ALL because it's exactly the same behavior which drove the market on the way up in reverse.

I re-read my above post and I think I wasn't clear on a point:
I think that the current shift in capitalization ratio can be close to or 100% explained by interest rates. I also think that as prices level off / start to recede, investors start to add back in risk premiums, which had disappeared or even gone negative in recent years because they were eclipsed by assumed appreciation.

Noah, thanks for the link to the video. I find that content excellent and this one was spot on. I’m a buyer and you guys nailed exactly what is going on out there. Also, weak/inexperienced brokers are adding to the problem because they didn’t see it coming and are still trying the argument (mentioned above) that sellers just want what they paid in 2015 (at least) without comps in 2018. That argument is, of course, absurd, but it’s tough to get through to some of these sellers who think their principal is guaranteed. Sellers—it’s not what you paid in 2015 or what you did to the apartment. It’s what the market says it’s worth today, right now, in this market. Full stop.

AM,
I think part of it is that if you try you can still find plenty of 2018 sales which support 2015 prices (or even higher). See the thread here in the past few days about 151 West 21st St.

You also have plenty of 2015 closings which were actually 2012/2013 sales as well as 2018 closings which were 2015 sales (as pointed our by 300 Mercer in the 220 CPS thread).

So if sellers want to cherry pick numbers it's easy for them to justify their prices. Add to that some of them are actually still getting these numbers and everyone always thinking that they are going to be "that one."

Thx AM!

Did Powell just blink with his statement that rates are not much below neutral?

Federal Reserve Chairman Jerome Powell said Wednesday that interest rates are “just below” a broad range of Fed officials’ estimates of a level considered neutral, a setting designed to neither speed nor slow growth.

From WSJ.

Equity markets happy.

So still at least one more increase in December.

It seems as if brokers have started to talk the talk, but have not seriously begun to walk the walk:
We are hearing from a lot of brokers who have said the market has changed, that you can't price from closed sales any longer, etc. But it seems a lot of these brokers who are saying this are still taking listings above peak prices.
In the past this has been the type of behavior which has led to harder market corrections. When markets correct and sellers quickly adapt, prices correct and deals keep flowing. When sellers resist the price correction, deal flow slows, inventory builds, only extremely motivated sellers transact, and prices correct even more harshly.

I don’t understand how the market gets better in next 4-6 months. Spring inventory and tax filing season, mortgage rates not going down, LLC buyers facing tighter disclosure requirements, and new buildings coming on market. If you don’t know that you’re holding for 8+ years, why are you buying now instead of renting?

Team M, I had a lovely long and well-phrased (I thought) answer, which of course got wiped because I wasn't signed in. So to try to put it in a shorter form, because I'm tired, I don't sell ultra-luxury. I only hear about it second-hand from friends and from other brokers.

But I do sell two-bedrooms in nice-ish neighborhoods, and I sell three-bedrooms in very desirable neighborhoods. So let's call those two price points, roughly, $1.5 million and $5 million.

And in general, my buyers at that lower price point are stretching to buy the best they can afford, which means stretching to spend whatever the co-op board will let them, generally in a range of 20% to 30% of income on housing. My buyers at the higher price point, in contrast, don't spend that much. (I might float the idea that a person spend 20% of her income on housing, but it's going to get shot down).

So when we see the effects of the tax bill on incomes (and we truly don't know what they are, because no one has done their 2018 taxes yet) assuming it's marginal to both groups, it will absolutely steer the former group away from certain properties, because they won't be able to afford them anymore. But the higher-earning group -- spending is much more individual to them. Someone in the higher-earning group might "feel" poorer -- and they might end up losing more of their income to taxation (thanks Trump) but that won't be an absolute prohibition that stops them from making a purchase. Does that make sense?

I think that in general "working /professional" class people spend "as much as they can afford" on their primary residence and "rich" people spend depending on how they feel at the time.

I got lucky with my guess.
"sipplemc, It is no more than 1200 sq ft. Mid-end reno. I think $1600+ per sq ft is a little high. I can understand if this were to be 1500 per sq ft. So $1.8mm is probably the current market in my opinion."

https://streeteasy.com/sale/1364005