Consultant firm projects bonuses in financial sector to sink in 2008 on credit problems, decline in business, and mounting layoffs. NEW YORK (CNNMoney.com) -- Looks like Wall Street bankers can kiss those fat bonuses goodbye this year. Some bankers' bonuses will be slashed by nearly half in 2008, and most can expect a 15% to 25% reduction from last year's levels, according to a recent projection... [more]
Consultant firm projects bonuses in financial sector to sink in 2008 on credit problems, decline in business, and mounting layoffs.
NEW YORK (CNNMoney.com) -- Looks like Wall Street bankers can kiss those fat bonuses goodbye this year.
Some bankers' bonuses will be slashed by nearly half in 2008, and most can expect a 15% to 25% reduction from last year's levels, according to a recent projection from compensation consultancy firm Johnson Associates.
Johnson Associates expects the big wigs to give up the most, with bonuses of senior firm managers at investment banks tumbling 35% to 45% from 2007 levels. With the public scrutinizing deep-pocketed CEOs when most Americans are penny pinching, shareholders may not stand for executives taking home millions while their companies lose billions, the consultancy firm said.
Other staffers at investment banks could see their extra compensation sink 20% to as much as 30%.
Hedge fund managers and commercial and retail bankers' bonuses could be 15% lower, while real estate brokers may have to take home 10% less than last year.
That's because banks have experienced "a fundamental change in business," weighing on their results, according to the consultancy firm. The subprime mortgage meltdown and ensuing credit crisis have hampered banks from engaging in their core lending businesses. As a result, layoffs, write downs and huge losses have mounted for the industry, and stocks have been hammered.
Merrill Lynch (MER, Fortune 500), Citigroup (C, Fortune 500), Wachovia (WB, Fortune 500) and many others have reported staggering losses and took billion of dollars worth of writedowns because of bad mortgage bets. When the final quarterly results are tallied, the financial sector is expected to report total profits of just $8.9 billion in the second quarter, down 85% from earnings of $61.3 billion a year ago.
Recently the meaty bonuses that bankers had become accustomed to began to shrink. Wall Street bonuses sank 4.7% in 2007 as firms' impressive results became impressive losses and 2008 looks to like it might be much worse.
http://money.cnn.com/2008/08/06/news/economy/wall_street_bonuses/index.htm?postversion=2008080618
Fortunately, the foreigners are moving in.
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Response by MMAfia
over 17 years ago
Posts: 1071
Member since: Feb 2007
1. Wall St. has nothing to do with Manhattan Real Estate.
2. Foreigners will support Manhattan Real Estate.
3. Manhattan is different- even though it exploded higher in prices like the rest of the country, it won't implode back down like the rest of the country.
Just ask Petrfitz- according to him, now is the best time EVER in the entire history of Manhattan Real Estate since the beginning of time to buy/invest in it. He even justified this bold statement in earlier threads.
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Response by stevejhx
over 17 years ago
Posts: 12656
Member since: Feb 2008
1. Wall St. has nothing to do with Manhattan Real Estate.
Agreed.
2. Foreigners will support Manhattan Real Estate.
Agreed. Don't forget the Martians. There's ice there, so tequila can't be far behind.
3. Manhattan is different
ABSOLUTELY. The capital of capitalism isn't subject to the laws of supply and demand. Who could be so dense as to think it would be.
The SAVIOUR in this is going to be the tax benefit.
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Response by EddieWilson
over 17 years ago
Posts: 1112
Member since: Feb 2008
But what about the Irish Carpenters...?
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Response by Jerkstore
over 17 years ago
Posts: 474
Member since: Feb 2007
Just think of the negative ripple effect on tanning salons and Lexus dealers' leasing operations. Oy vey. I may buy stock in Toyo Suisan, though.
I'm not even sure some of these firms should be paying much a bonus. The majority are bleeding capital like there is no tomorrow, borrowing money at any cost to finance their write-downs and some refuse to cut their dividends to keep investors & employees that are sitting on a mountain of their paper.
There has been much debate about the traditional investment banks having archaic business models that are broken & I think it's not difficult to see why. It will be interesting to see how long they can keep it up before additional capital becomes becomes rare as hens teeth.
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Response by EddieWilson
over 17 years ago
Posts: 1112
Member since: Feb 2008
> wait, wall st bonuses are going to be down?
Wait, there is a mortgage crisis?
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Response by eric_cartman
over 17 years ago
Posts: 300
Member since: Jun 2007
"Wall St. has nothing to do with Manhattan Real Estate.": violently disagree.
It's a well known fact that high wall st bonuses drive house prices high, but low wall st bonuses will not make house prices go down.
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Response by EddieWilson
over 17 years ago
Posts: 1112
Member since: Feb 2008
> It's a well known fact that high wall st bonuses drive house prices high, but low wall st bonuses
> will not make house prices go down.
Really? Who knows this? And which economist confirmed this correlation as fact?
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Response by JuiceMan
over 17 years ago
Posts: 3578
Member since: Aug 2007
"And which economist confirmed this correlation as fact?"
Give me a break EW. Why is it that every dooms day tidbit found on www.okmagazine.com is law but anything that could potentially go against your 40% correction prognostication needs to backed up with some sort of "fact" or "economist". Before demanding it from others, you may want to start listing the sources for all of your dooms day crap-o-la.
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Response by LICComment
over 17 years ago
Posts: 3610
Member since: Dec 2007
Hmm. Someone else thinks Eddie Wilson is full of crap. Interesting . . .
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Response by unnamed
over 17 years ago
Posts: 48
Member since: May 2007
A couple of observations. The best source of how Wall Street bonuses will come in is in the financial statements of the banks themselves: through roughly the 1st half of the year (roughly, some have Nov fiscal year-ends) they have accrued compensation expense at between 70-80% of 2007 levels, so suggesting that the average bonus will be down ~20-30% seems to make some sense. Perhaps a little less given that is spread across a smaller employee base. Jamie Dimon said explicitly on JPM's 2Q conference call, in response to a question noting their high comp accrual in the first half, that he was focused on maintaining morale and intended to pay his people.
My general view on Manhattan RE is somewhat bearish, but I do not think the fact that a mid-level VP who made $750K in 2007, and who is looking at total comp of 400-500K this year, will materially change his or her purchase decision, especially given that he or she probably also has substantial savings.
The larger issue is whether these individuals have lingering anxiety about their continued employment on Wall Street or around Wall Street. My personal view is that the bloodletting is largely over (take that for what it's worth!), at least it seems to be that way from the inside, and Morgan Stanley has publicly stated as much last week (and their stock has outperformed over the last 10 days since saying it.
So we will see. Usually when the media and blogosphere start forecasting an impending apocalypse, I back the truck up.
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Response by houser
over 17 years ago
Posts: 331
Member since: Apr 2008
"Usually when the media and blogosphere start forecasting an impending apocalypse, I back the truck up."
Interesting I always thought the new media and Blogsphere always gave accurate forecasts of the markets.
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Response by EddieWilson
over 17 years ago
Posts: 1112
Member since: Feb 2008
> Before demanding it from others, you may want to start listing the sources for all of your dooms day
> crap-o-la.
I do. I've posted more article and source links than almost anyone on this board.
Now its your turn.
> Hmm. Someone else thinks Eddie Wilson is full of crap. Interesting . . .
Hmm, LIC is excited that he's not the only one making up data. I'm still laughing about your 9% manhattan return based on a careful analysis of... your best guess. That was maybe your best ever.
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Response by EddieWilson
over 17 years ago
Posts: 1112
Member since: Feb 2008
"I do not think the fact that a mid-level VP who made $750K in 2007, and who is looking at total comp of 400-500K this year, will materially change his or her purchase decision, especially given that he or she probably also has substantial savings."
I don't agree with the latter assumption... but, more to the point, the New York Times RE section did a cover story 3-4 weeks basically all about the substance of your claim. It very clearly noted that the purchasing power of Wall Street folk has already been severly compromised, and it is already affecting purchase decisions. The link was posted on this board, if you have an interest...
And, thats all pre actual bonus determinations...
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Response by EddieWilson
over 17 years ago
Posts: 1112
Member since: Feb 2008
> Hmm. Someone else thinks Eddie Wilson is full of crap. Interesting . . .
Now its 150 posts in a row from LIC without a fact or a brain...
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Response by stevejhx
over 17 years ago
Posts: 12656
Member since: Feb 2008
"Usually when the media and blogosphere start forecasting an impending apocalypse, I back the truck up."
That's about the worst time to back the truck up. The best time is after the apocalypse has occurred.
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Response by eeeeeee
over 17 years ago
Posts: 5
Member since: Aug 2008
both Stevejhx and EddieWilson have made claims that they have posted the most articles and facts on Streeteasy. It can't be both of them, and so one is definitely wrong. We now have clear evidence that Stevejhx and EddieWilson are in contradiction to each other and clear evidence that only one of them, at most, is correct about statements made on Streeteasy.
Put that in your pipe
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Response by EddieWilson
over 17 years ago
Posts: 1112
Member since: Feb 2008
When did LIC's mom start posting?
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Response by mdennes
over 17 years ago
Posts: 15
Member since: Mar 2007
I do not think the fact that a mid-level VP who made $750K in 2007, and who is looking at total comp of 400-500K this year, will materially change his or her purchase decision, especially given that he or she probably also has substantial savings.
1. Typical wall street bonus = 250k cash cap plus earn-out stock component. Options typically vest over a 5-year period assuming improvement in share price. Financials down 10-15% this year. Old options are worthless. New options not yet in the money.
2. Not only are people making less money. There are less people. It is a complete bloodbath on the street. The mid-level VPs have all been fired.
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Response by serge07
over 17 years ago
Posts: 334
Member since: Aug 2008
I suspect those mid-level VPs have already purchased their apartments and perhaps a house or two. I don't see any meaningful demand from this group. No doubt that their numbers are also on the decline as WS is forced to reduce overhead.
The firms may have accrued their 2008 bonus pools but that doesn't change their liquidity crisis. I'll be interested to see the accrual numbers for 2009 & 2010. Those will tell the real story as revenue bases at these firms have declined 40% & profitability has been severely impaired. Goldman, Chase & Morgan are in the best financial condition but the others are in a world of hurt.
I've thought for some time that 2009 & 2010 could be the problematic periods for RE. The elections can also be very significant as we are facing considerably higher tax rates on dividends and capital gains, neither being great news for the investment climate. I have never seen anyone propose a 70-90% increase in the cap gains tax rate so there is no telling what the ultimate impact will be if passed.
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Response by ritchi
over 17 years ago
Posts: 61
Member since: Aug 2008
all things being taken into account, a 25% reduction from 2007 levels isn't bad when compared to 2005 or so. Remember, these are bonus amounts, it isn't like the net worth of the banker will be declining 25% and even though salary is just a fraction total, it is still paid.
Just a comment on the mid-level VP. From personal experience and that of friends in or close to that range: Making $500K vs. $750K makes a HUGE impact on purchasing decision. Keep in mind, he/she probably pays close to 50% taxes and has pretty high fixed and lifestyle expenses (car, restaurants, trips, clothes, etc.). Even worse if he/she has children and has to factor in child care. I promise you that they'll postpone buying an apartment, or buy a smaller/cheaper place way before they'd consider cutting down on the restaurants, clothes, trips, etc. So the money left over for a downpayment, and for monthly payments drops much faster than income, or disappears altogether.
Also, Serge07, why do you think they've already bought an apartment and probably a couple houses? Mid-level VP is maybe 35ish, has business school loans, an unnecessarily spendthrift lifestyle and/or likely a family to support, and they've only been making their high income for a few years. They well may own an apartment they bought several years ago, but are probably growing out of it and would love to expand, but all of a sudden it's a lot more of a stretch they it would've been a year ago - because they have to put a whole lot more down, and because their income and job security are down.
For the $1.5MM-$3MM apartments, I bet the mid-level VP making $750K is exactly where the demand had been coming from. Not so much anymore, I would think.
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Response by houser
over 17 years ago
Posts: 331
Member since: Apr 2008
What about those that received a severance package and that starts to dwindle come this fall and winter? I see some issues popping up. Time will tell.
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Response by TenthStreet
over 17 years ago
Posts: 48
Member since: Jul 2008
NB99, couldn't agree with your comments more. Demand from this segment will disappear for a couple years -- they generally have a balance sheet for a downpayment for a condo, maybe a co-op, but cannot buy these units in cash. Generally starting a family. There's basically no chance they'd buy that $1.5m+ 2 BR any more, especially with reduced pay, declining job security, and reduced expectations of future growth in pay. Not to mention shrinking availability of credit. The numbers just don't work. If demand continues, it will not be from this group.
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Response by 80sMan
over 17 years ago
Posts: 633
Member since: Jun 2008
Let's not overlook the fact that anyone getting paid $750,000 a year is probably getting more than a lot of that in stock. That can't be sold for 5 years (restricted stock). The crash in investment bank stocks has essentially wiped out a large number of paper millionaires. A big part of the bonus surge in real estate was people cashing in their restricted stock from 5 years ago, not so much being handed a big check for the current year (compensation for 2008 is actually paid in the future, as an incentive for you to stay put).
As an example: Merrill Lynch exec paid $750,000 in 2003: $150,000 salary + $200,000 cash + $400,000 stock
The stock price in 2003 was 52. Employee gets issues stock at a 30% discount or 36. Current price is 24. And they have to pay taxes on the stock when they cash it out.
This is a real disaster. People who are used to being able to pull several hundred thousand dollars out of thin air every year are going to find the coffers are empty. Very, very bad news for the Wall Street crowd.
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Response by newbuyer99
over 17 years ago
Posts: 1231
Member since: Jul 2008
80s Man - your point is valid but overstated. The IB VP making $750K total gets anywhere between 10-20% in stock, not 50%+ as in your example. The guys getting huge percentages of their comp in stock are the execs, and those numbers are much, much higher than $750K, and thus less relevant to this thread.
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Response by serge07
over 17 years ago
Posts: 334
Member since: Aug 2008
newbuyer99, I have a few friends (late 30s early 40s) in the financial field and not one of them rents. Two have purchased a second home (Ct & Adirondack) as a get away but also as an investment. I probably should have left out the "or two" in my statement above. :)
A heck of a lot of apts were sold in NYC during the past few years. Hopefully, it's not a stretch to assume that that a significant percentage of folks that had the means made the jump either for personal use or as an investment. I would be interested to know the percentage of condos in Manhattan that are currently held by investors as opposed to homeowner occupied. In the 1990s, the former wasn't much of an issue as the vast majority of the RE was co-ops.
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Response by newbuyer99
over 17 years ago
Posts: 1231
Member since: Jul 2008
Serge07 - fair statement. I think I was using the $750K/year VP and assuming ibanking such as M&A, which then implied younger than your friends - 30-35. Of the people that are older in other parts of finance making that kind of money, I agree with you that few if any rent.
But at today's prices, buying a nice family place in Manhattan for someone making $750K/year (let alone $500K/year) is not as easy as one might think. So I would guess your 40-ish friends either (1) make more than $750K, by themselves or together with working spouses, (2) live outside Manhattan or (3) bought more than 1-2 years ago, at meaningfully lower price levels. Not disagreeing with your last post, just making a related point.
newbuyer99, their incomes are lower than the levels you indicated (I'd say in the range of $300-$450 which isn't exactly peanuts in most circles) but they are savers for the most part and carefully invest their funds. If one has the discipline to put away a significant down payment and is able get below the jumbo loan limits (ie, Fannie Mae/Freddie Mac financing), these income levels should be quite workable.
The apts are all centrally located neighborhoods in Manhattan. I'm not exactly sure when the purchases were made but I would estimate mostly between 2003-2006. There are working spouses but also stay at home moms. Nothing is impossible if one has perseverance & patience. :)
I get a kick out of watching my brother-in-law in action. His income is multiples of your upper range but even then, he is one cheap individual. None of this lavish spending business that you discuss above. His offers are insulting at best and is relentless in his pursuit. However, he seems to manage to find exactly what he wants and at his price. I've learned a thing or two from his tactics; an asking price is simply the maximum a seller expects one to pay, no more than that.
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Response by newbuyer99
over 17 years ago
Posts: 1231
Member since: Jul 2008
Your points on saving and careful investing are absolutely valid. Still struggling with the math a bit, though.
Nice family apartment (I am assuming your friends have kids) costs at least $2MM today, and likely more. With 25% down, that's a $500K downpayment. That leaves a $1.5MM mortgage, only $1MM of which is tax deductible. Assuming 6.5% interest and $2500 in maintenance, $12K in monthly costs. Maybe $3K of tax savings, so $9K net per month, or $108K/year.
Say $375K income, stay-at-home spouse. Maybe 45% taxes, so $170K take-home pay. With a lot of discipline, you can maybe save $50K/year on that. Over 10 years, with 7% after-tax return on your investment (which would be very, very good), that becomes $800K.
So to buy that $2MM apartment, they'd have to put $500K down, spend $50-$100K on closing costs, probably spend at least something on renovations, and show the bank (and maybe coop board) some cash as a cushion. Pretty tight on the $800K savings. Then, they have to spend $108K/year net on mortgage and maintenance, which is 65% of their post-tax income. Even tighter. And finally, others more knowledgeable can correct me, but I don't think a $375K income would qualify for a $1.5MM mortgage.
I am not trying to argue with facts, just trying to understand how what you describe is possible. Please feel free to correct my logic above, or to add other factors I am not taking into account.
Maybe I am harping on the point a bit, but I think it's relevant for trying to gauge the market. One of the thesis of the bears (including myself) is the reduced affordability of real estate, which is unsustainable. I know from experience (myself and friends) how little one can really buy on a pretty large income, so would be interested in understanding the other side of the "affordability" argument.
As an aside, I like the point about your brother in law. Many of us can use a little of that.
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Response by serge07
over 17 years ago
Posts: 334
Member since: Aug 2008
newbuyer99, I don't recall any of them paying close $2mm for their apartment. The highest I'm aware of was $1.25mm and they did put a hefty down payment to reduce the nearly 2% condo mortgage tax. This was for a two bedroom located at either 91st or 92nd on the west side of 3rd avenue. I've been there often and it is a very nice spacious apt, full service building. I am not familiar with their maintenance/property taxes are so I can't comment on them. I'd say this was late 2005 or early 2006. BTW, this couple did a ton of research for easily six months before jumping and their efforts paid off.
Perhaps folks are asking $2mm today for a quality two bedroom but we'll see how those prices stick over the next year or two. I haven't done research on this market segment recently but it seems to me that one could do better. As an example, eighteen months ago I checked out a beautiful 2 bed pre-war (full service co-op, West End Ave, Hudson River views & low maint) with an asking price of $1.475mm. If you're referring to a three bedroom, then that's a totally different market.
Your math would change considerably if the mortgage were in the range of $700-800K which I believe is the correct amount in the above situation. In addition, back in those days anyone could walk into a bank and obtain a mortgage with relative ease. Today, things have changed just a tiny bit.
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Response by newbuyer99
over 17 years ago
Posts: 1231
Member since: Jul 2008
That makes a lot more sense. Still not cheap, but much, much more manageable at those income levels. I had made the assumption that the type of person you describe has a family and wants/needs at least a 3-bedroom, and maybe a 4-bedroom, with 1500-2000SF of space. That's why I figured $2MM or above. Of course, that describes my family's apartments wants/needs (we're only 30ish, but looking ahead), so others well may be different. In any case, appreciate the clarification.
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Response by ESueCho
over 17 years ago
Posts: 58
Member since: Apr 2008
has anyone figured out that EddieWilson and Stevejhx are the identical person?
Same positions
Same style of posting a negative article as worthy of its own discussion topic
Same argument style
Same sarcasm
Same level of anger
Same style of rebuttal, interspersing the original quote and his response
Same claim to have worked at an investment bank, but seemingly not in the investment banking group itself
Same imperfect ability to do math
Same language style and pedantry related to language
Same self-corrections of their own posting
Same reference to "they" and "them" as out to get people who don't think real estate is going up
what else is the same ... anyone care to point it out?
1. Wall St. has nothing to do with Manhattan Real Estate.
2. Foreigners will support Manhattan Real Estate.
3. Manhattan is different- even though it exploded higher in prices like the rest of the country, it won't implode back down like the rest of the country.
Just ask Petrfitz- according to him, now is the best time EVER in the entire history of Manhattan Real Estate since the beginning of time to buy/invest in it. He even justified this bold statement in earlier threads.
1. Wall St. has nothing to do with Manhattan Real Estate.
Agreed.
2. Foreigners will support Manhattan Real Estate.
Agreed. Don't forget the Martians. There's ice there, so tequila can't be far behind.
3. Manhattan is different
ABSOLUTELY. The capital of capitalism isn't subject to the laws of supply and demand. Who could be so dense as to think it would be.
The SAVIOUR in this is going to be the tax benefit.
But what about the Irish Carpenters...?
Just think of the negative ripple effect on tanning salons and Lexus dealers' leasing operations. Oy vey. I may buy stock in Toyo Suisan, though.
wait, wall st bonuses are going to be down?
Steve,
Are you this guy?
http://nymag.com/daily/intel/2008/08/tommii_cosgrove_proves_comment.html
Never heard of him.
I'm not even sure some of these firms should be paying much a bonus. The majority are bleeding capital like there is no tomorrow, borrowing money at any cost to finance their write-downs and some refuse to cut their dividends to keep investors & employees that are sitting on a mountain of their paper.
There has been much debate about the traditional investment banks having archaic business models that are broken & I think it's not difficult to see why. It will be interesting to see how long they can keep it up before additional capital becomes becomes rare as hens teeth.
> wait, wall st bonuses are going to be down?
Wait, there is a mortgage crisis?
"Wall St. has nothing to do with Manhattan Real Estate.": violently disagree.
It's a well known fact that high wall st bonuses drive house prices high, but low wall st bonuses will not make house prices go down.
> It's a well known fact that high wall st bonuses drive house prices high, but low wall st bonuses
> will not make house prices go down.
Really? Who knows this? And which economist confirmed this correlation as fact?
"And which economist confirmed this correlation as fact?"
Give me a break EW. Why is it that every dooms day tidbit found on www.okmagazine.com is law but anything that could potentially go against your 40% correction prognostication needs to backed up with some sort of "fact" or "economist". Before demanding it from others, you may want to start listing the sources for all of your dooms day crap-o-la.
Hmm. Someone else thinks Eddie Wilson is full of crap. Interesting . . .
A couple of observations. The best source of how Wall Street bonuses will come in is in the financial statements of the banks themselves: through roughly the 1st half of the year (roughly, some have Nov fiscal year-ends) they have accrued compensation expense at between 70-80% of 2007 levels, so suggesting that the average bonus will be down ~20-30% seems to make some sense. Perhaps a little less given that is spread across a smaller employee base. Jamie Dimon said explicitly on JPM's 2Q conference call, in response to a question noting their high comp accrual in the first half, that he was focused on maintaining morale and intended to pay his people.
My general view on Manhattan RE is somewhat bearish, but I do not think the fact that a mid-level VP who made $750K in 2007, and who is looking at total comp of 400-500K this year, will materially change his or her purchase decision, especially given that he or she probably also has substantial savings.
The larger issue is whether these individuals have lingering anxiety about their continued employment on Wall Street or around Wall Street. My personal view is that the bloodletting is largely over (take that for what it's worth!), at least it seems to be that way from the inside, and Morgan Stanley has publicly stated as much last week (and their stock has outperformed over the last 10 days since saying it.
So we will see. Usually when the media and blogosphere start forecasting an impending apocalypse, I back the truck up.
"Usually when the media and blogosphere start forecasting an impending apocalypse, I back the truck up."
Interesting I always thought the new media and Blogsphere always gave accurate forecasts of the markets.
> Before demanding it from others, you may want to start listing the sources for all of your dooms day
> crap-o-la.
I do. I've posted more article and source links than almost anyone on this board.
Now its your turn.
> Hmm. Someone else thinks Eddie Wilson is full of crap. Interesting . . .
Hmm, LIC is excited that he's not the only one making up data. I'm still laughing about your 9% manhattan return based on a careful analysis of... your best guess. That was maybe your best ever.
"I do not think the fact that a mid-level VP who made $750K in 2007, and who is looking at total comp of 400-500K this year, will materially change his or her purchase decision, especially given that he or she probably also has substantial savings."
I don't agree with the latter assumption... but, more to the point, the New York Times RE section did a cover story 3-4 weeks basically all about the substance of your claim. It very clearly noted that the purchasing power of Wall Street folk has already been severly compromised, and it is already affecting purchase decisions. The link was posted on this board, if you have an interest...
And, thats all pre actual bonus determinations...
> Hmm. Someone else thinks Eddie Wilson is full of crap. Interesting . . .
Now its 150 posts in a row from LIC without a fact or a brain...
"Usually when the media and blogosphere start forecasting an impending apocalypse, I back the truck up."
That's about the worst time to back the truck up. The best time is after the apocalypse has occurred.
both Stevejhx and EddieWilson have made claims that they have posted the most articles and facts on Streeteasy. It can't be both of them, and so one is definitely wrong. We now have clear evidence that Stevejhx and EddieWilson are in contradiction to each other and clear evidence that only one of them, at most, is correct about statements made on Streeteasy.
Put that in your pipe
When did LIC's mom start posting?
I do not think the fact that a mid-level VP who made $750K in 2007, and who is looking at total comp of 400-500K this year, will materially change his or her purchase decision, especially given that he or she probably also has substantial savings.
1. Typical wall street bonus = 250k cash cap plus earn-out stock component. Options typically vest over a 5-year period assuming improvement in share price. Financials down 10-15% this year. Old options are worthless. New options not yet in the money.
2. Not only are people making less money. There are less people. It is a complete bloodbath on the street. The mid-level VPs have all been fired.
I suspect those mid-level VPs have already purchased their apartments and perhaps a house or two. I don't see any meaningful demand from this group. No doubt that their numbers are also on the decline as WS is forced to reduce overhead.
The firms may have accrued their 2008 bonus pools but that doesn't change their liquidity crisis. I'll be interested to see the accrual numbers for 2009 & 2010. Those will tell the real story as revenue bases at these firms have declined 40% & profitability has been severely impaired. Goldman, Chase & Morgan are in the best financial condition but the others are in a world of hurt.
I've thought for some time that 2009 & 2010 could be the problematic periods for RE. The elections can also be very significant as we are facing considerably higher tax rates on dividends and capital gains, neither being great news for the investment climate. I have never seen anyone propose a 70-90% increase in the cap gains tax rate so there is no telling what the ultimate impact will be if passed.
all things being taken into account, a 25% reduction from 2007 levels isn't bad when compared to 2005 or so. Remember, these are bonus amounts, it isn't like the net worth of the banker will be declining 25% and even though salary is just a fraction total, it is still paid.
Not sure how well those bonuses are going to be coming back in the next uptick. Yikes!
http://www.nytimes.com/2008/08/12/business/worldbusiness/12indiawall.html?ex=1376280000&en=24e02695e0d5bc64&ei=5124&partner=permalink&exprod=permalink
Just a comment on the mid-level VP. From personal experience and that of friends in or close to that range: Making $500K vs. $750K makes a HUGE impact on purchasing decision. Keep in mind, he/she probably pays close to 50% taxes and has pretty high fixed and lifestyle expenses (car, restaurants, trips, clothes, etc.). Even worse if he/she has children and has to factor in child care. I promise you that they'll postpone buying an apartment, or buy a smaller/cheaper place way before they'd consider cutting down on the restaurants, clothes, trips, etc. So the money left over for a downpayment, and for monthly payments drops much faster than income, or disappears altogether.
Also, Serge07, why do you think they've already bought an apartment and probably a couple houses? Mid-level VP is maybe 35ish, has business school loans, an unnecessarily spendthrift lifestyle and/or likely a family to support, and they've only been making their high income for a few years. They well may own an apartment they bought several years ago, but are probably growing out of it and would love to expand, but all of a sudden it's a lot more of a stretch they it would've been a year ago - because they have to put a whole lot more down, and because their income and job security are down.
For the $1.5MM-$3MM apartments, I bet the mid-level VP making $750K is exactly where the demand had been coming from. Not so much anymore, I would think.
What about those that received a severance package and that starts to dwindle come this fall and winter? I see some issues popping up. Time will tell.
NB99, couldn't agree with your comments more. Demand from this segment will disappear for a couple years -- they generally have a balance sheet for a downpayment for a condo, maybe a co-op, but cannot buy these units in cash. Generally starting a family. There's basically no chance they'd buy that $1.5m+ 2 BR any more, especially with reduced pay, declining job security, and reduced expectations of future growth in pay. Not to mention shrinking availability of credit. The numbers just don't work. If demand continues, it will not be from this group.
Let's not overlook the fact that anyone getting paid $750,000 a year is probably getting more than a lot of that in stock. That can't be sold for 5 years (restricted stock). The crash in investment bank stocks has essentially wiped out a large number of paper millionaires. A big part of the bonus surge in real estate was people cashing in their restricted stock from 5 years ago, not so much being handed a big check for the current year (compensation for 2008 is actually paid in the future, as an incentive for you to stay put).
As an example: Merrill Lynch exec paid $750,000 in 2003: $150,000 salary + $200,000 cash + $400,000 stock
The stock price in 2003 was 52. Employee gets issues stock at a 30% discount or 36. Current price is 24. And they have to pay taxes on the stock when they cash it out.
This is a real disaster. People who are used to being able to pull several hundred thousand dollars out of thin air every year are going to find the coffers are empty. Very, very bad news for the Wall Street crowd.
80s Man - your point is valid but overstated. The IB VP making $750K total gets anywhere between 10-20% in stock, not 50%+ as in your example. The guys getting huge percentages of their comp in stock are the execs, and those numbers are much, much higher than $750K, and thus less relevant to this thread.
newbuyer99, I have a few friends (late 30s early 40s) in the financial field and not one of them rents. Two have purchased a second home (Ct & Adirondack) as a get away but also as an investment. I probably should have left out the "or two" in my statement above. :)
A heck of a lot of apts were sold in NYC during the past few years. Hopefully, it's not a stretch to assume that that a significant percentage of folks that had the means made the jump either for personal use or as an investment. I would be interested to know the percentage of condos in Manhattan that are currently held by investors as opposed to homeowner occupied. In the 1990s, the former wasn't much of an issue as the vast majority of the RE was co-ops.
Serge07 - fair statement. I think I was using the $750K/year VP and assuming ibanking such as M&A, which then implied younger than your friends - 30-35. Of the people that are older in other parts of finance making that kind of money, I agree with you that few if any rent.
But at today's prices, buying a nice family place in Manhattan for someone making $750K/year (let alone $500K/year) is not as easy as one might think. So I would guess your 40-ish friends either (1) make more than $750K, by themselves or together with working spouses, (2) live outside Manhattan or (3) bought more than 1-2 years ago, at meaningfully lower price levels. Not disagreeing with your last post, just making a related point.
The recovery has begun.
http://www.cnbc.com/id/26160442
newbuyer99, their incomes are lower than the levels you indicated (I'd say in the range of $300-$450 which isn't exactly peanuts in most circles) but they are savers for the most part and carefully invest their funds. If one has the discipline to put away a significant down payment and is able get below the jumbo loan limits (ie, Fannie Mae/Freddie Mac financing), these income levels should be quite workable.
The apts are all centrally located neighborhoods in Manhattan. I'm not exactly sure when the purchases were made but I would estimate mostly between 2003-2006. There are working spouses but also stay at home moms. Nothing is impossible if one has perseverance & patience. :)
I get a kick out of watching my brother-in-law in action. His income is multiples of your upper range but even then, he is one cheap individual. None of this lavish spending business that you discuss above. His offers are insulting at best and is relentless in his pursuit. However, he seems to manage to find exactly what he wants and at his price. I've learned a thing or two from his tactics; an asking price is simply the maximum a seller expects one to pay, no more than that.
Your points on saving and careful investing are absolutely valid. Still struggling with the math a bit, though.
Nice family apartment (I am assuming your friends have kids) costs at least $2MM today, and likely more. With 25% down, that's a $500K downpayment. That leaves a $1.5MM mortgage, only $1MM of which is tax deductible. Assuming 6.5% interest and $2500 in maintenance, $12K in monthly costs. Maybe $3K of tax savings, so $9K net per month, or $108K/year.
Say $375K income, stay-at-home spouse. Maybe 45% taxes, so $170K take-home pay. With a lot of discipline, you can maybe save $50K/year on that. Over 10 years, with 7% after-tax return on your investment (which would be very, very good), that becomes $800K.
So to buy that $2MM apartment, they'd have to put $500K down, spend $50-$100K on closing costs, probably spend at least something on renovations, and show the bank (and maybe coop board) some cash as a cushion. Pretty tight on the $800K savings. Then, they have to spend $108K/year net on mortgage and maintenance, which is 65% of their post-tax income. Even tighter. And finally, others more knowledgeable can correct me, but I don't think a $375K income would qualify for a $1.5MM mortgage.
I am not trying to argue with facts, just trying to understand how what you describe is possible. Please feel free to correct my logic above, or to add other factors I am not taking into account.
Maybe I am harping on the point a bit, but I think it's relevant for trying to gauge the market. One of the thesis of the bears (including myself) is the reduced affordability of real estate, which is unsustainable. I know from experience (myself and friends) how little one can really buy on a pretty large income, so would be interested in understanding the other side of the "affordability" argument.
As an aside, I like the point about your brother in law. Many of us can use a little of that.
newbuyer99, I don't recall any of them paying close $2mm for their apartment. The highest I'm aware of was $1.25mm and they did put a hefty down payment to reduce the nearly 2% condo mortgage tax. This was for a two bedroom located at either 91st or 92nd on the west side of 3rd avenue. I've been there often and it is a very nice spacious apt, full service building. I am not familiar with their maintenance/property taxes are so I can't comment on them. I'd say this was late 2005 or early 2006. BTW, this couple did a ton of research for easily six months before jumping and their efforts paid off.
Perhaps folks are asking $2mm today for a quality two bedroom but we'll see how those prices stick over the next year or two. I haven't done research on this market segment recently but it seems to me that one could do better. As an example, eighteen months ago I checked out a beautiful 2 bed pre-war (full service co-op, West End Ave, Hudson River views & low maint) with an asking price of $1.475mm. If you're referring to a three bedroom, then that's a totally different market.
Your math would change considerably if the mortgage were in the range of $700-800K which I believe is the correct amount in the above situation. In addition, back in those days anyone could walk into a bank and obtain a mortgage with relative ease. Today, things have changed just a tiny bit.
That makes a lot more sense. Still not cheap, but much, much more manageable at those income levels. I had made the assumption that the type of person you describe has a family and wants/needs at least a 3-bedroom, and maybe a 4-bedroom, with 1500-2000SF of space. That's why I figured $2MM or above. Of course, that describes my family's apartments wants/needs (we're only 30ish, but looking ahead), so others well may be different. In any case, appreciate the clarification.
has anyone figured out that EddieWilson and Stevejhx are the identical person?
Same positions
Same style of posting a negative article as worthy of its own discussion topic
Same argument style
Same sarcasm
Same level of anger
Same style of rebuttal, interspersing the original quote and his response
Same claim to have worked at an investment bank, but seemingly not in the investment banking group itself
Same imperfect ability to do math
Same language style and pedantry related to language
Same self-corrections of their own posting
Same reference to "they" and "them" as out to get people who don't think real estate is going up
what else is the same ... anyone care to point it out?