Real Estate Predictions For 2009

So you think that there should be a total of 60% from the 2008 prices?What would be the range in each area.thatis Soho,Tribeca,Chelsea,UES,UWS,Sutton place and others.The more high end finishes would have what reduction of price?Thanks

I don't know what would happen to individual areas as I'm not interested in but a few.

I do think that on the whole prices will be down 50% from last year's peak. That would put this unit:

http://www.streeteasy.com/nyc/sale/364333-coop-350-bleecker-street-west-village-new-york

at about $650,000, which is a 40% decline from its current listing price.

It would bring it back to the 2003 price, which is still 300% more than the 1998 price.

There are many new construction that was completed in 2005-2008 and people are starting to flip these units.I am listening to CNN Open House and they are saying that the bottom may not be until 4Q of 2009.So will the higher end new construction flip ,fall as much?Interested in Sutton Place and Chelsea area but may expand search.

Are you tracking purchase prices to market rents, with the stabilization point being a 1:1 correspondency?

I'm not sure about this, steve, but I will agree with you that (a) market rents in Manhattan will be lower in 2009 than in 2008 and 2007; and (b) purchase prices will go in the same direction.

I'm not sure they will track each other at the same speed. I think if you can buy a two-bedroom in your neighborhood for the same carrying costs as you're renting, it would be a good time to buy, but prices could still decline after that point. A year ago I would say to you that sideliners would step in before you think they will as prices slip. Now I think sideliners will be spooked or wiped out and disqualified.

The bottom CNN is talking about is for the national housing market, which is much further along the correction curve. Our prices are dropping faster but they have a long way to go.

Market-rate rentals fall faster than housing prices - nothing worse for a landlord than unsold inventory. Owners will try to keep their prices high because they have more time on their side. But now that BAC has swallowed MER we're going to see the effects of unemployment, retrenchment, relocation to Charlotte starting soon.

"Now I think sideliners will be spooked or wiped out and disqualified."

I was a sideliner, but like everybody else I lost a ton in the market collapse after LEH. If the market recovers to that point then maybe I'd consider buying again, but still I can't find anything as cheap as what I can rent for. The sad thing is, it's not even close.

"like everybody else I lost a ton in the market collapse"

This is what I was saying last year when I said that if we have a R/E REAL crash it will be precisely because there is no one left to scoop up "bargains" as things loosen up. Really, I am now seeing more moving targets than I would have expected in my most downish moments. I'm not sure where rents will go. The building I mentioned in another post in the East '50s with high vacancy one would expect to lower rents to attract tenants, but they haven't. They emptied out because they gave people 90-day lease renewal notices in first '08 months thinking that May '08 market rents would be like July '07 rents. People moved out. They didn't care. People did not move in. When do they adjust the rents?

Will people continue to rent or sell and go into rentals, lessening the vacancy rate? Do newer rental buildings adjust their rents more quickly because they have more debt than '70s and '80s buildings?

What about foreclosure sales? Will they be scooped up by vulture investment funds when they finally hit the pipeline?

You keep referring to this move to Charlotte of the financial center of the US as though it is a fact, and it's overdramatic, IMHO.

My building just lowered rents by about 15%, in one month. I expect to see further reductions.

No the Charlotte connection is not overdramatic, at all. Retail banking is a commodity business, not different from Walmart. Being a low-cost, efficient operation is key to profit making. That's why they have a Six Sigma program.

BofA already has massive operations in Charlotte, and with the demise of Wachovia there's plenty of cheap office space down there. There is no reason to run MER's IT or back office operations from New York. The space and people are cheaper there. Ditto traders - BAC has a massive, modern trading floor in Charlotte. They probably don't even need most of MER's traders.

Nationsbank did the same thing with the old BofA (which I used to work for) when they bought it. I was on vacation in Mexico a year ago, met an IT person who had been laid off from BofA, asked him about the data centers where I used to work. They were still there, but the people weren't. It was all automated and operated remotely. They kept the facility only because they owned it, and for security purposes - not having all their operations located in the same place.

Dealmakers will likely stay in the city - Charlotte isn't exactly an international destination.

I agree with you, Steve. I also think that 2009 will see appreciable panic selling, which will accelerate the decline in pricing. You can already see it starting to happen, mostly in new developments that had contracts signed in 06-07. The buyers wee either flippers, or have gotten laid off. Some are trying to rent out their units, which s forcing down rents in condos, e.g. 101 Warren.

As an aside, I just received a nice dividend check from BAC. Would you suggest buying more? My average price that I bought the stock at is around 26. Clearly I was early in building my position, but the fact that they honored their dividend, even after receiving TARP money is amazing.

That condo rental you are intersted in. ... expect on Tuesday a drop in the asking rent. Watch for it.

I wouldn't count on BAC's dividend to be safe, though there's no way to know for sure. It was curious that they closed on the MER acquisition on 1/1 rather than 12/31 - I surmise they had Merrill clean out everything, didn't want the results to show on this quarter's balance sheet.

I'll be putting some money in FAS ETF, when it falls back below $20, which it will. It's a 3x financial bull, but a broad financial measure. It's my speculation play. Financial firms won't be allowed to fail, they can't continue to hoard money because they can't make money if they don't lend it out.

It's plain that banking in the US is now an oligopoly: BAC, JPM, WFC control nearly 50% of the deposits, credit cards, mortgages, asset management, etc. Re-regulation will be back in style.

People are just now starting to realize how dire the NYC economic is. MS will not survive alone. Hedge funds will be regulated. Investment banks no longer exist. Leverage - which is what made this Ponzi scheme possible - will be 10x, not 40x. That will mean the end to the massive, and ultimately harmful - financial shell game that we've been playing. The 700% appreciation in housing prices in 10 years is over, and it will deflate to where it should be: 2003 levels.

Ken Lewis is asking for a bonus. If he gets a bonus and then cuts the dividend again, he's out.

"If he gets a bonus and then cuts the dividend again, he's out."

I doubt it.

I agree on the dividend. They cut it last year, but the fact that they honored it on DEC. 26 was interesting.

Well, no one has accused you of lacking a point of view.

well, 2003 levels in RE prices and market rents doesn't seem cheap by any stretch, at least to me, so I won't argue

But if things are so dire in commercial RE in Manhattan, why wouldn't some of these new oligopolians take space in Tourist Mecca? That way they'll have something to promise to Charlotte employees to look forward to, and they can have real pizza slices for lunch.

"why wouldn't some of these new oligopolians take space in Tourist Mecca?"

Because taxes and wages are much higher here than in Charlotte. Retail banking is a commodity business.

"Retail banking is a commodity business."

Good point, but I don't think that means the end of financial services companies of one sort or another having some arms of their gargantuan enterprises housed in New York City. BTW, it's interesting we all still refer to "Wall Street" when all the "Wall Street" firms have been located nowhere near Wall Street for ages. FWIW

Something unquestionably will be left here. Just not on the scale that it used to be. And current real estate prices are based on that scale, and those bonuses. They are gone forever.

"Wall Street" because that's where the NYSE is. No reason that has to stay in NY, either.

stevejhx... couldn't agree with you more.. .yep lost a ton in fall 08' (stks) and still licking my hands from all the bleeding... but on the financials... I'd wait Q109' results ( I think this toilet needs another flush)... no need to be a hero.

And the relationship between high finance and NYC RE has yet to be de-coupled and truly reflected in its prices. All $100K and above back office jobs are now $60K in exburbs and Charlottel... and $500K plus associate, VPs, MDs are gone forever and will much likely reflect commercial banking bonuses which have been 1/10 I-Bankers.

FWIW... I think we are setting up for another leg down in DJIA... it seems like Obama's new team, fiscal stimulus package, TARP etc... is giving Bulls something to cheer about... but until unemployment #s stop accelerating for a few months... it'll just be a painful hammer blow to the market every month... reminding the market that until consumers get back in the game a couple of new bridges to nowhere can't stop this train wreck. My two electrons...

w67, I can't argue with you because you might be right. I haven't invested in the financials yet - I have the money sitting in cash, ready to pounce. We can't count these last few days as volumes were light - the short-sellers were on vacation. Next week will be telling.

Unemployment is a lagging indicator, there was so much carnage in the 4th quarter that it will be ugly. But there's also a huge stimulus package coming, a clearinghouse for CDS's, new regulations (and if the uptick rule is in effect, watch the VIX fall to normal levels). But I think - and I could be wrong - that the financials will start to go up before the results. Look at what's been happening recently - higher highs and higher lows, and the market has shrugged off a lot of bad news.

But I could be wrong. God knows I was after Lehman.

On the other hand, I'm not wrong about Manhattan real estate and its connection to no-more-bonuses. I'm not wrong about Charlotte, either: it's cheap, and getting cheaper since Wachovia died. I know of ibankers who moved there after the dot.com bust because it was the only place they could find work. Now it will be even worse.

Steve. I have to respectfully disagree on the unemployment indicator as lagging in this recession. In a traditional downturn, absolutely a lagging indicator. On this pull back, much more of a "structural" re-shifting away from RE (contruction, mortgage bankers, borkers, entrepreneurs (for heavens sake George Clooney became a developer), home stagers, flippers etc.) more akin to the disintermediation in manufacturing in the US in 70's and 80's but in a compressed time of over let's say 5 years. It's going to be painful this unwinding of wealth effect and acceptance of a large portion of the US to save and to learn to live within their means.

On all your other points... I agree. Can't argue with 4 acres and 5000sq ft for $300K... hell I could pay that off from my checking account. :)

"WIW... I think we are setting up for another leg down in DJIA... it seems like Obama's new team, fiscal stimulus package, TARP etc... is giving Bulls something to cheer about..."

Agreed. This is setting itself up for another sell the news moment. Everyone rah rah rahing the new team and all the new stimulus coming down the pipe. I'd be curious as to what happens to the market the day after that stimulus is signed.

Fundamentally, we still aren't even close to recovering. Can't see how a recovery is even on the horizon when unemployment will hit over 9% by Q4.

"respectfully disagree"

Nobody respectfully disagrees on streeteasy! :)

"structural re-shifting away from RE"

I agree with that, but that's what recessions usually are - a fundamental restructuring of the economy. This is farther and faster than anything we've ever seen, because the real estate bubble was the largest single asset bubble in the history of the world. Bigger than tulips.

But the stock market wasn't the bubble - the stock market was the bubble in dot.com. Housing is just a small portion of the overall economy. Don't underestimate the effect of all the money that is in the system right now. Velocity may be zero, but supply is practically infinite. And a huge stimulus package is also in the works. This correction did not have to happen like this, and wouldn't have had they not let Lehman go bust. I believe the correction back up to pre-Lehman levels - still technically a bear market - will be rapid, a matter of a few months. Beyond that I don't know.

"Can't argue with 4 acres and 5000sq ft for $300K"

I'd be bored out of my mind in Charlotte.

Agreed.. there's a ton of dry powder on the side.. however, there is a fundamental shift to getting one's house in order and an new era of saving for one's retirement at hand and bodes ill for earnings going forward.

There was an article in NYT the other day of Long Term Capital rescue and its effect on current crisis... I seemed like the only guy screaming in my office that all the counterparties should have taken their lumps back then...I also absolutely believed we were headed for a mild recession at that point, but that's when the housing boom really started in earnest. I point this out, b/c of your Lehman opinion. The fed needed to let the market participants know that knowing your counterparty is at the core of this calamity and needed to show they wouldn't and shouldn't step in again. What is done is done. On the other hand if AIG went under it would have meant the complete financial system as we know it. Imagine if over-nite you had to question if your car, life, disability, liability and retirement insurance/benefits were intact... you can imagine planes not flying, cars not being driven, doctors not showing up for work. That needed to be saved, Lehman? I'm gonna side with Fed on this one. Above all Know thy Counterparty.

One other thing Steve and jgr... most of the past (milder) recessions have been an adjustment to inventory builds by manufacturing, this feels completely different to me, much more visceral. Am I missing something? Probably, but won't know till 2 years out.

Charlotte is boring but pretty cool fishing and sailing... :)

I'm with you, w67thstreet. Gotta know your counterparty. People have to know that the government doesn't guarantee everything! Otherwise, it truly is socialism. Due diligence. We've got to move beyond "too big to fail," otherwise this sort of nonsense will just keep happening.

I love NY. That said, NY has just become far too expensive relative Charlotte. Think we're in for a tough adjustment period. But eventually, NY will become more reasonably priced.

Yea!

I believe that we will be on the road to recovery sooner than everyone thinks. However, the businesses that will boom won't be the ones that boomed before - there will be a new cast of characters, most likely in a refreshingly different industry, other than real estate and mortgages! I also believe that Wall Street and therefore Manhattan will come back, but not for families, and I believe that apartments will trade for much lower prices (down 50%) due to the fact that most big apartments are financed with a gain from a previous sale. Once those gains are few and far between so, too, will be sales in the big "trade-up" market.

Families who have been on the sidelines renting and waiting for the market to tank will be the clear winners here, but it is unclear what (if anything) they will win. City schools, both public and private will be in shambles after the smoke clears, and simply finding a half-way decent education for your kids in the city will be near impossible. Many private schools will collapse in this mess, or be looking to merge, which will make job security as a teacher or administrator tenuous at best. There will many mid-year transitions (students in and out/teachers in and out/administrators in and out) which will be disruptive in the classroom, and not bode well for the quality of the education. Those who wrote the $40K check will start feeling the pressure to get out and move to a well-established public system outside the city that is funded by a stable property tax base. Then, there will be the Ah-ha moment in the media..."perhaps private schools don't survive well in a down economy" (duh!) Then, there'll be a rush over to the public system, with the media cheering everyone along...PRIVATE EQUALS BAD, PUBLIC EQUALS GOOD. The top surviving private schools (Dalton, Horace Mann, Collegiate, Brealey) will be even more impossible to get into as wealthy families look for schools that are "too well-established" to fail. Those who don't get the acceptance letter from one of them will have no choice but to leave the city which will put even more pressure on prices, especially those laid out for family lifestyles.

Sounds depressing if you're a private school parent, but let's face it - private schools in Manhattan were just as big a bubble as real estate, and the fallout and media attention could be even greater since wealthy families are involved, and journalists tend to be public school parents and advocates!

We sent Chelsea to Sidwell Friends School. Excellent education, and later on to Stanford and Oxford.

And I thought I had a negative view of the education outlook for NYC.

I'm with w67th. Money is a grand thing, but if there is no one at the end of the day to purchase what you can make with it, it's just currency, not capital. The huge transfer of profits (percentage-wise) from those who work to the wealthy, coupled with the wealthy lending those increasingly poorer individuals money to continue consumption, seems a recipe for longer-term disaster. This recession is already in its 14th month, and from everything I've read unemployment will only increase and significantly this first quarter, and probably the second as well. Money is there (except for that $50B that disappeared recently), but what the hell are you going to do with it? There are so many needs for the stimulus money, just to maintain the status quo, that I can't see how it's going to fill anything more than some holes. Too bad the package wasn't passed at the beginning of '08, instead of '09, it might have had a better chance then.

It's all about the kids, ultimately. I believe that the "good" public schools will remain okay, if not stellar. Mediocre private schools will definitely collapse.

I don't know. If the so-so private schools collapse, I hate to think what that might do in the short term to the good public schools. Many of them are at or over capacity, and there isn't any money for much expansion right now.

Nationsbank did the same thing with the old BofA (which I used to work for) when they bought it. I was on vacation in Mexico a year ago, met an IT person who had been laid off from BofA, asked him about the data centers where I used to work. They were still there, but the people weren't. It was all automated and operated remotely. They kept the facility only because they owned it, and for security purposes - not having all their operations located in the same place.

SteveJHX That's called a "Lights Out Operation"

mrsblogs:
"Families who have been on the sidelines renting and waiting for the market to tank will be the clear winners here, but it is unclear what (if anything) they will win"
I think thats a really astute comment. Nobody wins in an environment where taxes rise, and the quality of life suffers. Some of the price depreciation to come, IMO, will be as a result of a net movement of upper-income families out of the city as taxes and crime rise, and the quality and stability of the (private) educational product implodes.

"This is what I was saying last year when I said that if we have a R/E REAL crash it will be precisely because there is no one left to scoop up "bargains" as things loosen up."

This is it in a nutshell.

For all the talk about "sideline" money waiting to come in, that money is more scared than ever to jump in and the bigger point many missed is all those people jumping TO the sidelines.

75% decline in sales... with all the discounts... doesn't get more telling than that.

Its going to be a while before folks are going to be willing to touch this market.

"Then, there'll be a rush over to the public system, with the media cheering everyone along...PRIVATE EQUALS BAD, PUBLIC EQUALS GOOD"

Yeah, the problem with that is... HIGH SCHOOL.

Yes, maybe on the lower levels, definite improvements in public schools.

But when the kids finish, if they aren't going to Stuy or Bronx Sci or Hunter, Manhattan parents are basically screwed. Really no decent public high school options after the top. It goes right to crap after that.

Thank you, McHale, I was a computer auditor and IT management consultant at Bank of America and Price Waterhouse for years. I do know how it works.

My point was where they run the operation from: Charlotte, not San Francisco or Los Angeles.

"I seemed like the only guy screaming in my office that all the counterparties should have taken their lumps back then"

Unfortunately, you can't let them. That's why banks are guaranteed, and heavily regulated. If Bank A can't settle with Bank B, then Bank B can't settle with Bank C, and the whole thing collapses in a matter of seconds because all the trust is gone.

Look at any chart after Lehman, tell me what it shows. They all show the same thing: near collapse of the international financial system. It was the stupidest policy decision since wage and price controls.

"most of the past (milder) recessions have been an adjustment to inventory builds by manufacturing, this feels completely different to me"

This is a combination of overbuilding of housing and excessive leverage to buy those houses. There is fraud involved just as with the dot.com boom, just this time it was the ratings agencies, mortgage brokers (a dying breed), banks, borrowers. Like all Ponzi schemes, it eventually collapsed: you can only loosen credit so much until you can't loosen it anymore, which occurs precisely at the time the first borrowers start to default and you can no longer lend, and when you stop lending prices collapse.

I hate to say Cramer was right, but I agreed with him long ago that we were in a severe deflationary spiral. It got worse after Lehman. The Labor Department must go back and change how they calculate inflation for housing: buying housing is considered capitalizing rent, yet inflation figures don't take the capitalized value into account (the asset price) but rather the equivalent cost of renting. So prices can soar, yet rents fall because more people are buying than renting. That leads the government to say that there is deflation, when in fact there was inflation.

I predict the high end prices will come down because they are inflated so much. Studios and one bedrooms I don't see much unless the seller needs to (divorce, marriage, the usual).

Or they lose their jobs...

Good think there is not much of that around here...

Stevie... Lehman was an I-Bank and no banks are not guaranteed, the deposits are and if someone was foolish enough to keep above $100K in it (bf bailout) then shame on them (know your counterparty). FDIC and other state/federal agencies will take over if a bank is insolvent and they are regulated except for the "derivatives" market which they lobbied with Greenspan to be left alone... and there is the crux of why we are bailing out banks left and right. Whereas pre-Glass-Stegall act's demolishment in late 90's, I-Banks and Commercial Deposit Banks were separated a failure of Lehman would have been a blip to the functioning of the banking system. However, all commercial banks that I know of (including my old firm) started doing Credit Default Swaps in order to eliminate the capital requirements set by regulators and guess who their counterparty was? Lehman, the other "blue chip no fail" AAA rated investment banks and Insurance Firms and Hedge firms.

Stevie... correlation does not equal causation. If not Lehman it would have been Madoff, AIG or some other "shock" but Lehman's failure in of itself was not the cause of your (and mine) pain. It was this unregulated "phantom" capital that created marriages between Insurance, FDIC regulated Commercial Banks, S&Ls, and I-Banking.

Yes people should know a lot more about how the government calculates inflation and you are absolutely right about "capitalized rent" which failed to measure the huge run up in housing costs (as an inflationary measure which is totally crazy) and now is missing this tremendous deflationary spiral which we are setting up. Cheers again... you I like.

For the rest of you who think I stopped taking the little yellow ones. DILDO and Boobies. :)

nyc10022.. Stuy, Bx Sc!!!! all the way baby... yep Brooklyn Tech till doesn't count. Mrsblogs... you and my wife would totally get along... what is up with these crazy private schools...

Just a crazy suggestion from a crazy on-line person, if parents intellect and economic status is the number one predictor of a child's success in life.. .should't the parents take the entrance exams and bring a copy of their audited Net Worth (excluding RE) to a private school's entrance interview?

Oh... boy... even I'm afraid the kind of "Sh-t" I'm gonna get for writing this :)

ClintonB does Dildo=cigar? You crazy ex-president you... don't you have a dinner at the White House for Obama?

"Lehman was an I-Bank and no banks are not guaranteed, the deposits are and if someone was foolish enough to keep above $100K in it (bf bailout) then shame on them (know your counterparty). "

Separate agencies protect brokerage accounts. Your assets are yours, first of all, even if the bank collapses. If they somehow get lost, there is something like $600k of coverage...