economy collapses yet sellers aren't lower prices

Only two things will prompt sellers to come down in price today: (1) a very bearish view on the direction of the market longer term; or (2) a compelling need to sell. One partial influence on the market is how the banks are appraising property values, but this effect takes a while to be realized because many Manhattan buildings have buyers with significant down payments.

not yet, most sellers are anchored at peak prices. everyone here looks at real estate market day to day. Why? Trust me, this market is illiquid now, and sellers are not lowering their prices in masses because they think maybe tomorrow, that perfect buyer will show. They may, who knows. But bids are not coming in anywhere near the levels brokers here are used to

that's exactly right ud. and julia, let's not get hyperbolic. "the world is coming to an end as we know it." no. we're heading into a bad economic time, the world is not ending.

the world isnt ending...but real estate prices based on income from highly levered assets are...

its not just one side of wall street being affected: its fixed income, arbitrage (no deals), private equity (no funding for risky deals), equities...

there will be an adjustment of real estate prices of 30-40% down over the next 2 years, I predict.

ALSO--people are waiting to see what an obama presidency does to their tax brackets, etc.

urbandigs--I agree totally--the market is illiquid..but the number of sellers forced to sell will be rising dramatically in the next 2 months, I predict.

Julia, there are major layoffs scheduled to occur (all announced recently) December & January by every major WS financial institution. I hope that that will be the bulk of it but I'm doubtful as cost structures continue to be trimmed for quite sometime.

Not sure what prices will be in the next month or two as I have zero interest diving into NY RE for at least a couple of years but, there are enormous economic pressures for RE prices to decline substantially from their lofty peak. Patience.

I have a small business and when I meet with clients all I hear day in and out is we can't buy now. The world obviously is not in the same as it was in '29 but what I'm experiencing is that people are very nervous and it is definitely affecting everyone.

This is a deflationary spiral that none of us has ever experienced. The value of cash is soaring and with good reason, investors/consumers have little trust in anything other than Federally Insured deposits and Treasury obligations.

Having cash in this type environment is important and for most folks, its becoming increasingly difficult to part with it. You're absolute on the money, this is a tough one.

Sellers can still look at Q3 stats and say prices are up year over year. After the Q4 stats come out, that will change. Then brokers can grab sellers by the ears and say guess what you need to ask 15% less than this unit sold for in Q4 2007. And then it snowballs.

"deflationary spiral," i wouldn't be so sure. the deficit will be running at $750 billion or more this year, interest rates are low, and the government is doing everything it can to inflate. All of this debases the currency. I am more concerned about stagflation than I am about deflation.

Deflation is happening right now - across all asset classes. But they will keep pumping money into the system and I think inflation is a risk in 2010.

happyrenter, I use the CRB index, RE trends & debt pricing as my primary indicators. They are and have been in a free fall and the story is not limited to the US.

As far as deficits are concerned, they need to be financed with savings which could have been employed/invested in far more productive sectors of the economy. We will see some gigantic Treasury auctions in 2009 (sucking savings out of the economy) and beyond and their ultimate effects on the Government borrowing rates are yet to be seen.

Ii's tough to buy into the inflation story specially if we're referring to the traditional demand pull type. I can't see how sinking $700 billion into basically damaged businesses is inflationary. The USD is in a bull market versus every major world currency (exclusive of the Yen) and will remain so until the trends change. If history is any guide, currency trend shifts are long term in their nature. The USD, after being the most hated asset class in recent history, has only recently begun its recovery.

BTW, interest rates are not low if one looks at corporate borrowing rates let alone what banks are charging individuals ad small businesses. This is chocking economic expansion. Companies such at AT&T & Cat have priced medium term debt recently @ 450-550 basis points over Treasuries. High corporate yield spreads are at or near record levels, @ 1500 BP over Treasuries. Emerging market debt is a waste land.

2009 should be very interesting and let's hope things improve.

The dollar has only bounced in a long term bear trend by any definition you want to use. Not sure what you are talking about. Inflation is not always demand pull... Many examples in history of the other kind.

Sellers are not cutting prices because they have a valuble asset - NYC real estate.

There's always one in the crowd... Sellers are not cutting prices because they think somehow denial changes reality. Inordinate hope. If you bought before 2003, nice job. If you bought after 2003, you will be out of the money if you aren't already.

Rhino - Don't mistake the rent-stabber groupthink of this blog with reality. :)

Rhino86, perhaps you are also a user of technical analysis which for commodity trading, it's a very useful tool.

If ones looks at Sterling, Canadian, Australian, Russia, New Zealand, these currencies have been pluged to multi year lows. The Russians have used 20% plus of their foreign currency reserves this year alone trying to stabilize their currency. Latin America currencies are also a mess.

As for the Euro, yes it has support in the 120-126 zone which is promptly hit after collapsing from 160. If it were to begin trading below the 120 level, the sellers will jump all over it, again.

Technically, there isn't a currency at this time that I would invest in versus the USD (Yen also strong). If and when the trends change, I will gladly take the other side.

Happy owner, reality is prices are down 20% in 3 months. Serge07, I need to take another look you may be right. My gut says the US was a haven in the scare, that idea may break down. I'm moving a little into gold because its finally acting like the insurance it's supposed to be.

Rhino - Not sure where you made up your 20% figure. Is it other rent-stabbing bloggers? Please post comps.

Happy owner, been there, done that. I have no need to educate you.

Rhino - Yes, as I suspected, this is your fantasy. Q3 stats show modest increases across Manhattan. Sales activity slowed post-Lehman. I suspect the market will clear at similar prices to pre-Lehman, perhaps over a year's time as people like those on this blog meet reality and realize they want to live in a real apartment not a rental. Again, only stupid sellers will throw away their apartments.

"and realize they want to live in a real apartment not a rental."

"Again, only stupid sellers will throw away their apartments."

Now he sounds like steveF. Perhaps it's really spunky.

happyowner - have you considered putting your apartment on the market? I hear you talking your book, but think of all the nights lately you've been freaking about the daily decline in value of your apartment and worse, waking in fear that there's no light at the end of the tunnel and that it's going to keep going down down down for a long time.

You're not sweating for no reason.

My advice to you: sell your place if you measure your self-worth by the value of your apartment. If you don't care about price declines, close your eyes and ignore these blogs and the newspapers for the next 5-10 years.

Beatyer stop being silly. Don't you realize if he doesn't sell it the price doesn't change? Jeez every owner knows that!

happyowner=spunky on a much needed prescription. Colonapan, perhaps. For sure there can only be one person in the world unable to appreciate what is about to happen in this market. Even the sellers know it, they just can't accept it yet. But you wouldn't catch even them regurgitating things like "I suspect the market will clear at similar prices to pre-Lehman, perhaps over a year's time". This guy is NUTS.

If you really believe what you are saying, you can go buy the NY housing futures at a 20% discount to current levels tomorrow. That is tyou can buy NY real estate at a discount today. That's how sure the financial world is that prices are coming down in NYC. And you can leverage yourself 10 to 1. So you're probably right, happyowner, go make 200% on your money and buy some futures. All real estate in NYC has to do is stay where its at for you to triple your money,

Lotta angry non-owners above.

The only reason not to buy NYC real estate now is that you think quality stocks are a better value, and/or you already own a place for your family.

steve - One more time: a p/r of 20 is equivalent to a tax-free yield of 5%, about what a longer term NY muni yields, plus the future rental-inflation protection. Again, this is for an unlevered cash purchase, so I ignore all mortgage-interest tax benefits. If you really think Cleveland is a higher-growth area for rents and income than NYC over the next 5, 10 or 20 years, and therefore merits a higher p/r ratio than NYC, please feel free to act on your economic forecast.

Happyowner, are you really this stupid? When is the last time muni bonds went down 20% in two months. The NYC real estate market just did. Momentum is only beginning to kick in and the stock market is trading at 10x. Please realize that 1987-1997 was basically a gooseegg for appreciation. Expect this to be the case for 2007-2017. Stocks are infinitely better here. And there is a whoe 300-plus comment thread on here about all the evidence of 15-20% price declines since July. Seriously. Seriously. Stop wasting our time. This board is helpful to take the temperature of the market and cross reference anecdotes. People like you just waste our time.

"only stupid sellers will throw away their apartments."

Or recent buyers who lose their jobs and find they can't afford their homes. Or leveraged foreign investors who lose their incomes and face currency hell. This is the big question mark - how many people who bought at the peak bought with huge mortgages and just got laid off? Some people are assuming ALL recent purchasers bought with 10-20% down and are losing their jobs. Who knows?

"only stupid sellers will throw away their apartments."

... or people who realize the top of the market is behind us and the future is only down. I know two couples offhand who are listing their apartments for this reason alone - bank the profit, save by renting. Not rocket science.

Rhino - When is the last time muni bonds went down 20% in two months.

Er, the first two weeks of October.

As for valuation: if there were a 5% tax-free yield stock in a highly important area of the world economy, it would be a good buy. That is what NYC real estate is now. At the current Q3 prices.

Or you can fantasize about "down 20%" RE prices. I expect prices next year to be higher than this year.

happyowner - there is not one person I know who thinks prices next year will be higher than this year. Not one. Including many people who bought within the past 1-2 years. You get points for your contrarian attitude. I hope you have an iron constitution (and cash in the bank).

umm.. have you checked on muni bond yields in NY lately? Every week over the past month there has been another WSJ article about how if you live in NYC and pay in the top tax bracket you are acheiving a tax equivalent yield of something like 8% on the average investment grade NY muni bond.

>Or you can fantasize about "down 20%" RE prices. I expect prices next year to be higher than this year. <

I one REALLY wants a piece of Manhattan RE, much better off investing in something along the lines of Vornado Realty Trust which owns several excellent properties throughout the city. It's off 65% in value since its early 2007 peak of around $150/share. Yield is roughly 5% but who knows how long they can maintain it as lease & occupancy rates continue to plummet.

A heck of a lot more liquid investment than a small pocket of air space plus it has already been hammered.

BTW, this is NOT investment recommendation. It's an illustration that Manhattan RE values (at least on the commercial side) have already fallen off the cliff in the eyes of investors.

mrsbuffet, best to hold off until the credit downgrades, which are more likely than not to come, are discounted. Stick with GOs.

Serge this is not an attack.. but what do you think of the idea that GOs are worse off because budgets are busted. If you are getting paid on a toll road that's more recession proof. I am about 20% /
domestic stock, 3% gold, 3% emerging markets and 3% ag commodity ETFs. Any ideas on fixed income side for me? Now that money yields are back to earth I am feeling the need to get more yield. My bracket may be lower next year, but is max this year.

GO's are supported by tax revenues and the taxing authorities can & historically have increased taxation to support those municipal projects. Schools in the upscale areas are usually safest and more likely to maintain an investment grade credit rating.

Revenue bonds, in an economic slow down of this magnitude are far more difficult to analyze. It's almost impossible to gauge the revenue drop-off as the economic activity diminishes. One has to carefully analyze each project before jumping in. On the flip side of a recession, they ca be excellent investments as economic fundamentals bottom and a recovery phase begins.

As to fixed income investments, there are terrific values in the investment grade area. In my view, they represent better values than the general stock market. We've been sticking with very high grade issues that can weather this economic storm w/o problems. One isn't going to get rich but will receive a very good return versus Treasuries and sleep at nights. At some point, we'll be far more interested in the lesser credits but probably not until 2010, at the earliest. I'm sure there has to be excellent mutual funds out there that invest in high grade fixed income....just make sure the manager is as good as it gets.

"Lotta angry non-owners above."

I'm an owner and a renter. Both. So I guess you're not counting me.

"The only reason not to buy NYC real estate now is that you think quality stocks are a better value, and/or you already own a place for your family."

Actually, since stocks are at a relatively all-time low at least for the past 10 years, and properties are at a high, unless you've signed up for the buy high sell low school of making money, now is the perfect time to dump your property and buy stocks.

"steve - One more time: a p/r of 20 is equivalent to a tax-free yield of 5%"

How do you come up with that, please?

"about what a longer term NY muni yields, plus the future rental-inflation protection."

What about property price deflation? We've already seen radical cuts in new dev. like $250,000 per apartment at Chelsea Stratus. If it costs you $5,000 to rent the place, that's 4 years' rent for free.

What goes up....

"Again, this is for an unlevered cash purchase, so I ignore all mortgage-interest tax benefits."

Are you trying not to sound like your alter-egos?

"If you really think Cleveland is a higher-growth area for rents and income than NYC over the next 5, 10 or 20 years, and therefore merits a higher p/r ratio than NYC, please feel free to act on your economic forecast."

It's not a question of what I "think." It's a question of what the historical numbers are, and real estate, like everything, eventually comes back to the mean.

High growth by itself means nothing. Income means absolutely nothing when comparing a ratio. None of those factors affects the p/e ratio of rents to purchasing prices in Manhattan. None. Again, as with your "supply and demand" being "random dots," your ignorance belies your true identity.

"a p/r of 20 is equivalent to a tax-free yield of 5%"

Just to clarify - "yields" have nothing to do with price/earnings ratios. Where do you see "yield" in that ratio?

Where?

"Actually, since stocks are at a relatively all-time low at least for the past 10 years, and properties are at a high, unless you've signed up for the buy high sell low school of making money, now is the perfect time to dump your property and buy stocks."

Couldn't agree more. Seems like the no-brainer trade to do is buy stocks now and use those proceeds in a couple years (when it's 50% higher) to buy real estate when it's 30% lower.

"a p/r of 20 is equivalent to a tax-free yield of 5%"

I'm guessing if P/R = 20, then R/P = 5% = tax-free yield. Though i'm not sure where the tax-free comes from.

Steve -

"a p/r of 20 is equivalent to a tax-free yield of 5%"

Just to clarify - "yields" have nothing to do with price/earnings ratios. Where do you see "yield" in that ratio?

Where?"

Real estate's main financial return is as an alternative to rent, plus a very very long term very approximate inflation hedge. If the price to rent is 20, then the 'implied rental dividend' is 5%. This is "tax free", since you don't have to pay taxes on your wages to "pay" (to yourself) the "implied" rental dividend. You also get some inflation protection, since only your maintanance goes up, not the whole implied rental amount.

Since tax-free bonds in NY now yield about 5% for 15 year AA or better, and they have no increase in the future for rental increases, NYC real estate at 20 times rent is a fair long term buy.

Again, by p/r you should deduct the carrying costs from your estimated rent to get the true implied rental yield.

NYC real estate in 1998 was a screaming bargain, since people over-invested in stocks in the 90's due to their perceived higher return, and avoided real estate. If you think Money Mag journalists understand anything about investing you deserve your results.

steve - $250,000 per apartment at Chelsea Stratus.

I think all new construction is way overpriced. I like pre-war, or even 60's white brick if you need more space for your money, near transportation. I also like co-ops, since then you know your neighbors. Those Trump monstrosities on the fringes of the west side looking out on the beautiful highway system can fall to zero for all I care.

Happyowner, for a guy so facile at applying price to rent ratios and calculating yields, you ought to know that 20x rent sucks as an entry point, and is about a shitty an entry point as buying stocks is when the market P/E is over 20. The expectation of appreciation at an entry point of 20x rent is very very low. As a matter of fact, its probably next to nothing over anything but a 15 year or greater time horizon. If you get some perspective, you may realize that the only thing that pulled late 1980s impetuous buyers out of the whole over a 15 year time horizon was Greenspan's overzealous rate cuts.

happyowner, you made a leap there, or at least lost me. Are you suggesting that it is 5% cheaper to own at 20 times rent than to rent? And if so, can you show how you get to that? If I tak my $1 million and instead of buying an apartment, I buy a 15 year AA bond, I yield 50,000 per year, almost enough to cover my rent. If I buy an a apartment, I get no yield, and I pay about 15-20k in maintenance and taxes. Then it all comes down to the appreciation or depreciation on the apartment, correct? So in a flat market, I am in the whole 20K per year buying. How do you get 5%?

Dmag, don't try to make sense of it. His analogies are so poor on so many levels they make a sound thinker cringe.

PS Happyowner if you want to calc the dividend of owning you must do it after-tax and you must deduct maintenance. You will find it to be very low. The analysis will work fantastically well when we fall to 12x or less rent from the 20-22x peak though. You should read some articles from the roaring early 90s of real estate in Manhattan. Then you could wax on how many ways its different this time. Yes, this time the stock market did not pop back as quickly, and this time its a cyclical decline that may be coinciding with a much larger secular turn down in the US hegemony.

Has anyone heard of the three ds: death, divorce and debt. Over time, it is the occurrence of one of the three ds, or the anticipation that one will soon occur, that leads people to sell their apartments. This idea that no one will sell because prices have gone down is beyond absurd. There are over 900 properties on the market for over $5 million in Manhattan right now. You think people have put them on the market because they are convinced that now is a great time to sell luxury real estate? Thank the 3 ds.

Pardon me--there are slightly fewer than 900 listings over $5 million. I was including listings that began over $5 million but have subsequently been reduced and are no longer in that category.

Rhino - deduct maintenance

Yes, of course. See my comments on "carrying costs" in my next to last post above. Thx for playing.

dmag - You forgot the increase in rent over your 15 year hypothetical holding period. If you expected *no* rental increase over 15 years, then they would be the same investment (real estate would not be worse, just the same, assuming house prices were nominally the same with no inflation increase also for 15 years). If rents increase in 15 years, then the real estate was better than the bond (liquidity aside, assuming a 15 year holding period, and assuming nominal house prices are the same with no increase for inflation).

In short, anyone willing to buy a 15 year 5% muni bond and hold it to maturity, should also be willing to buy Manhattan real estate at a p/r (after deducting maintanance costs) of 20, unless you think rents will be totally flat for 15 years and nominal house prices will be lower in 15 years.

oh happy owner,

i was at first flattered that you decided to imitate my blog name (imitation being the sincerest form of flattery) but now that you've taken to writing such claptrap i am starting to reconsider. I used to be a "happy owner." I didn't really consider my apartment an investment--it was a home first and foremost--but when it doubled in price between 2004 and 2007 I just could not ignore the unsustainably high price. I sold, and now I rent a nicer apartment for half what the person who bought my place pays on a monthly basis to live in my old apartment.

2 points: 1. You cannot compare a bond, which comes with a guaranteed payout, with an investment valued based on EXPECTED rent. You are correct that rents can go up. They can also go down. They can rise quickly, or they can rise slowly. They are variable, kind of like...corporate profits! The correct analogy is with stocks, not with bonds. The rental yield is the equivalent of corporate earnings. Since we should expect rents to be somewhat more stable than earnings, I will grant that we should be willing to accept a slightly lower rent yield than P/E ratio--after, that is, factoring in common charges and real estate taxes (which can also go up or go down over time). We should also factor in transaction costs, which are as much as 100 times greater for real estate than for public equities. If we do all of that, we will certainly discover that at the peak of the real estate market, Manhattan real estate was trading at well over 24x annual rent. Now that rents are also declining, the ratio to peak prices is even worse.

2. Prices have come down significantly and will continue to do so. Most sellers have not lowered prices dramatically, but that's not the interesting story. What is interesting is that even dramatic/desperate price cuts have not resulted in sales. If you think the real estate market is so healthy, how do you explain:

300 West End 4A
06/26/2008
Listed in StreetEasy by Stribling at $6,495,000
07/11/2008
Price decreased to $5,950,000
08/11/2008
Price decreased to $4,995,000
11/14/2008
Price decreased to $4,100,000

45 Christopher 8AG
STREETEASY HISTORY
05/07/2008
Listed in StreetEasy by DJK Residential at $3,950,000
06/05/2008
Price decreased to $3,495,000
08/29/2008
Price decreased to $2,995,000
10/30/2008
Price decreased to $2,595,00

30 5th Avenue 16K
STREETEASY HISTORY
02/12/2008
Previously listed in StreetEasy by Corcoran for $3,750,000
08/04/2008
Corcoran listing temporarily off-market at $3,400,000
09/03/2008
Listed in StreetEasy by Bellmarc at $2,750,000
11/08/2008
Price decreased to $2,400,000

(apologies for reusing data from other post)

happyowner: "steve - $250,000 per apartment at Chelsea Stratus."

Yup, those were the price reductions. More coming.

Happyowner has an answer for everything - first 20x rent is fine, then "I think all new construction is way overpriced."

Then he's looking at rental prices, and comparing them to co-ops, which don't allow rentals for the most part: "I also like co-ops, since then you know your neighbors."

"I like pre-war." Apparently you like John Jacob Astor.

You can't have it all ways, though perhaps you can go back to your initial personalities.

Kudos to Happyrenter, you did what I lacked the energy to do, and did better than I could have. Random, are your intials M.S.? You seem familiar.

PS: Henceforth ignoring Happyowner.

Thanks Rhino. I have to say, while I have long thought apartments are significantly overpriced relative to rents, and thus destined to come down over time, I am surprised by how quickly things have deteriorated. I think that with the right seller it would be possible to get 50% off peak prices on a few apartments right now, today. And I think that there are so few buyers out there right now that there are some apartments that will struggle to find buyers at any price, particularly at the ultra high end.

Happyrenter, you are not 'MS' initials are you?

Yes its impossible to know in the sea of inventory right now which desperate $1.9mm classic six could be taken for $1.1mm... You'd have to be able to screen on original purchase prices, likely.

my initials are not ms, no.

my first-choice location is greenwich village/west village, where prices are coming down but, as always, there is not a ton of inventory. but my second-choice location, the UWS, just seems to be overrun with available apartments of all shapes and sizes. should be a very interesting few months.

My wife won't want to move to the Village. However, you are right about it, that is why over time it may be the best investment location. I know 'more unique' is improper usage, but it really is a part of Manhattan that will always be exclusive in its feel and never seems to be overrun with availability. That said, I have a friend who bought a 5th floor walkup on Jane Street in 1996 for 4x rent.... Like $60k for $1200 of monthly rental power.