A prediction for the spring

NYC and SFO have quite a bit farther to fall while it will be a great spring/summer 2021 in suburban nowhere, in resort towns from Northeast Harbor to Palm Beach to Traverse City to Tahoe, and other destinations of mass affluent and private jet set will have a great spring/summer in 2021.

Reasons:

1. Covid isn’t going away. NY/SF companies are now talking about WFH till summer 2021. The bad winter for Covid will convince another set of city dwellers to move to better climes and bigger houses, creating Wave 2 of an existing trend. The longer people get used to WFH and being away from the city, the more permanent the change will be.

2. There is NO inventory in these places, while NYC’s inventory overhang is well-documented. In a couple of the markets that I watch, the summer’s dregs have sold in the past few weeks, usually after modest price chops. There is nothing to follow. What is being listed is often put on the market at 20% over the Zestimate. Nobody there is talking about leaving – where would they go? Unlike MCR's hood, people aren't being taken out of their houses in boxes, and foreclosures don't happen much in rapidly rising markets.

3. Speculators, who are always a step behind the trend, will follow the money. The rental markets remain extremely robust, with unlevered cap rates on long-term rentals in some markets exceeding 6% (defined as rental revenue minus all operating expense divided by market value) and levered cap rates in a zero-rate environment approaching 20%.

4. Renting is often the first step towards buying. There are a bunch of city people whose leases will expire who need to decide if they’ll buy in Nowhere.

5. It doesn’t take more than a few city slickers to soak up all the inventory in these places. There are 9000 unsold new construction condos in NYC. In some smaller resort towns, there are fewer than 9. Zoning, geography (oceans, mountains), or being bordered by public lands prohibit building more. I remember people telling me that Manhattan is an island and they’re not making more land. Somehow they forgot about building up or that land is infinite if you don’t mind living in what Gatsby called “a valley of ashes”.

P.S. what I called a "levered cap rate" is of course better called a cash-on-cash yield.

Having 0.5% to 2% cash-on-cash yield on NYC Real Estate is perhaps the single biggest reason I have been predicting prices must come down. Everyone has been betting on the come and the game of musical chairs stops when people admit prices are no longer rising because you absolutely need appreciation when there isn't any cash flow. I don't care how low interest rates are - how do you accept real returns on Real Estate lower than the mortgages which finance them? Why not be the lender instead?

George, What measure will you be using to track your prediction?

Articles in the NYT, TRD, NYPost, WSJ, etc.

Just use Streeteasy condo index. It lags 3 month from actual contracts signed. Download at the bottom of this page.

https://streeteasy.com/blog/data-dashboard/?agg=Total&metric=Inventory&type=Sales&bedrooms=Any%20Bedrooms&property=Any%20Property%20Type&minDate=2010-01-01&maxDate=2020-09-01&area=Flatiron,Brooklyn%20Heights

I expect it to continue to go down next three months as contracts signed up to September close.

@George - Unclear how much thought you gave to the source of your quote, but King Lear is a great illustration of the ethos I described in another thread. Per that belief structure, money and power trump everything, including family.

"“New York City is in a world of hurt. I’m really glad we don’t have exposure there,” Sternlicht said during Starwood Property Trust’s third quarter earnings call with analysts on Thursday morning. “We stayed away from those markets permanently because of the pressure on costs” and increases in real estate taxes."
https://therealdeal.com/2020/11/05/barry-sternlicht-says-real-estate-is-a-four-letter-word-in-the-capital-markets-right-now/

MCR - the quote is indeed from the Fool in King Lear. Fool's prophesy of a prophesy, which immediately follows the lines I used, is bleak. Britain is in chaos now (the King has gotten me mad), and the Fool is predicting a prophesy (by Merlin) of continued chaos.

Meanwhile, NYC real estate is improving; it will be fine very soon. Now if you'll excuse me, I'm going to join some pimps and wh0res in building a church.

Well somebody is a Grim Gus indeed.