Manhattan market prognostication 2023

I guess everybody can have a different outcome Steve, depending on what and when they bought.

Curious since you have quite a bit of experience with buying, and have done a fairly thorough analysis of the situation, what motivated you to purchase?

Some of my wholesale lenders are doing temporary buy downs meaning that the rate for the first two years of the loan will be reduced. The first year the rate will be reduced by 2%, the second year of the loan the rate will be 1%.

Correction: the second year of the loan the rate will be reduced by 1%.

Keith, I sincerely appreciate your information on this thread.
But have you become a lender?

@Keith - BK condo was first time purchase. Seemed like the thing you do in your 30s when you finally have some money and want to lock down some stability in living arrangements & cost.

The cost aspect did not turn out to be true.

I also bought at what turned out to be the most recent peak after which everything traded down/sideways - 2017.

I can't talk about Zillow, but for the big RE companies and UrbanDigs here is one possible explanation for Brooklyn:

I still have the Corcoran Market Reports for the early 1990s somewhere, but I'll We count this from memory. The 1992 report had studios in Chelsea at something like $145,000, The 1993 report had them at something like $100,000 and the 1994 report at something like $80,000. But anyone who knows anything about what the market for studios in Chelsea was actually doing at that time knows it was skyrocketing.

The data for the 1992 Report was one single condominium, for the 1993 report was a handful of co-ops and a condominium, and for the 1994 report about three times that number. What was happening is that in 1992 Corcoran really wasn't active in Chelsea at all and as they increased their presence lower down in the market They actually got more accurate data.

Something similar has been going on with Brooklyn data for the last two decades. At first few of the big firms actually even had offices in the borough and the ones who did had them in the most expensive areas. As Keith has pointed out on more than one occasion places like Bay Ridge, Mill Basin, etc still don't have much representation from the firms that prepare these data reports. And even in more popular areas of the borough the big firms start at the higher end and overtime trickle down to meat and potatoes transactions. As such the data we see for much of Brooklyn is not very representative of what is actually going on because the data sets used are not necessarily representative of the market. For example with UrbanDigs everything from new to 5 years old is "New Dev" and only over 5 years is resale. Being that the "luxury" condos in Brooklyn became popular not much longer ago than that it's hard to separate out how much of a bump in $/SF in Brooklyn condo prices is merely "quality creep" as those luxury finish units make their way from the New Dev bucket to the resale bucket.

Similarly with townhouses in Brooklyn 20 years ago it was rare to see them with whole house high end renovations even in the top neighborhoods. Now it's common to see fully renovated houses in all but the worst neighborhoods. So how do you separate that out? You certainly have to significantly discount sales prices to accurately gauge market appreciation vs physical improvements.

And in Manhattan it's the opposite. You have plenty of units bought 20 years ago as new or new-ish renovations that have already had renovations (or 2 or 3...). But I don't see any accounting for the loss incurred when someone bought a unit for $1 million, put in a $300,000 renovation, and then sold it for $1,200,000. Many here count that as a $200,000 win rather than a $100,000 loss (and more like a $200,000 loss with transaction costs).

Got it Steve. Thank you.

Keith>> There are plenty that underperform the market, I've never said anything differently. I'm simply presenting a counter to the negative bias. Not everything loses...

So…

Inonada notes bias between anecdotal examples and the SE index as “market”, which uses a methodology some guy (partially) won a Nobel prize over.

Keith senses “negative bias” in discussion about bias between the index and the anecdotes people focus on. Keith counters the perceived bias by intentionally introducing bias in the other direction.

This whole Fox News / MSNBC dynamic is starting to make a whole lot more sense…

300, I have no clue about ZHVI. I’d never heard of it until today.

>> But I don't see any accounting for the loss incurred when someone bought a unit for $1 million, put in a $300,000 renovation, and then sold it for $1,200,000.

The resale-based index methodologies always have outlier removal. Suppose resale pairs over some interval have tended to come in at distribution of 10% +/- 10%. When some resale comes in at +50%, you call it an outlier due to renovation and exclude it from the index.

This sort of thing works well when you have a gut reno or a tear down. It breaks down for smaller renos, especially as variation within a market is larger. Suppose the market did 10% +/- 10% and you see a print at $2M => $2.5M print. Was this a hot trade with a $500K increase? Or was it zero increase on a $500K reno. The outlier removal cannot tell, so it gets counted as a 25% data point.

I personally attribute about 1%/yr to this effect. As 30yrs points out, most places get 10% in facelift work done each decade that falls under radar of typical variability. Renovate the bathrooms. Redo the kitchen. Replace the roof. New windows. Etc.

Even new dev is not immune. A favorite activity of the rich is to buy ultra-lux new dev and immediately renovate to create the space they’ve always dreamt of. At best, they’re putting in custom mill work, paneling the walls, etc. At worst, they’re ripping out high-end kitchens and bathrooms, basically replacing one version of giant marble slabs with another. Gaggenau gets ripped put, La Cornue comes in. Or vice versa. Really wasteful dickering IMO.

Regardless, this shows up in the stats as 10% “appreciation” over the original sale. No practical way to separate it.

Ah. ZHVI is based on Zestimates which we know do not work for BK and Manhattan at least.

>> Seemed like the thing you do in your 30s when you finally have some money and want to lock down some stability in living arrangements & cost.

I skipped that phase. I never had interest in locking down costs, as my attitude was to grow it faster than I can spend it rather than lock it down. And if I’m growing it faster than I can spend it, how many years will I actually care to spend in living arrangements I managed to lock down in my 30s? Not a mindset that works for everyone, but it worked for me. I wasn’t exactly a punk rocker, but I never had anxiety about setting myself up with a degree of stability. “I’m probably headed up, but if I end up heading down how bad can it be? I was perfectly happy in that state not too long ago.”

300>> Ah. ZHVI is based on Zestimates which we know do not work for BK and Manhattan at least.

We also know they don’t work for iBuying either. Using predictions of where market transactions would land, had there been transactions, seems like a roundabout way to create an index, compared to simply using transactions. To say nothing of potential bias in said predictions.

300, it seems we’re both having trouble falling asleep tonight. Do you happen to know where I could order diazepam online?

"A favorite activity of the rich is to buy ultra-lux new dev and immediately renovate to create the space they’ve always dreamt of. "

I think I mentioned this in the past:
I've known some supers in Tribeca buildings who've made tidy sums selling never used Wolf/Subzero/etc appliance packages to contractors when people have ripped out brand new kitchens in newly renovated buildings.

People think Zillow's iBuying folly was solely due to errors in Zestimate. I think a bigger problem is that in many cases they ignored their own valuations and just paid whatever it took to acquire the property because they had volume targets.

There's a general problem when "data scientists" start making "adjustments." They mean well but they end up introducing their own biases into things. Like when they adjusted data in the 2016 Presidential Election and all had Hillary Clinton winning. Since "It's difficult to get a man to understand something when his salary depends on not understanding it" and almost all the indices are paid for by those who want to see them go up* it is very easy to get well meaning/"rational" adjustments which have an index going up 3% when it could just as easily go down 5%. But that 8% gap in reality is quite meaningful. It's very easy to dismiss data you don't like as "outliers." Even if that's the meaningful stuff.

*Around 1991 I took Larry Silverstein's Breakfast Series at NYU for Real Estate Continuing Education. At one point there was a discussion regarding the latest reports that the market was going to turn around In the near future. I made a comment along the lines of "That's because no one is willing to pay for data which says the market is going to go down." Everyone there put on their Farbissina Punim and muttered under their breaths. But we're all know what actually occurred over the next few years from that point onwards.

"300, it seems we’re both having trouble falling asleep tonight. Do you happen to know where I could order diazepam online?"

Someone has to approve these posts. In my eyes it looks like the next step in StreetEasy trying to destroy this forum. As far as I can tell if you use the app you can't get here. Is there any other ways than either having it bookmarked or specifically Googling "StreetEasy Forum"?

FYI I didn't buy a home until I was 48, at this point I was looking for a place to keep my shit. Which is mostly just skis, surfboards and golf clubs.

All I was doing was posting some examples of properties that showed gains over a certain period of time, please don't over think it. I've certainly seen people post examples of properties losing money.

And I can tell you I've never watched MSNBC or Fox News, I haven't had live television in 15 years.

30yrs, where did you see that about Zillow’s iBuying program?

I always figured it was the following. The Zestimate is right on average, but with errors bars of (say) +/- 5% on any particular home. Zillow figures they can bid 5% below actual price, saving the seller hassle and costing them nothing relative to brokers’ commission.

Given those facts, the reasonable strategy would be to bid at ~15% below Zestimate. You have a 5% pad for profit, plus a 10% pad for selection bias. Presumably, none of the places Zestimate underestimates will hit the bid but places Zestimate overestimates will. You need a pad presuming that while you average Zestimate might right, the average Zestimate that sells to you will be biased high.

But think about the optics. On one page, Zillow trumpets their Zestimate to you, how they use machine learning, blah-blah, to give you the most accurate, bestest value of your home so you can ogle over it anytime. Then you click on “iBuy my home”, and they bid 15% below. WTF?!?!?? Zillow is trying to rip me off, bidding 15% below their own Zestimate!!!

So Zillow started bidding closer to the Zestimate, partially for the optics and partially to get trades done so they don’t fall behind competitors. The bids then got hit at above-actual prices.

Contrast this to a Zillow competitor. All they need to do is come up with a private estimate and bid 15% below. For some fraction of homes, this’ll be close to the Zestimate and look like a good bid to the seller.

I gotta imagine Zillow understood all this internally, but some form of corporate dysfunction kept pushing against it until the reality of billion-dollar losses hit.

Just giving you a light ribbing, Keith.

Buying at 48 — why so young? BTW, experience has shown me that it you can fit a lot of shit into not that much storage space…

I'm used to it... In my case the home purchase worked out well.

I was thinking at the bottom of real estate listings they should put a disclosure like they do on my brokerage account "these investments are not government insured, and could lose money". Or something to that effect, haven't read the disclosure in many years!

Any first impressions on the Manhattan sales & rental markets so far this year?

I have sensed a small uptick in contracts. Year ends => bonuses come in => those delaying awaiting an infusion of cash pull the trigger.

The rental market seems dead and on its way down. The apt I rented ~8 years ago came on the market at the beginning of Dec 2022, asking 15% more than 2014. I thought it was a good price all things considered, about 10% below a same-line comp from summer 2022. They just cut the price by 15%, back down to the 2014 ask.

Mostly, I take this as a sign that no one is showing up for viewings anymore. That, and the tripling of high-end inventory compared to spring last year.

@keith

https://ceforward.com/2020/03/real-estate-agents-stop-advertising-mortgage-rates/

re:iBuying from Zillow
There were some stories that in certain hot markets, they were the marginal buyer, to the point that they basically were a poster child of adverse selection.
That is, the brokers they they were working with were known, so sellers brokers were making sure to bring them the listings that would meet the iBuyer sniff test but not the human buyer.

This makes some semblance of sense, considering that they were racking up losses even during the peak heat of the COVID bubble already.

There were also some anecdotes of overriding their models to meet buying quotas set by management so.. doubly worse.

The data out of the Zestimate is also BS because they change history. It is not "point in time".
Whatever chart they show you today is not necessarily the same historical values they will show you again in 1,3,6,12 months. Therefore they can make their history look "more right" over time, whereas their current/recent data can continue to be wrong.

If I had some time and noticed earlier, I would have scraped their valuation of my home monthly off their website.

StreetSmart I'm not a mortgage broker, and I have no special relationship with any banks regarding lending. As a practice we accept no gifts or referral fees or have any special arrangements with anyone that provides third-party services to our clients.

I've simply been posting the mortgage rates sent to me by a Wells Fargo agent. However thanks for pointing this out to me, I'll look into it a little bit more to see if it's a practice I should stop.

Nada: the markets been very slow, but we're finally showing some signs of life after an almost dead in the water November and December.

We have a few offers out, one contract signed this month. January is never a great month, but that's slow for us historically. However we have been seeing activity pick up, with a few new clients added to the roster this month, and older clients picking up where they left off last year.

On Mortgage rates, current rate data is available everywhere. This is just information and transparency not advertising. Of course, mortgage brokers may have an incentive to stop that transparency.

Mortgage brokers don’t make the law.
That said implying that one is a lender is against the law.
@300 are you an attorney?

@keith,
Thanks for your feedback.

Anyone who has spent more than 5 minutes on SE knows Keith is just copying emails he gets from WF. However, read in isolation, his copy-and-paste yesterday sounds like it’s first-person. (E.g., “I’d be happy to discuss…”.)

Yeah I noticed I forgot to encapsulate it in parentheses. Not sure if that makes it a little clearer. I have been purposefully leaving out the bankers information.

Anyway, sorry if I caused any confusion. This information probably isn't really that useful, as I'm sure it's easily attained by any poster here if they're curious.

Actually, it is pretty useful information. You just have to attribute it to a bank which you typically do.

So what's everybody's best guess on rates?

Ironically, I follow a handful of real estate blogs that are bearish, some extremely so. They all were convinced we'd be seeing 8% rates, followed by a much swifter demise of Real Estate valuations than we're currently seeing.

I think we'll see valuations continue to fall for 1- 2 years throughout much of the United States. New York City is always harder to predict. I certainly think we'll continue to see a softer market overall with stiffer declines in certain pockets throughout the city.

We've been in a varying degree of a seller's market for quite a while now. It's been difficult to adjust, for lack of a better word to a more normal market. I'm currently feeling that I am in the acceptance stage. Basically not sure if I'm going to see anymore 15 deals in a month for some time, and that's okay.

I think rates will stay in the current neighborhood for a while (at least a year but probably a few). So ranging from high 4’s to mid 6’s depending on the product, creditworthiness, relationship discount, etc. Call it about double the ZIRP era.

Higher rates from the Fed are working, in that they’ve stemmed worsening of inflation. But core inflation is still running at 5.x%. Unemployment is still at 3.5%, as low as it’s ever been. And unemployed per job opening continues at 0.5, way lower than had ever been seen before. The overhang of the ZIRP era remains — think of all the stimulus money out there, the 2.x% mortgages, wealth effect from inflated assets. I think all this means the era of ZIRP is over, with rates over the remainder of the decade coming in closer to current rates than the ZIRP era.

In terms of where the Manhattan market is headed, I think sales volumes are going to continue to be low for a while. Q4 2022 at best.

We are working our way through “forced” and cash-rich buyers. Cash has become very attractive, borrowing has become limiting. It’s no longer 3% cap rate against 2.x% mortgages and 0% from cash. It’s now 3% cap rate against 5.x% mortgages and 4.x% from cash. Slowly, but surely, this pressure reduces the buyer pool at current prices.

Sellers will, of course, be reluctant to sell at lower prices. Natural sellers reliant cheap mortgages will become accidental landlords, in a bid to monetize the cheap mortgage. Natural sellers with better cash positions will be more likely to sell than engage in extend-and-pretend tactics of the ZIRP era. It’s no longer “Can I sell it for 2% more next year, covering my cc+taxes and then some?” You now add 4.x% interest to that calculation.

It’ll be a good year to rent. Not 2020 levels, but certainly better than mid-2021 to mid-2022.

On the demand side, there will be fewer high-paying jobs, incomes will be down, job insecurity will be up, and asset cushions will feel less cushion-y. People will be less willing to stretch their budgets, post-pandemic ethos of FOMO and YOLO will yield to financial sobriety. Shiny stuff is good & shiny, but having played with it for a year or two, its appeal wanes. “Why am I spending x% of my income on a home office when I can just go sit my ass in my work office, showing some face time along the way so I don’t get cut in the next round?”

On the supply side, lots of new buildings are coming online. And lots of sellers, reluctant to sell at lower prices and/or lose their cheap mortgages, will become accidental landlords. I’m seeing a lot of this these days. List for sale for ~6 months… no takers… list for rent.

Here’s what’s happening with jobs in the “real” economy:

https://apple.news/AvebKzvGbRdiJSz8EX9dvmQ

While the ZIRP-levered economy is doing this:

https://apple.news/A68y1uuHrRG-IeqJPYbNeXA

Nada,
Thank you for your insights on the economy. I do agree that mortgage rates may remain in the current rate of 5-5.5 percent. Perhaps lower if we get a recession mid year.

So how much decline in Manhattan SE index from 01/2023 print to 07/2023 print?

Yup, that's what we're experiencing and we have a business model that gives people a tangible financial reason to work with us. Many brokers/agents must really be feeling this post zirp world of hurt.

Mortgage rates more likely to be 6-8% than 4-6% for a while
Fed is going to push past 5% fed funds rate so mortgages going north of 6%

Steve, How do you explain the current yield curve inversion with 10y (based on which most of the fixed rate mortgage are based) almost 100 bps lower than expected Fed Fund rate after upcoming meeting?

There were groups buying crap homes in certain locations SPECIFICALLY to flip to Zillow. To me this indicates certain insider knowledge of glitches in their algorithm.

inonada,
Probably DelPrete's but was multiple sources (including personal connections).

inonada,
What do you think is going to happen with the car market?

Steve, my range started at “high 4’s”, so if you’re gonna round, I’d characterize it as 5-7% (not 4-6%). While I see your 6-8% outcome as a plausible change to the upside from the status quo, I see a similar shift to the downside as similarly plausible. So 5-7% is my median expectation. But between 4-6%, 5-7%, and 6-8%, it really doesn’t much matter. It’s all double-ish the ZIRP era. It’s the slow incorporation of that state into RE that’ll matter, not instantaneous reactions to the smaller shifts. The writing was on the wall with respect to rates a year ago, but plenty of people kept piling into their RE purchases at peak prices nevertheless. For a while.

I do see Fed rates crossing 5% in 2023 (so 75bps from here) as a plausible scenario. Market expectations are just shy of that, Fed expectations are not, so it is very possibly in the cards in everyone’s view. Nevertheless, banks are willing to lend on ARMs at current Fed Fund rates or lower. Why? Part of it is that future rates are expected to go lower. I don’t see 300’s “mid-year if recession” as likely, but in a few years we are unlikely to be at 5%. Part of it is that banks collect fees & points on loans, making it profitable to lend on ARMs at Fed funds rate with relationship discounts where they constantly try to “help” you by putting you in better investments.

I cannot tell you how often I get calls every time I move a chunk of money into an account somewhere, with some “investment advisor” telling me they could put my money to work in a better way, invariably in a high-fee proposition with zero demonstrated alpha, only selection bias.

30yrs, thanks on the DelPrete reference. I have no clue on the car market. I try to limit my time wasted to studying and making prognostication on a market for no particular reason to just NYC RE ;). But I’ll eagerly listen to your prognostications on it.

"Just finished watching the first two episodes of the Madoff documentary on Netflix. Amazing how greed will cloud even the most lucid minds."

I had a different takeaway, though I agree with you about the greed part. How could a well-known, highly respected person get away with it all those years? Because he was a well-known, highly respected person. It's like being a made man. "Oh, you think Madoff might be up to something fishy? Impossible. He's Madoff." Why is Prince Andrew so deluded and entitled that he gave that disastrous TV interview? Because he's Prince Andrew. The prestige of the Royal Family must be protected and preserved. Therefore, no matter what Prince Andrew did, the prestige of the Royal Family was protected and preserved. Why did Madoff get away with a secret unregistered investment advisory business with phony statements? Because he got away with it.

Keith, I think it’s more than just broker employment who will be negatively affected post-ZIRP world.

If you look at the average American, their finances are not very levered to ZIRP and rates. Their jobs are fine — note the continued tight labor markets outside the ZIRP-levered industries. Their homes will get hit by higher rates, but this is mostly hedged by the 30-year fixed mortgage they will hold to maturity. And there is not much in the way of a stock portfolio.

The average Manhattanite looks very different. Their employment/incomes are negatively levered to rates — think banking, private equity, tech, startups, commercial RE, brokers, etc. Their home values are negatively levered to rates. And unlike the average American, it is not typically hedged: the purchases are much more likely to be all-cash, an ARM, or an IO ARM. Even those with a 30yr fixed are unlikely to stay in the same home for 30yrs. They also have an investment portfolio that is negatively levered to rates, whether in the form of stocks or bonds or munis.

I gotta add the Madoff documentary to my watch list.

I’m a bit skeptical of this statement:

“Amazing how greed will cloud even the most lucid minds.”

The most lucid minds trivially concluded it was basically a fraud:

https://www.wsj.com/articles/SB125211198200188027

"We did feel that despite the fact that we're kind of smart people, we were just looking at matters of public record," he also said in his testimony. "This is not rocket science," Mr. Laufer told the inspector general's office, according to Friday's report.

The issue is that most people, whose minds are lucid enough, are too lazy to do the work when it comes to investment and financial analysis. Outcomes are so often detached from fundamentals that people ignore and then eventually skip the fundamentals. They just latch onto the mantras — homes are always a good investment, stocks always go up in the long-term, Madoff always makes money — while proudly embracing ignorance on the details.

Here’s the reality about Madoff. Circa 2008, I and others I knew had more than a little awareness of the top-tier players in investment management. When the story broke, the near-universal reaction was “Who’s Madoff?” While Madoff has been described as a legend, as far as I can tell, he was only a legend to those who seemed to know nothing. Those who knew something had for the most part never heard of him. That was probably an important aspect of maintaining the fraud.

@inonada - I think your anecdote on the real vs ZIRP economy divergence points to why the Fed will keep raising. The only pain is at the top end, and the near term expected pain continues to be at the top end (another round of banking & tech cuts).. while the "real economy" continues to have a worker shortage and bid up labor rates.

Note that as much as people are hyperventilating over tech job cuts, most of the FAANGs are only cutting back to roughly 2020-2021 labor levels. They are just so big now that 10k sounds huge, but on a percentage they really aren't. Same with banking where it's barely even caught up to what used to be annual 2-5% cuts, which have not been in effect for 3-5 years.

On the tech side you are seeing generalized across the board cuts, but also entire boondoggle divisions finally being cut loose (AR/VR/metaverse BS). They have many more boondoggle divisions to review. Banking one need look no further than GS and their money pit of Marcus..

So, I don't think the pain is anywhere near done for SF/NYC tech&banking economies.

Historically inflation never hits 10% and then reverts to "normal" in a matter of months. I think "normal" looks closer to 5 years out than 1 year out.

I think unlike the GFC, this is a top down rather than bottom up recession. So the "elite" in media/banking/tech that are "early" in observing/worrying/writing about a recession that has not happened for the vast majority of Americans yet. This is inverted from GFC where the music kept playing in Manhattan right into LEH crash, despite housing nationally having turned over 1-2 years earlier.

Interestingly, despite the "top down" recession, walking around the city.. it still feels more like mid 2006 than mid 2008 out there. To me it looks like higher income people are worried about.. SOMEONE ELSE having a recession, and continue to spend freely.

So I think fed manages to cross 5% until the "real economy" shoe drops, which we are further from than people think.

Makes sense on Madoff that he was only a legend to the people he was swindling. I just think its interesting how people like to feel like they're getting in on something, that they're special. This acquaintance of mine whose family had I'm guessing maybe around 10 million with him, were just the type of people that like to show off, got a ego high off of telling people we got into Madoff, but not everybody can...

Guess the wealth management people were aware of him because they were losing business to him.

One of the Wall St explanations I saw in real-time around Madoff were - yeah a lot of in-the-know people assumed he was up to something dubiously legal, but not fraud. That is - he was exploiting *something*, possibly illegal, at least not ethical, but that the returns were in fact real.

Something like front-running his other business clients or using insider info, etc.
So this encourages a lot of look-the-other-way behavior.

steve123, what you said about an inverted recession makes a lot of sense to me.

A lot of high-end jobs/income in NYC have been levered to the easy money policies of the past ~15 years. Mine points in the opposite direction. Rates go up, my income is likely to go up. Both in response to the initial shock (2022) and the sustained beyond (2023 onward). This is not from any sort of grand plan or master insight from me — it’s just the nature of the job I happened to step into long ago.

One behavior that has been interesting for me to observe over the past few years is the piling into financial positions levered to low rates, by people whose livelihood is already levered to low rates. Given the rate hedge of my income, you’d think I’d be more inclined than most with taking on financial positions levered to low rates. But it was much the opposite. I kinda looked at it as “make a little money if rates stay low, lose a bunch if rates go up” and felt “no thanks”. The extreme status quo of ZIRP plus trillions of ongoing Fed purchases made the whole thing asymmetric with no real possibility of upside from “make a bunch if rates go down”. So my finances too were pointing toward excess upside should rates go up, both in response to the initial shock (2022) and on an ongoing basis (2023 and beyond). Not that I was betting on it specifically for that purpose — much like my income, it came with the territory — but I was intentionally steering clear of positions predicated on ZIRP forever. But between TINA, blind faith in the 60/40 portfolio, loading up on 2.x% mortgages to lever into stocks & munis, etc., it sure seemed like the end of ZIRP was not a possibility people were paying attention to. Which, of course, made the end of ZIRP all the more likely.

Madoff had also run a legitimate securities broker-dealer - equity market makers since the 1960s. His senior positions with the SIA, NASD, and NASDAQ, and high-profile status (at least within the specialist/market-maker/floor-broker world) no doubt provided cover for his doings. That side of the business did legitimate trading, and too many regulators* may have conveniently looked the other way when it came to what their friends relatives were doing.

(*e.g., Eric Swanson? Laurie Richards?)

@Aaron - that's what I was alluding to. A lot of "smart money" assumed that the thing his hedge fund side was doing was probably some sort of front running of his own broker-dealer clients or insider information around positioning, in a gray if not illegal area, but producing real returns on the hedge fund side. Sort of like "honest graft" .. yeah he's a crook, but he's our crook.

What's funny is the FTX/Alameda relationship sort of feels like a crypto variant of this.
Everyone assumed Alameda was making money because of either information leakage or order book prioritization for Alameda. Instead it turns out Alameda was losing money most of the way, and FTX was propping it up by giving it unlimited margin against FTX client funds.. which were slowly, and then quickly evaporated! Hats off to the crypto kids speed running 100+ years of Wall St failure in 5 years.

@inonada - maybe we are in similar lines of work

To me every current argument against a recession / in favor of quick return to ZIRP / talk of "soft landing" / "market pricing in a reduced chance of recession" just smells of wishcasting. We can argue about onset timing, duration, and depth.. but some sort of slow down is at hand. On rates, there's plenty more room to go up, plenty of time for it to stick at levels this high, and a good while until we see meaningful cuts.

The interest rate increase is barely a blip on the chart right now and people are like "ok we're done right" and "they are gonna cut again real soon".

The only historical analogy anyone can point to on a "soft landing" is Greenspan 1994-1995 era when rates went from 3 to 5% without a recession. Well even then, what happened.. rates stayed at or above 5% for 7 years! 3% was not seen again until 2001, post Dotcom implosion. Rates in fact went up right to 6.5% into the 2001 crash. So even some sort of soft landing scenario seems like we bake in moderately high rates for north of 5 years.

The thing that would cause drastic rate drops again would be a sharp turnaround and deep recession, which would obviously not be preferable to just having 5% rates for a while. We've had a pretty long bull market with a short, deep, but government-intervened 2020 COVID crash that barely registered as a recession on the charts. In other words - we're kinda due for one, even if just garden variety moderate depth & length.

The idea that we can have a soft landing while also returning to low rates is like wanting to eat dessert every day, not exercising, and also losing weight. Could it happen? Maybe. Will it happen? Unlikely.

Question for everybody:
What is the dominant profile of buyers in your building over the last 5 years and how will that group be affected economically if we see the economic downturn some are projecting?

Trust fund kiddies & high ranking people from VC funded tech cos who recently experienced a liquidity event.

The first category depends on where mommy&daddy money comes from, the second category is now extinct..

steve123,
I wish we had like buttons here like on the UD forum.

PS Do you think Mommy & Daddy will be less likely to park money in NYC apartments now that they can actually get a return on that money elsewhere?

@30 - good point. Arguably a lot of trust funders I've heard say stuff something along the lines of "my parents wanted to invest in real estate and didn't want me wasting money on rent". So at least some percentage of that class of buyers.. justified some percent of their purchase as an "investment". So being able to earn sizable returns elsewhere like on safe bonds or just putting money in CDs may give them pause.

Further, as we talk about this being a "top down" recession, the kind of people who have money to throw on NYC real estate for their kids are the very definition of top, so they may be a little less loose with their spending..

Steve,
Parents money is not stopping as it is basically inheritance transferred before death. Financial Risk return analysis is typically not done on this and it is not a significant portion of the parents wealth. Pure love.

I think about my non door-man building which has relatively large units, I can only think of 1 person in 20 having any inheritance but most of their kids will - in some case more than >$10mm each kid.

@300 - as with all things, there are levels, right?

I broadly call them "trust fund kids" but theres tiers that are "hey I've got $1~2M to spare from other investment purposes and I don't want my kid living in a hole in Ridgewood / paying $6k rent" from parents that are still of late working age.

Many of the 20-somethings in our building I deride as "trust funders" are more like - mostly gainfully employed but not in a field that would be able to pay luxury rent, with parents buying them the condo with 50-100% down, often in their own name, not the kids name...

Broader question of what happens to whatever $1M-$10M pot of money a parent has in a tougher investment environment than "steady up and to the right" we've had for a while. People usually become more reluctant to deploy capital in the face of volatility.

"The rich are so rich, they'll keep buying my preferred investment product regardless of conditions" is usually not a good investment thesis.

My point is not that it goes to 0, but that market conditions are clearly a headwind more than a tailwind for these buyers too.

We saw SPX 3500 last year. Nothing changed. It is mostly emotional decision buying 1/2 bedroom apartment for your kid - almost entirely need based so that your kid can keep up the lifestyle they grew up with.

I-Buyer Fiasco:

https://www.bloomberg.com/news/features/2023-01-30/wall-street-is-losing-out-to-first-time-homebuyers-this-housing-slump?srnd=premium&sref=8b9zkmXu

Pretty sure I've posted here as elsewhere from the beginning of iBuyers that flipping has never been a scalable business.

30, We had a couple of threads on this including one after Zillow took a loss.

Looks like Contracts Signed January for Manhattan comes in 27% below average and down 41% year over year.
https://www.urbandigs.com/dashboard/

Isn’t the 600 contracts in Jan 2023 lower than any January before, going back to 2008?

Yes, with the exception of January 2009 which produced 337 contracts.

Right-o. That wasn’t showing up on my viewing of the chart earlier.

On a purely anecdotal note, after a few months of very little activity, we're suddenly very busy again. We currently have four or five accepted offers, and working with quite a few very active buyers.

I'm not reading too much into this, put on a very personal level I'm glad to see business normalizing to some degree. Let's see a future months data shows the improvement I'm currently experiencing.

I’m guessing future months will show the increase you have been seeing. The bigger question is whether this is a bonus-fueled blip (from people who were going to take the plunge but needed a little more cash / certainty) or something more lasting. My sense is the former, but you would know better.

I realize this is supposed to be a Manhattan thread, but Contracts Signed for January in Brooklyn down over 60% year over year.

It's not quite as dramatic if we compare it to January 2019 (Manhattan) which saw 761 contracts signed.

How about if we compare it to The Hindenburg? It's not nearly as big a disaster as that. Or let's compare it to before UD kept records on sales. It's a huge improvement over that. Yes, let's pick a year where everyone (well ALMOST everyone) admitted was a totally shitty time for Real Estate sales in NYC and compare to that. And what do we get? It's still significantly below the worst January in a decade?

Clearly that's a buy signal! It's a great time to buy! Because it's always a great time to buy! Except if you're under 48 years old. Or if you want to buy property in NYC then it's only a great time for YOU to buy.

It seems that every one here is bearish on NYC real estate. How do people square that with stock market rebound from SPX 3500ish and rates moderating in the last 3 months?

Nada-I don't think my small representation of buyers really would add anything tangible to the who's buying and why question.

For what it's worth, from what I can ascertain from my conversations with the five clients with accepted offers, it's not bonus driven. Price range from $1.5mm-$4.5mm, clients coming from law, tech and finance.

Am I regretting putting 50% of my dollars in treasuries? No, I'll take the guaranteed return for now. But I am glad I left the other half (sep)in stocks. Whether I'm thinking about real estate or other investments, I'm always thinking 10 years out. And I try to keep enough rainy day money liquid so I sleep well at night, I'm in a pretty unpredictable business.

"According to LPL Research, a gain of 5% or more in January following a negative year bodes well for the market. Since 1954 this has happened five times. The market was higher every year with gains ranging from 20% to 45%. The last time the S&P gained more than 5% in January after a negative year was in 2019. It gained 29% for the full year. Whether history repeats remains to be seen."

I see down 42% Overall. Down 37% for resale.

30 Wrote> Contracts Signed for January in Brooklyn down over 60% year over year.

>> It seems that every one here is bearish on NYC real estate. How do people square that with stock market rebound from SPX 3500ish and rates moderating in the last 3 months?

FWIW, I’m more sideway-ish than bearish. I don’t really try to square the set. If anything, rates matter more than stocks. And it’s the slow application of elevated rates that matters more than the short-term fluctuations.

Sorry, should have been clearer. I do not mean the wealth effect due to stock price increase since 3500. What I mean is that how does one square the bearish outlook for real estate in NYC with stocks (clearly interest rate sensitive asset) which seem to have gotten comfortable with increased rates. And mortgage rates have come down from the peak - jumbo low 5 vs 6.5. Perhaps sideways is indeed the way to reconcile as real estate price adjustment takes far longer than stock price adjustment.

I'll wager that prices in my neighborhood (Beekman) continue to decline - anyone up for taking the other side? (This is not a serious question - I do not expect any takers).

300, I think that real estate moves slowly, which is why it can still go down when other markets have bottomed. Contracts signed down 43% year-over-year in 4Q, despite inventory modestly increasing Y-o-Y, suggests that market prices may not yet be at a level where the market fully clears. Let's see if inventory builds this spring. Increasing inventory and increasing days-on-market can lead to further weakness.

Real estate isn't stocks or rates where time on market is milliseconds and we always know exactly where something clears and the market speaks instantaneously through price. RE prices certainly never reflected the sub-3% to near 7% mortgage rate move in prices - it was reflected in the market just stalling when rates were that high.

Woodside, I generally agree. However, I do think that 3-3.5% 30y (which remained for a while) was definitely reflected if you look at the national housing price increases. 7% did't stay for long enough to have a large impact. Now we are somwhere in the middle at low 5%. So I tend to agree with Nada thinking side way.

300, I don’t think WoodsidePaul was saying the 3% rates were not reflected in prices. Rather, just that the move up to 7% was not (yet?) reflected.

I think you might be mixing indices / products / discounts with the 7% to 5% retracement. It’s more like 7% to 6% for most 30yr conforming indices. I’m sure some people are getting 5% jumbos currently, but I think those same people were getting 6% at the peak.

It’s also good to recall the peak of 7% was a brief blip on the radar, despite all the ink spilled over it. It lasted perhaps a few weeks. The big story is a decade at 3% shifting into what may be a decade at 6%. We’ve only had 6 months at 6% so far.

Perhaps I should have characterized the last decade as 3.x%…

On a jumbo index basis (we know in Manhattan most people get 25-75 lower than that), pre-covid we were 4% plus and now 6%. So the same 2% uptick as low 3% to low 5% in Manhattan which as you say will take a while to get reflected in the housing prices. Counterbalance is already increased rents vs pre-covid in Manhattan reflecting supply demand situation.

Covid period saw some exodus from NYC. In my opinion, that is the biggest reason why Manhattan really didn't see the boom most other places saw in housing prices. That exodus has now reversed to a large degree and Manhattan is not looking at expensive as pre-covid vs cities like Austin and Phoenix. Of course, NYC didn't have e-buyers and large private real estate funds driving up the prices either.

https://fred.stlouisfed.org/series/OBMMIJUMBO30YF

Lastly mortgage payment impact is much smaller:

$1mm mortgage 30y amortizing monthly payment
3.5% $4,490
5.5% $5,678

26% increase (blunted further by mortgage interst deduction) vs 50% increase in the base rate. Rents up 15-20% vs pre-covid in the basic doorman luxury segment.

Of course, there are many people who did 5/10y ARM and Interest Only.

300, I’m looking back a bit further than your chart, 2012-2022 or so when the average was more like 3.x%:

https://www.mortgagenewsdaily.com/mortgage-rates/mnd

Some years 4.x% (2017-2019) offset by some years at 2.x% (2020-2021). I think the lag at which rate changes fully incorporate into RE prices is longer than a couple of years. My sense is that only half (or a bit more?) gets incorporated after 2 years. These processes work slowly.

I agree that the pandemic exodus explains a large part of the Manhattan / country discrepancy. I also imagine stretched valuations (Manhattan price-to-rents were much worse) and an actual supply pipeline played into it. As much as people complain about inadequate / expensive housing in NYC, it is not a NIMBY town. Most suburbanites I know view zero long-term density growth as the natural state of how suburban living should be.

On interest costs vs total payments, my sense is that the typical affluent Manhattan buyer focuses on the former. I’ve heard a lot of views from people on SE and in real life about what motivated a purchase, how they viewed the economics, etc. Virtually everyone quotes the rates or discusses the interest cost. When rates went to 2.5%, not one single person I can think of said “Wow, my mortgage payments are now 10% lower. Blended with taxes, my monthly nut is now 7% lower. Let me load up!” The sole cost of a mortgage was seen as the interest paid to the lender, not principal paid to yourself.

Looks like attempted revisionist history.

Seems like some people were all 'bout data UrbanDigs Market Pulse when they were tryin' to front the market was doin' great back 2017-2019. How dat Market Pulse doin' t'day?

Nada, What do you see the average here pre-covid for 10 years and for 8 years?https://www.mortgagenewsdaily.com/mortgage-rates/30-year-jumbo

Nada, How do you define affluent for the purpose of this discussion? Total mortgage payments matter a lot when it comes to qualifying for the mortgage for under $2mm apartment buyers. I don't look at the monthly payments for myself but many people do and are forced to for qualifying. For ultra-luxury and say >$4mm price it does not matter much. Perhaps that is what are calling affluence buyers.

All they have to do is get interest only mortgages, right?

>> Nada, What do you see the average here pre-covid for 10 years and for 8 years?

I’m not sure what years you’re asking about exactly, but using the MND data I eyeball:

2010-2020: 4.2%
2012-2020: 4.0%
2012-2022: 3.8%

If one were to transaction-weight it according to Manhattan sales, subtract perhaps 0.2%. And of course subtract whatever you think is appropriate for typical relationship discounts relative to this index (currently at 5.75%).

Recent years’ rates probably matter more than old years’ rates for influencing the current price, obviously.