The magic of co-ops

I have to agree with that. Coop boards, with all of their nonesense, rarely allowed shareholders to finance using risky mortgages such as ARM's. And most residential buildings (I think 70%?) are coops. One good reason why Manhattan has been shieled from the subprime fallout affecting the rest of the country.

Condos have sold at a premium over coops, I think you'll now see them coming down in price, more in line w comparable coops.

Well, co-ops certainly didn't hold up during the 1990s financial recession. A qualified buyer remains qualified as long as they are employed be it be a condo, co-op or commercial tenant.

Co-ops are also vulnerable if they have a significant mortgage on the building. In the 1990s, some buildings became unmarketable (as in no financing available) when they encountered difficulties refinancing.

I was there and while in theory the rather strict co-op rules should shelter co-ops in a downturn, I didn't see much evidence of this. Perhaps this time it will be different.

Co-ops almost always have underlying mortgages. Mine on Fire Island didn't, now they do & I'm dumping it. I don't need the extra risk right now.

"rarely allowed shareholders to finance using risky mortgages such as ARM's"

Wrong.

serge07, while I wasn't there in the 1990's downturn, I think this situation is different.

Today interest rates are still low, and many buildigns with outstanding mortgages have locked in good rates; therefore I can't see many refinancings in the near term. Unlike the 90's, when interst rates were decreasing so many buldings were refinancing.

OP's point (as I see it) is that coops have retained their value relative to ex-Manhattan because the factors affecting the RE market don't seem to apply. That's not to say the market may not soften up, and that coop rules alone won't prevent a downturn; but in this situation it hasn't hurt.

They have prevented foreclosure. They will not prevent a severe downturn.

stevejhx, are you saying that many coops have allowed risky mortgages?

Even if they have, in many cases, coops have been more thorough in evaluating tenants than banks.

uptowngal, the need to refinance in the 90s was not the result of any particular rate. It was common practice for co-ops to use 10 & 15 year interest only mortgages and when they come due, the debt must be rolled into a new loan. In the 1990s, some of those loans had to be refinanced during the credit crunch and at the time, banks were unwilling to underwrite such loans. A quick study on the financial statements, will quickly reveal the loan that's on a particular building.

I don't know what the rate would be for such a loan with the credit markets as locked up as they are today. Looking at the various credit spreads, I suspect it would not be on the low side.

right on Someone...coops boards and to some extent condo boards have prevented subprime loans from infiltrating the Manhattan market. That is what has kept the Mnahattan median price moving higher even with this year long credit jam. People who buy here are forced to be extremely financially conservative. Thank You Coop and Condo boards.........

Show me ONE co-op that allowed anything remotely resembling an exotic loan or subprime mortgage to an unqualified borrower. It simply doesn't happen, ever. Not in expensive Manhattan co-ops, and not even in cheap co-op buildings in the outer reaches of the boros. I am VERY broadly invested everywhere from the Upper West Side and Greenwich Village to the boondocks of Staten Island and the outer-reaches of the Bronx. The degree of strictness varies from building to building (though not, as you might expect, from neighborhood to neighborhood; I've seen buildings in the ghetto stricter than fancy-shmancy co-ops in Manhattan) but the concept remains the same: the fact that a buyer has secured financing for a particular purchase means nothing to a board as far as his own qualifications are concerned. They scoff at that as a barometer for financial viability. Boards conduct their own independent analyses of buyers' viability, and those standards are ALWAYS stricter than those of the banks - before subprime, during subprime, and even likely after subprime as well.

That, coupled with high downpayment requirements, are what has insulated the entire 5-boro (including Manhattan) market from the same wave of foreclosures and depreciations in equity that has afflicted the rest of the country. Will that absolutely, necessarily prevent a downturn given the current crisis - no. But it should serve as at least a partially mitigating factor.

I think kgg got it right. Coops followed condos up, and they will follow condos down. Fewer coop owners will be forced to sell, but the ones who do sell will have to compete with condo pricing. Why? Because the potential coop buyer pool is almost entirely a subset of the potential condo buyer pool; if condos offer better value, those people will buy condos.

Maybe the tight price linkage between condos and coops is partly irrational, but it's undeniable.

This conversation is soooo 2007. Yep, coops didn't allow fancy financials and kept a close eye on who was coming in. And yes, they are less likely to have a foreclosure. (In fact they will have NONE because their "foreclosures" do not go through the regular foreclosure process.) But that does not insulate them from price drops. All the limitations they put in also kept their prices below that of condos (as do lots of the other inflexible rules). What they did was reduce their "beta", their volatility as compared to the rest of the NY market. But they are still vulnerable to the market. And people will still choose to purchase in a financially viable condo over a coop at a given price.

And these practices don't insulate the rest of Manhattan from prices going down because people need bought more apartment than they could afford, or lost a job on Wall Street or can't close on a condo. It doesn't change the laws of physics. If 2BR condos drop to the point where they are the same price or lower than a coop no one will want to buy into the coop.

I think it's largely irrelevant how stable coop loans are. price is always set at the margin. about 25% of owner-occupied units are condos (I believe closer to 50% of sales are condos, but I could be wrong on that statistic).

In any case,

1. Given coop gives you restricted rights and condos give you full rights, condos will always command premium over coops

2. Condo prices are coming down

3. Hence, coop prices will go down (all else being equal, why buy $1M coop when you can get condo for same price)

"to some extent condo boards have prevented subprime loans from infiltrating the Manhattan market."

Not true. All condos have is a right of first refusal, which is expensive to execute.

"Show me ONE co-op that allowed anything remotely resembling an exotic loan or subprime mortgage to an unqualified borrower. It simply doesn't happen, ever."

Many allowed interest-only loans, jumbo ARMs, etc. Those may not be "exotic," but they are risky.

"That, coupled with high downpayment requirements, are what has insulated the entire 5-boro (including Manhattan) market from the same wave of foreclosures and depreciations in equity that has afflicted the rest of the country."

Actually, that's not remotely true. Co-ops, when they foreclose, don't show up in the figures until after the foreclosure has occurred, not when notice is filed. Foreclosures in New York take 12-18 months to execute, giving people more time to sell, as opposed to title-theory states like California, where foreclosure is almost instantaneous since the lender owns title to the property. And the property downturn is just starting here, whereas it's far advanced elsewhere in the country.

Sorry to burst one more bubble.

Co-op boards have saved us from subprime. But they will not save New York from declining prices. While bogus mortgages inflated prices nationally, unsustainable Wall Street bonuses have inflated prices in Manhattan. As pay and employment come down (along with job security), so too will prices, even in co-ops. The relative illiquidity of co-ops might intensify that downward pressure.

I do think that condo prices will come down more so than coops. When my wife and I looked around I believe there was something like a 40-50% premium on price/square foot for condos over coops. Coops will still have their appeal to people because it will still be a better long-term investment with less risk.

Also, please remember that a lot of people who bought coops have put 2 years of maintenance in escrow that will help to ride out a downturn.

Finally, are there coops that allow exotic financing in NYC? Yes, but it is EXTREMELY rare and most likely was allowed for a buyer who had a ton of assets and wanted to finance their apartment this way. because of their wealth they were allowed a bit more flexibility and these are most likely people who are going to be fine in the lonbg run anyway. I looked at over 100 apartment last year before we bougth and we discussed what the board would accept in almost every case, plus other people I speak with in similar situations. Based on this real data that is current, I am confident that the answer I have provided is accurate as to the exotic financing in coops.

"Show me ONE co-op that allowed anything remotely resembling an exotic loan or subprime mortgage to an unqualified borrower. It simply doesn't happen, ever."

A good friend of mine bought with a no-doc loan in Seward Park, Lower East Side in 2003.

I've also seen brokers at open houses including financing sheets from bankers they had relationships with. These often included ARMs as available products for that particular unit, FWIW.

Coops will hold up better in the short-term, but when all those sublet-and-wait-it out owners hit the 2-year sublet max (which I'm not so sure boards waive in tough times), their prices will plummet.

co-ops tend to have non-amortizing balloon mortgages. Who knows what the reset will be, or if they'll even be able to get financing when the loan comes due.

Don't underestimate the increased risk of a co-op.

AVUWS: I totally disagree with your assessment that ALL people would choose a condo over a coop if money were no issue. I prefer coops: I know my neighbors, I know that units are owner-occupied, and I don't have to deal with "investors" purchasing apts. as if they are stocks and bonds to be traded and flipped. I also like knowing that I live in a place where people have had to make financially responsible choices in order to own.

Nothing has ever stopped a purchaser of a coop from making unwise financial decisions after their coop purchase (Hamptons, anyone?). Being overextended is just that, for whatever reason, foolishness, unemployment, being squeezed by rising costs of everything. It has only been recently that coops have been requiring 2 years maintenance in escrow. Coops are, generally, more stable, but if people have to sell, they have to sell, at which point the co-op owners may very well find themselves in the untenable position of not being able to find a buyer due to coop restrictions.

stevejhx, each coop is different. This is why you have to do your due dilligence before purchasing - find out what type of underlying mortagage is in place, the terms, etc.

Re: Co-op vs Condo, don't overlook the SIGNIFICANTLY higher closing costs of Condo's.

Re: "Exotic" mortgages, my work is almost exclusively Co-op, and I've not seen much resistance to 5/1 ARM's. Not the same can be said of "interest only" or "option" ARM's.

"This is why you have to do your due dilligence before purchasing - find out what type of underlying mortagage is in place, the terms, etc."

Fully agreed - but you can never tell how crazy the Board is until it's too late.

Call me an elitist f*ck. I wouldn't live in a condo. I am 100% a coop guy.